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C O N F I D E N T I A L SECTION 01 OF 06 LONDON 004328

SIPDIS NOFORN SIPDIS STATE FOR NEA/IR, EEB A/S SULLIVAN, ISN/RA:RNEPHEW, EUR/WE TREASURY FOR ABBY SULLIVAN COLLEEN EDDY, MOLLY MILLERWISE E.O. 12958: DECL: 11/21/2017

TAGS: PREL MNUC EFIN PTER KTFN IR UK

SUBJECT: (C/NF) UK SHARES U.S. GOALS ON IRAN; WE SHOULD RE-FOCUS UK DOMESTIC EFFORTS AND INCREASE COORDINATION REF: A. STATE 156409 B. STATE 157039 LONDON 00004328 001.2 OF 006

Classified By: PolMinCouns Maura Connelly; reason 1.4 (b, d)

1.(C/NF) Summary: Prime Minister Brown and Foreign Secretary Miliband are increasing pressure on Iran by SIPDIS pressing aggressively for tough new EU measures (to be considered in an EU meeting November 28), strengthening its public rhetoric, and using financial oversight to quietly scrutinize Iranian banks operating in the UK. The British government is developing a list of all their options ) multilateral to domestic, regulatory to bully pulpit - and told Economic and Energy Bureau Assistant Secretary Sullivan that by mentioning Bank Melli in a recent speech, Brown and Miliband are seeking to get Melli named as part of the next UN Security Council Resolution. They believe the EU and UN processes will be the quickest and most effective tools, so are focusing efforts there and in internal regulatory squeezes. U.S. and UK analysis and goals on stopping Iran's nuclear proliferation are in sync, so we suggest Washington take advantage of the UK's current review process and actively consult UK officials, while suggesting to them a few achievable goals ) i.e., announcing domestic non-proliferation legislation, publicly canceling their already frozen export credit program - as ways to ratchet up the pressure on Tehran. The upcoming November 30 visit of Treasury Under Secretary Levey would be a great opportunity to work with our leading ally on Iran policy, and refocus some of their efforts. End Summary.

2.(U) Below is an update of the UK's efforts on various Iran-related issues, and suggestions for ways the USG can engage where appropriate: (C/NF)

Push for UK Non-Proliferation Legislation --------------------------------------------- ----

3.(C/NF) The UK currently lacks legal authority to freeze assets based on proliferation activities alone. We have asked them whether they plan to propose legislation similar to what they have for terrorist activity, and have been told by HMT and FCO that it is under consideration, but would take a long time to pass through Parliament. The lengthy process, the UK says, is the reason for fully pursuing an EU remedy. We propose Washington supply key points from U.S. non-proliferation legislation and press the UK for a commitment to begin the process. Even if the legislative cycle is slow, its public announcement will send a strong message ) to Iran and to the UK's EU partners. We note, however, that UK courts require a mental element in determining whether a person or entity is involved in terrorist activities ) and this presumably would carry over to non-proliferation legislation. To freeze a bank's assets on terrorism grounds, the bank must 1) be actively involved in the effort to get money to the terrorist entity; 2) be aware of what was happening, but chose to turn a blind eye to it; or 3) should reasonably have known that the money was diverted to a terrorist activity. We should urge the UK to broadly interpret the third category in deciding whether to freeze assets. (C/NF)

UK Vocal on EU/FATF Measures ------------------------------------

4.(C/NF) HM Treasury (HMT) Director for International Finance Mark Bowman told EEB A/S Sullivan on November 13 that the UK has a proposal in to the EU Member States to designate LONDON 00004328 002.2 OF 006 Bank Melli at their next meeting on November 28. HMT puts the prospects of EU passage at 50-50, but hopes this will lead to UN action against Melli. HMT is less optimistic that the case against Bank Saderat will rise to the evidentiary level needed in either the UK or other EU Member States, despite PM Brown's desire to see Saderat designated. Any further intelligence addressing Saderat's knowledge of terrorist finance activity would be greatly appreciated by several UK agencies.

5.(C/NF) Bowman also told Sullivan he wanted the Financial Action Task Force (FATF) to take a more strategic and political approach, and was very pleased with the direction FATF took under UK leadership to publicly single out Iran as a bad actor on financial transactions. On October 12, the UK released a statement of public support for FATF's announcement on Iran. The UK piece warned of the higher risks of money laundering and terrorist financing in Iran's financial system. If Iran does not respond to the FATF statement, the UK will push to raise this at the next IMF/World Bank meetings. (C/NF)

Increased Bank Scrutiny: FSA; Bank Mellat, XXXXXXXXXXXX---------------------------- -------------------------------------------

6.(C/NF) The UK is quietly and effectively pressuring the Iranian regime by putting Iranian banks through their banking regulator's (Financial Services Authority ) FSA) strict scrutiny of "fit and proper" standing. The FSA is also studying whether it can legally use classified intelligence in its fit and proper reviews. The UK claims it cannot go public with its efforts against the banks without risking political backlash for singling out one country's commercial assets over another's The UK is trying to boost London's position as the international financial center through a principles-based regulatory system. Our challenge will be to keep HMG focused on using all its financial tools ) such as intense regulatory oversight ) while maintaining political ) and more importantly business - support. The FSA's move follows Treasury A/S O'Brien's urging in September and is a major policy shift for a government that wants to do the right thing on Iran without betraying its principles-based banking and open investment policy. We should congratulate HMG for taking this move, and press it to continue to use all its tools ) public and private.

