Step Right Up: After Iran, Who Will Be Next To Float a Sovereign Bond To International Investors? Iraq?

(Washington, D.C.): After more than two years of preparation, Iran is finally slated to make its first foray in the global securities markets since its 1979 revolution. The Iranian sovereign Eurobond offering — which could launch as early as next week — is expected to net Tehran some 500 million Euros ($490 million) with the help of Germany’s Commerzbank and France’s BNP Paribas, the lead managers on the float. It is likewise netting political controversy. For example, last month the U.S. restricted Moody’s rating agency from providing a financial rating for Iran’s government — an act determined by the Office of Foreign Asset Control (OFAC) to be providing a service for Iran.

Going Down This Road Again

The William J. Casey Institute has long voiced concern with respect to global bond offerings by governments that are engaged in activities that could potentially threaten the vital security interests of the United States. Sometime next week, however, the government of Iran will receive a check for roughly $500 million with no questions asked regarding where the money is going or how it is being used.

It is extraordinary that — within days of President Bush’s meetings with other G-8 leaders focused, among other things, on the need to counter terrorists and their state-sponsors — his European counterparts will actually be welcoming Iran back to the global financial community with open arms. Indeed, how long do we think it will take before Libya, Syria and possibly even Iraq try to take advantage of Europe’s willingness to permit terrorist- sponsoring regimes to gain access to global financial flows?

Even more disturbing is the prospect that this hard currency injection may be used by Tehran to help further burnish its dubious distinction of being, according to the U.S. State Department, the world’s “most active state sponsor of terrorism” and/or to intensify its efforts to develop weapons of mass destruction and ballistic missile delivery systems. The heinous attack of September 11 on the United States was estimated to cost a mere one-tenth of one percent of the funds expected to be raised by Iran next week. The mind reels at how far Iran’s half-a-billion dollar Eurobond windfall can take it in buying advanced technology and weapons components on the global black markets.

Who’s Manning the Fort?

According to the Treasury Department’s OFAC, U.S. persons, banks and companies are, under penalty of law, not allowed to purchase or hold Iranian bonds. As is often the case, however, loopholes exist. In this instance, the foreign subsidiaries of U.S. entities are allowed to hold Iranian debt — as long as they are doing so of their own accord (i.e., not on behalf of the U.S. parent) and a U.S. citizen was not involved in the transaction. (Note: In today’s globalized financial arena, the act of being “involved in the transaction” includes pushing a “buy” button.) To be clear, unless it is closed, this loophole would allow American companies to directly fund the Iranian government.

The Bottom Line

While closing this loophole should be a near-term goal of OFAC, a real-time priority of this agency, along with the Securities and Exchange Commission (SEC), should be alerting U.S. investors to this prohibition. Indeed, unlike America’s trade community — which is well-versed in sanctions law — investors have never before had the opportunity to purchase the debt of a government under U.S. sanctions.

In a world where millions of financial transactions take place every hour, the likelihood of one of this country’s tens of thousands of boutique investors, hedge funds or money managers unwittingly violating the law while buying Iran’s paper is high enough to justify immediate action. Specifically, OFAC and the SEC should immediately place an advisory on their websites and the SEC and Treasury should consider a media advisory and press conference. For his part, President Bush should make clear America’s determined opposition to European or other investors writing blank checks to an “Axis of Evil” government — and call on U.S. allies to demonstrate whether they are, in fact, with us or against us in this war on terror by following suit.