INSIGHT-Sanctions-scarred banks may hold back Iran's economic relief

By Yeganeh Torbati, Anna Yukhananov and Karen Freifeld

WASHINGTON/NEW YORK, May 14 (Reuters) - Major banks wary ofheavy U.S. penalties will be reluctant to restore ties with Iraneven if sanctions are lifted in a possible nuclear deal, bankexecutives and advisers say, likely denting Iran's ambition toattract foreign investment to revive its crippled economy.

After years of being frozen out of the global banking systemand most trade with the West, Iran is eager for sanctions to belifted so it can draw in foreign companies and attractinvestment to upgrade its long-neglected energy sector.

Yet without more bank financing and a means of transferringfunds in and out of Iran, that commercial potential could remainlargely untapped, stunting hopes for a post-agreement investmentboom. Banks' reluctance to deal with Iran highlights the riskthat its economy will not get quick relief, possibly erodingsupport for the nuclear deal among Tehran's leadership.

Lured by the world's fourth-largest oil reserves andsecond-largest natural gas reserves, oil majors such as Shell have expressed interest in entering Iran

Airlines and automakers are also interested, according todiplomatic sources and people close to the industries, eyeingIran's 80 million population -- more than that of the combinedsix-nation Gulf Cooperation Council.

But about a dozen international banks, mostly European, havebeen stung by U.S. penalties for sanctions-busting totalingnearly $14 billion since 2009, raising industry fears that therisk of engaging Iran would overshadow any gain.

Banks recently hit by penalties include BNP Paribas and Commerzbank while several othersincluding Deutsche Bank, Societe Generale and Credit Agricole are under investigation, accordingto people familiar with the matter. BNP Paribas had to forfeit$8.9 billion.

"Given all the anti-money laundering issues, anyone whothinks they can go into Iran has got to be insane," an executivewith a major U.S. bank said, asking not to be identified giventhe sensitivity of the topic.

"There's just not enough business in Iran" to risk onepayment causing a massive penalty, the executive added.

Under a framework agreement reached between six major powersand Tehran in April, Iran agreed to limit its sensitive nuclearactivity in exchange for sanctions relief. Crucial details,including the timing of sanctions removal, still need to beworked out ahead of an end-June deadline for a final deal.

But the deal would only lift nuclear-related measures,leaving in place a host of mainly U.S. sanctions related tohuman rights and Tehran's support of militant groups in theMiddle East.

The U.S. Treasury's designation of the entire Iranianfinancial sector as a "primary money laundering concern",alleging terrorism financing and pursuit of weapons of massdestruction, would likely remain. While that itself does notprohibit transactions, it would discourage banks from re-openingbusiness with Iran, bankers and sanctions experts said.

Standard Chartered, among the few internationalbanks with a license to operate in Iran, is not looking to goin, according to its spokeswoman, Julie Gibson.

In 2012, New York's financial regulator threatened to revokeStandard Chartered's state license, calling it a "rogueinstitution" that hid $250 billion in transactions tied to Iran.It ended up paying U.S. and state authorities $667 million infines that year for sanctions violations, and deferredprosecution agreements are still in effect.

BNP Paribas, JP Morgan, Barclays,Commerzbank, HSBC, Citigroup, and Credit Suisse declined to comment.

Deutsche Bank declined comment on the investigation as wellas on how the bank would react if sanctions are lifted as partof the nuclear deal. A Credit Agricole spokeswoman said theinvestigation was ongoing but declined further comment. LloydsBanking Group, ING Group, Unicredit,and Societe Generale did not respond to requests for comment.

Banks targeted by U.S. authorities have generally beenaccused of knowingly moving millions of dollars through the U.S.financial system on behalf of Iranian, Sudanese, and otherentities subject to economic sanctions. The banks hid thetransactions, in part by stripping wire information identifyingsanctioned entities so they would not raise red flags.

Companies have already experienced difficulties operating inIran due to banking problems.

MTN Group, a South African mobile phone operator,has struggled to get money from its Iran unit out of the countrysince 2012 due to sanctions.

It still has about $1 billion in accumulated dividends and aloan repayment stuck in the country.

CHINA, DUBAI TO THE RESCUE?

Banks based in countries such as China and India are likelyto be less worried about the risks, because they have lessbusiness in the United States and do not believe their owncountries would re-impose sanctions on Iran. These banks couldexpand their Iran business in the event of a deal, said GaryHufbauer, a former Treasury official and sanctions expert at theWashington-based Peterson Institute.

Iran last month became a founding member of the newChina-led Asian Infrastructure Investment Bank, whose remit isto finance infrastructure development in the region, althoughthe bank has yet to launch and its priorities are unclear.

A senior banker at the state-owned China Development Bank said its lending relationship with Iran "has alwaysbeen very good" and its business will continue regardless of anuclear deal.

But many others remain cautious.

Banks have shied away even from legitimate trade with Iran.The existing sanctions include waivers for food and medicineimports.

State Bank of India, the nation's top lender andthe only Indian lender to have presence in Iran, said it doesnot have immediate plans to expand in Iran, or convert itsrepresentative office in Tehran into a branch.

Among Gulf banks, memories are fresh of a U.S. sanctionscrackdown that forced Dubai-based Noor Islamic Bank, now knownas Noor Bank, to stop channeling billions of dollars fromIranian oil sales through its accounts in 2011.

"The cost of non-compliance is high so nobody will risk it,"said one lender with a Dubai-based bank. "I don't think it willbe banks that move in first, it will be our customers going inand we will follow."

A spokesman for Emirates NBD, Dubai's largest bank, declinedto comment on potential opportunities in Iran, noting theongoing nuclear negotiations.

The kind of long-term investments crucial to revamp oilinfrastructure will be difficult without the participation ofmajor international financial institutions, experts said.

In the country's most recent five-year plan, Iranianofficials called for $230 billion of investment in the petroleumsector, mostly to expand oil and gas production.

Western sanctions have cut Iran's oil exports by more thanhalf to around 1.1 million bpd from a pre-2012 level of 2.5million bpd, hurting investment in new development.

Development of gas reserves has also been long delayed. Iranshares the world's largest natural gas field with Qatar. Theresource has made the neighboring Gulf country the world'slargest exporter of liquefied natural gas. Iran, by contrast,has often turned a net importer of gas to meet its needs.

One chief executive of a large European bank said it couldhelp his country's major companies with payments and loans ifthey go into Iran. Other than that, the bank has no interest andwill not pursue any private client business in Iran, he said.

"Am I waiting at the border to go in as soon as the ink isdry? No," he said, asking not to be identified. (Additional reporting by Thomas Arnold in Dubai, DeviduttaTripathi in Mumbai, Engen Tham in Shanghai, Louis Charbonneau inNew York, Joe White in Detroit, and Douwe Miedema in Washington,Editing by Soyoung Kim and Stuart Grudgings)