7.(C/NF) In response to our proliferation-related demarche (Ref A) FCO Iran Multilateral Team Leader Will Gelling told Embassy Iran Watcher (Poloff) on November 16, that HMG has no legal domestic UK authority to freeze XXXXXXXXXXXX assets on proliferation grounds, but would press the EU to designate Bank Mellat. Gelling said HMG is already pursuing administrative/regulatory steps on Mellat, including stepping up the pace of FSA inspections of Mellat and other banks and pressing Mellat to be on the alert for proliferation-linked transactions. Gelling said HMG could freeze Mellat assets under current legal authority only if USG could provide sufficient evidence linking the bank to terrorist, vice solely proliferation, activities. FSA is also monitoring Iranian bank assets in London to see whether there is asset flight from Melli and Saderat, and has found no movement yet.

8.(C) A/S Sullivan pressed HMT and FCO for a concerted effort to get Asian banks and firms on board with this issue. HMT and Foreign Office officials were open to Sullivan's LONDON 00004328 003.2 OF 006 suggestion of a joint approach (possibly with Paris, Tokyo and Dubai) to get Chinese and Malaysian banks to stop doing business with Iran, and will include this as part of the list of options for PM Brown to consider. We believe U/S Levey should seek a firm commitment to do this, and present the British government with draft talking points. (C/NF)

IAEA report: UK shares USG view, plans joint E3 approach ------------------------------ ---------------------------------

¶9. (C/NF) On the IAEA's latest report on Iran's lack of progress, Poloff explained USG views per ref B to FCO; Gelling, for whom Poloff had previewed USG views on November 15, confirmed UK views are in full conformity with USG's, and equally pessimistic. Gelling noted the UK would - along with France and Germany - jointly demarche the IAEA along exactly the same lines, and that the E3 together would press other IAEA governments to also make strong statements at the BOG, as outlined ref B. The UK government told us it had "hoped that Iran would finally, after stalling for many years, come clean about its past nuclear activities. But the IAEA is still unable to state its confidence in the answer Iran has given." The UK urges Iran to implement the Additional Protocol immediately. (C)

UK Banks: Clear No More Sterling for Iran Banks --------------------------------------------- -------

¶10. (C) UK banks are beginning to limit certain services in the UK for Iranian banks due to the exercise by HMG of "considerable moral suasion." As of November 30, according to Gelling's deputy Chris Gotch, no UK-chartered bank will offer sterling clearing services to any Iranian bank. Iranian banks will still be able to hold accounts as private businesses at UK-chartered banks in the UK but will not be able to clear sterling transactions. Iranian banks will still be able to clear sterling in the UK through UK branches of foreign banks (i.e., banks chartered outside the UK ) mainly in Russia and Turkey, according to HMT). UK banks began this new practice within the last month, with HSBC the last UK bank to do so. Iranian banks are beginning to move UK funds into Euros, and will have direct access to the Euro clearing system. Both FCO and HMT officials agreed, however, that Iranian banking (i.e, Saderat) via UK branches of foreign banks would be unaffected. Gelling also agreed the move by itself would not affect entities who were in effect acting for Iranian banks.

11.(C) Bank Sepah, meanwhile, is winding down, according to HMT. It is functioning at a minimum level and has reduced its staff by over one-half, going into "hibernation mode" following its UNSCR designation. (C)

The Value of Threatening Oil and Gas Sanctions --------------------------------------------- ------

¶12. (C) Foreign Secretary Miliband's thinking on the threat of oil and gas sanctions revolves around medium and long-term ideas to squeeze the Iranian hydrocarbon sector of foreign investment and expertise, according to Gelling. The oil and gas reference in the Prime Minister's Annual Foreign Affairs speech on November 12 had been aimed primarily at Iranian oil and gas investment; the UK's first efforts to line up support for squeezing Iran on oil and gas would be aimed at Germany, France, Italy and Spain. Gelling pointed to liquefied natural gas as an especially vulnerable, longer-term, "pinch LONDON 00004328 004.2 OF 006 point," since Iran has so few of the applicable technologies or infrastructure despite large gas endowments. Gelling said that for now, although there is no immediate way to organize oil and gas sanctions to create any short-term practical effect on Iran, HMG would continue actively and publicly to invoke the specter of action on oil and gas as a way to increase political pressure on Iran. (C/NF)

Iran Attacks PM Brown's Speech --------------------------------------

13.(C/NF) Gelling noted that after the November 13 Brown speech, Iran's Ambassador Movahedian called on FCO Iran Director Antony Phillipson to complain. Reportedly, Movahedian, a figure whom FCO regards as an ineffective and ponderous trusty of Ahmedinejad, said the Prime Minister's speech had the effect of "poisoning the atmosphere" between the UK and Iran, "rather than building an atmosphere for dialogue." (C)

Miliband Keen to Press Iran Hard Now -----------------------------------------

¶14. (C) Gelling explained that, though the idea to press the hydrocarbons sector is a serious one, HMG believes the short-term impact on Iranian behavior is achievable primarily via financial sanctions, of which he argued multilateral ones are most effective. Gelling argued western governments have key leverage based on Tehran's badly wanting to avoid losing access to Western capital markets, the availability of China and other capital markets notwithstanding.

