Years of U.S. fines over Iran loom for foreign banks

(Reuters) - For years, the United States struggled to get foreign bankers to comply with its effort to throttle Iran's economy - but a couple of billion dollars in fines, not to mention lurid headlines and talk of jail time, has suddenly got their attention.

A half-hearted shuffling forward to settle years-old claims of busting U.S. sanctions on Tehran is becoming a stampede since Washington tightened rules to punish Iran's nuclear programme and a new aggression among regulators so alarmed many banks that shareholders will be paying out billions more for years to come.

Deutsche Bank and Italy's Intesa San Paolo are among big names that may soon join the still short list of foreign banks that have so far paid more than $2.3 billion in fines; some still protest their innocence but have regarded the cash as the price of keeping access to the U.S. market - and keeping executives out of court, or even jail.

The drama played out last month between Standard Chartered and the New York state supervisor who threatened to strip the august British institution of its vital Wall Street banking licence was not entirely typical. But StanChart's about-face within days, from vigorously defending past deals with Iranian clients to handing over $340 million - 5 percent of its pretax profit - was illustrative of an industry-wide shift in mindset.

"The acceleration in a sense is coming from (the banks') side defensively," said Michael Malloy, a professor at the University of the Pacific McGeorge School of Law in California.

"The notion being that it would be better to get out in front of this and confront the difficulty and come clean rather than wait for the authorities to ferret you out," said Malloy, who previously worked for the U.S. Treasury.

Clearly, it is not something all boards will shout about; when another British bank, Royal Bank of Scotland, made mention of talks with regulators on U.S. sanctions regulations in its quarterly report last month, it took another two weeks before many investors became aware of the issue via the media.

But, after Standard Chartered and June's record $619-million fine paid by Dutch bank ING, the list of European banks going public with warnings about possible U.S. payouts includes Germany's Commerzbank and HVB, a unit of Italy's Unicredit, as well as HSBC in Britain.

And Chinese banks have become embroiled in the process too, with the New York Times reporting on Wednesday that prosecutors said they had found evidence in their investigations that they, too, may have flouted U.S. sanctions against Iran.

By contrast, U.S. regulators long gave little opportunity to domestic banks to deal with Iran at all, leaving American bankers now little troubled by inquiries into past transactions.

FINED SO FAR

It has taken time to reach this point; since Britain's Lloyds TSB Bank Plc became the first to settle, forfeiting $350 million in January 2009 for masking the origin of payments to evade U.S. sanctions on Iran, Libya and Sudan between 2002 and 2007, others to pay penalties have included Credit Suisse, in December 2009, Barclays, in August 2010, and ABN Amro - now part of RBS.

Yet, as disclosures by the regulator in the Standard Chartered case made clear, bank executives were discussing among themselves the risk of personal criminal liability as long ago as 2006, as they sought to maintain profitable business despite confusion over exactly what was permitted under U.S. sanctions rules which had last been substantially altered in 1997.

Political heat over Iran's nuclear programme grew as Tehran defied U.N. resolutions in 2006 and denied Western accusations it was seeking atomic weaponry, but only in late 2008 did the U.S. Treasury ban a key element of non-U.S. banks' business with Iranians, known as "U-turn" transactions, by which they passed dollars for Iranian clients anonymously through the U.S. system.

Since 2009, the U.S. Justice Department (DoJ), the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) and the Manhattan District Attorney's office have clamped down on banks dealing with countries blacklisted by Washington.

The sharp tightening of U.S. sanctions late last year, while not strictly relevant to past conduct, and the heightening of political drama over threats by Washington's ally Israel to bomb Iran's nuclear facilities also seems to have limited bankers' appetite for defending in public their dealings with Tehran, however strong many believe their legal cases would be.

"It is a very intense area of focus," said Michael Zolandz, an attorney with law firm SNR Denton in Washington.

"We're certainly sensing from large international banks ... that the pressure on them to disclose transactional information, to start sharing account data and monitor payments ... is definitely increasing."

"PRICE OF DOING BUSINESS"

The rules for U-turn transactions in particular have long been ambiguous at the least, legal experts say:

"Even after recent settlements there remained a need to clarify how the sanctions regime would be interpreted and enforced, which underlines how much uncertainty there is," said Susannah Cogman, at London law firm Herbert Smith.

But despite that lack of clarity over their previous business dealings with Iran, few Western banks now seem ready to put up much of a fight against the United States government.

"To an extent this is the price of doing business in - and with - the U.S.," said Cogman, an expert on regulatory disputes.

Showing an early willingness to cooperate could also help the banks limit the damage and avoid criminal charges.

"There is also the very real possibility of criminal sanctions," said Malloy at the University of the Pacific. "A showing of good faith and attempt to cooperate once you've been made aware of the problem would protect you in most cases."

Deutsche Bank in 2007 stopped taking on new business with counterparties in Iran, and, in a mark of the sensitivity to the risk to employees of U.S. legal action, a regulatory filing from March this year shows it did not involve any American citizen in either a managerial or operational role in Iranian transactions.

Commerzbank warned last month it faced a financial hit to settle the U.S. probes into violations of sanctions on Iran and other countries, which could exceed provisions.

Also last month, Italy's UniCredit said it was reviewing its German unit HVB to check "historic compliance", adding that the New York County District Attorney's Office, the DOJ and the OFAC were leading an investigation.

French banks BNP Paribas and Credit Agricole are conducting inquiries into U.S. dollar payments to check whether they are in breach of U.S. sanctions, they said late in August.

And Intesa Sanpaolo is still subject to an assessment by the OFAC, which could lead to administrative sanctions, half-year financial statements show. It has no further information on the timing or the size of any possible fine.