European Lenders Keep Ties to Iran

At least several European banks that vowed to stop doing business with Iran have kept handling billions of euros in transactions for Iranian entities and foreign companies with operations there, a review of regulatory filings and other documents by The Wall Street Journal shows.

The dealings aren't suspected of violating any sanctions, which are looser for the Continent's banks under European Union rules than prohibitions imposed by the U.S. But some government officials and banking experts said the banks are risking embarrassment or regulatory problems in the U.S. as it scrutinizes financial transactions with sanctioned countries.

"The risk to reputation and legal standing is great," said Iain Begg, a professor at the London School of Economics, adding that any bank still active in Iran could jeopardize its access to the U.S.

Germany's Deutsche Bank AG handled as much as $2.8 billion in transactions with Iran last year. Other banks still doing business in Iran include France's BNP Paribas SA, Banco Santander SA of Spain, ING Groep NV of the Netherlands and HSBC Holdings PLC of the U.K.

The Wall Street Journal examined dozens of securities filings and other disclosures, and confirmed the figures in the documents with bank officials.

Exact figures on the volume of transactions aren't publicly known, but the Journal's review shows that European banks have billions of euros in long-term trade-finance contracts in Iran.

The dealings are a sign of Iran's continued access to the global financial system despite U.S. efforts to isolate Iran, and go against a perception among some observers that the banks have cut ties to Iran completely.

Several of the European banks said they aren't pursuing new business opportunities in Iran and are trying to wind down their relationships with existing customers. But doing so isn't easy. In addition to the legal risks they could face for breaking contracts, bank officials are worried that they would gain a reputation for not honoring their commitments.

Still, Société Générale SA recently stepped away from its Iranian business, citing increased political risk and logistical hassles. The French bank closed an office in Iran and returned its banking license to the Central Bank of Iran in May of this year, a spokeswoman said. All operations with Iranian entities were halted in February.

A 2010 U.S. law requires the Treasury Department to cut off from the U.S. financial system any foreign bank conducting transactions with Iranian entities blacklisted by the United Nations or U.S. Those blacklists include some Iranian banks, Tehran's energy sector and the businesses of Iran's Revolutionary Guards.

Treasury officials say the Iranian banking system is so intertwined that it is hard to avoid substantial interaction with sanctioned entities, according to an agency spokesman. As a result, European banks that do any business in Iran are possibly risking their access to the U.S. market, the spokesman added.

"Foreign firms and financial institutions should exercise significant caution when dealing with Iran especially if there is any danger that transactions may become involved with designated Iranian banks," the Treasury spokesman said.

EU sanctions primarily target businesses linked to Iran's nuclear program or human-rights abuses. Other business with Iran is monitored by individual euro-zone countries but other than petroleum products generally isn't prohibited, a spokesman for the European Commission's head of foreign affairs and security policy said.

U.S. officials recently have cracked down on sanctions violations before 2008 that are unrelated to contracts held by European banks. The U.S. government is investigating European banks for allegedly failing to uphold U.S. money-laundering laws.

Standard Chartered PLC last month agreed to pay $340 million to New York's top banking regulator to settle allegations that the U.K. bank broke U.S. money-laundering laws by illegally handling at least $250 billion in transactions with Iranian entities.

HSBC is being probed by U.S. authorities for Iran sanctions violations and has set aside $700 million to pay fines. Deutsche Bank also is under investigation for possible Iran-related violations, according to people familiar with the probes.

In 2007, Deutsche Bank decided to "not engage in new business with counterparties such as Iran, Syria and North Korea and to exit existing business, if any, to the extent legally possible," according to a 2008 securities filing.

In February, Deutsche Bank reported its transactions related to Iranian trade at a rate that hasn't changed since 2007—less than 0.1% of the bank's total assets, or $2.78 billion in the bank's 2011 business year. Total income from dealings in Iran amounted to less than 0.1% of earnings, or $42.4 million, in 2011. Other European banks declined to cite their exposure.

Deutsche Bank is forced to continue its Iran business due to long-term contracts that the bank can't terminate, said a spokesman.

BNP Paribas "has no branch or subsidiary in Iran, no longer undertakes new business with Iran in its business area or currency, and has since 2007 been winding down its existing activities," a spokeswoman said. An ING spokesman said the firm has had a policy since 2007 not to enter into new relationships with Iranian clients. Current dealings "exist solely in the context of our ongoing efforts to further run down the legacy portfolio of commitments," he added.

HSBC has allowed its license in Iran to lapse.