¶15. (C) Gelling said the hydrocarbon issue is part of "an important rhetorical shift" by HMG, in which he said USG can expect to see sustained, notably "harsher" UK rhetoric on Iran, beginning now and continuing into 2008. Gelling said Foreign Secretary Miliband's internal guidance to HMG officials is becoming "extremely aggressive," and that he has been "impatient" at the deliberate pace at which the EU has moved on Iran sanctions; Gelling and Gotch said Miliband wants to push for "tough, rapid" financial action against Iran within the EU across a range of measures, including banking, export credits and investment facilities, all during 2007. Gelling included on the UK's own national action list a likely scaling down of the UK's investment facilitation services in Tehran. (C)

No New Export Credits --------------------------

¶16. (C) The British press reported recently on an on-going UK export credit program in Iran, however, FCO tells us those reports are inaccurate and that HMG has not extended new export credit for British investment in Iran since September 26, 2006; during UK fiscal year 2006-2007 (which ran from April 6, 2006 to April 5, 2007) there had been a total of 5 million pounds ($10 million) in new cover approved for Iran business - all prior to September 26, 2006. Gelling told Poloff there has been no new UK cover for Iran during the current fiscal year and that the Export Credit Guarantee Department (ECGD) is "not processing new applications." Gelling said there had been no public announcement of this "HMG decision" to end credit cover, to avoid prejudicing existing investments, but that there might be such an announcement in the future; he gave no hint on timeframe. Gelling said current UK credit exposure on Iran is now about 275 million pounds (USD 550 million). HMT told A/S Sullivan that the EU could act on export credits, but would meet LONDON 00004328 005.2 OF 006 German and Italian resistance ) the former is worried about an Iranian default because it is heavily exposed in Iran. We recommend that the USG urge the UK to publicly cancel its export program. (C)

UNSCR: Better to Whack Them Quickly and Unanimously --------------------------- ----------------------------

¶17. (C) Revisiting a familiar theme, Gelling said HMG believes strongly, based in part on what he said are the views of UK Ambassador Sir Geoffrey Adams in Tehran, that the timing and unanimity of the next UNSCR will be more important than its substance. He said the three elements in a UNSCR that can affect Iran are "timing (i.e., speed), toughness, and unanimity," but that achieving all three is unrealistic. Gelling said HMG will argue within the P5 plus 1 that getting some measure (acceptable to Russia) adopted unanimously and at the end of November will have a much stronger effect on the Iranian regime, following the build-up to the El Baradei and Solana reports, than a measure with somewhat more substance adopted sometime in December or later. Gelling said FCO senior figures believe "the dynamics of whacking them publicly and unanimously now are far better - the perfect is the enemy of the good." In a separate meeting a source at the International Institute of Strategic Studies, told us that a visiting PRC diplomat told him it is likely China would permit a third UNSC resolution, after its language has been weakened to a point acceptable to China.

¶18. (C/NF) As FCO officials often do, Gelling also emphasized the greater "psychological and political" effect which multilateral sanctions have on Tehran, especially given the UK's image among most Iranians of treachery, exploitation and deceit. He argued in this regard that the announcement in Iran of national measures by "the original Great Satan," the UK, would have little impact on Iranians, as opposed to the effect of unified international measures, which by their nature tend to place the regime at a moral disadvantage, which matters in Iranian politics.

¶19. (C/NF) COMMENT: UK officials at all levels want to move quickly and strongly to create fresh pressure against Iran. They emphasize both the practical and symbolic steps they believe are most quickly achievable, with a clear UK preference for multilateral measures, which they argue are ultimately more effective than unilateral ones. On any domestic measures we want the UK to adopt against Iran we must give specific examples, attempt to coordinate timelines, and factor in that the British government believes it is already leading a full court press within the EU at the politically most advantageous time. We should focus our requests to a few well-briefed domestic measures we want them to pursue. Presenting a laundry-list of requests would likely generate strong push-back from HMG reps (both because they believe they are doing all they can under their legal and financial systems and because they have far fewer resources to devote than the USG does). The British will also push for collective efforts to be focused on the EU and UN. We suggest Washington send us key points to preview with our UK partners early the week of November 26, followed by a high-level phone call from NSA Hadley to his counterpart Simon McDonald in the Cabinet. U/S Levey would then come on November 30 for focused consultations with FCO, HMT and Cabinet. End comment.

¶20. (U) A/S Sullivan did not clear this message. Visit London's Classified Website: LONDON 00004328 006.2 OF 006 XXXXXXXXXXXX 
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