Bush blocks Iran’s only access to U.S. banking

WASHINGTON – The Bush administration Thursday ratcheted up the financial pressure on Iran by revoking an exemption that gave Iranian banks access to the U.S. financial system, but it stopped short of blacklisting the Islamic republic’s central bank.

The announcement coincided with the fall in oil prices, which has hurt Iran’s economy and put political pressure on President Mahmoud Ahmadinejad, who faces elections next June.

In an effort to derail Iran’s suspected nuclear weapons program, the administration already had invoked U.S. law and United Nations resolutions to blacklist five large Iranian state-owned banks. The action, however, still allowed Iran access to the U.S. banking system through third-country transactions.

This exception was called a “U-turn” provision because it allowed Iran to do business in dollars in the U.S. banking system through third countries that send the money back to Tehran, as if making a U-turn across traffic.

On Thursday, Stuart Levey, the undersecretary of the Treasury for terrorism and financial intelligence, said in effect that the Treasury would erect a “No U-turn” sign.

“Iran was using the existence of the U-turn exemption to hoodwink foreign banks into handling transactions for them,” Levey told reporters in a news conference.

“They would say, ‘Please handle this for us; don’t mention there is any Iranian involvement,’ and they were able to argue to financial institutions abroad that it was okay to do this because of the U-turn exemption, and therefore what the U.S. financial institution on the other end of the transaction didn’t know wouldn’t hurt anybody.”

Now, he said, foreign financial institutions will know that their U.S. subsidiaries cannot conduct any business in the United States on behalf of Iran.

Earlier this year, when oil prices surged past $140 a barrel, scrapping the exemption would have been risky as it could have sent prices even higher. Now, with a global financial crisis at hand and oil trading at just over $60 a barrel, Iran has less room to retaliate.

Levey insisted that oil prices had nothing do with the action and acknowledged that the amount of money involved in U-turn transactions was “relatively small.” He wouldn’t offer even a ballpark figure, nor would he stipulate what U.S.-based foreign bank subsidiaries might be affected by Thursday’s action.

U.S. banks have long avoided doing business with Iran because of the risk it poses to their reputation, so the action likely is intended to isolate Iran from European and Asian banks, said a U.S. banker familiar with financial sanctions.