Why Did Sanctions Against Iran Work?

November 28th, 2013

After decades of sanctions and years of negotiations, the permanent members of the United Nations Security Council (and Germany) have reached a temporary deal on Iran’s nuclear program. Under the agreement, for the next six months, Iran will halt activities that would enable it to make a nuclear weapon and allow international inspectors to dramatically increase their oversight of the program. In exchange, the United Nations and the United States will ease international economic and financial sanctions (including by unfreezing billions in Iranian assets abroad).

Not everyone is happy with the deal. Israeli Prime Minister Benjamin Netanyahu called it an “historic mistake.” Some lawmakers in Washington have expressed skepticism over whether the deal will actually impair Iran’s ability to pursue a nuclear weapon. And others have argued the decision to ease sanctions is a mistake—that now is actually the time for stricter controls.

Yet both opponents and proponents generally do agree on one thing: the sanctions against Iran worked. Since 2006, the United States, European Union, and United Nations have enacted increasingly tougher economic and financial sanctions on Iran. Economic sanctions included export restrictions on oil, automobiles, and arms. On the financial side, these nations have frozen the assets of Iranian entities and public sector, banks which do business with Tehran, and Iran’s currency. Together these sanctions resulted in significant negative economic consequences for Iran’s economy, including drags on oil revenue and GDP and increases in inflation.

Generally, analysts have also agreed that it was not the economic sanctions that wielded the harshest damage to the Iranian economy, but rather the financial ones.

International financial sanctions are often leaky at best and downright porous at worst. Tax havens, secrecy jurisdictions, and banking secrecy enable nations and individuals to circumvent financial controls.  In the case of Iran, former district attorney Robert Morgenthau has shown how Venezuela uses banking secrecy to help some Iranian banks gain access to financial markets in the U.S., though it is illegal. Other times individual banks will use secrecy to violate sanctions for financial gain.  For example, Barclays Plc violated trade laws by facilitating transactions with banks in Cuba, Iran, Libya, Sudan and Burma between 1995 and 2006.

Given the holes we have observed in financial sanctions (both with Iran and elsewhere), what made these ones different?

In short, I would argue it was Treasury’s efforts to administer compliance among financial institutions, and the Justice Department’s success in enforcing that compliance. For example, according to a 2013 GAO report, the Treasury Department made “overtures to 145 banks in 60 countries, including several visits to banks and officials in the UAE, where Iran seeks to route much of its banking.” Treasury and Justice have also liberally punished banks that helped Iran violate U.S. sanctions. For these types of violations, they fined, penalized, or settled with: UBS for $100 million in 2004, Dutch Bank ABN Amro for $80 million in 2005, Credit Suisse for $356 million in 2009, Dutch Bank IMG for $619 in 2012, and Standard Chartered for $340 million in 2012.

Together these initiatives have resulted in dramatically improved compliance with financial sanctions internationally and—as a direct result—a significant negative effect on Iran’s economy. For the moment, it looks like Treasury’s efforts to plug the leaks in the international financial system have worked—with an arguably significant benefit to the world’s security in the short-term. Only time will tell whether these sanctions will also give the world—and Iran—long-term change.

Written by Ann Hollingshead

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