Increased external pressures and flaws in Iran's banking system are substantially limiting Iranian letter of credit (L/C) business.

Tougher western sanctions are increasing external pressures while poor oversight in the banking system may have been laid bare by the US$2.8 billion alleged L/C fraud that has also had severe political ramifications (DC World News, 26 October 2011).

New sanctions

In November, Canada, the US and the UK imposed tougher sanctions on Iran's financial sector than those that had already made it impossible in practice for western banks to write Iranian L/C business.

The UK government was toughest, severing ties with the central bank while the US legislated against foreign financial institutions that write business with Iran's central bank.

The European Union banned dealings with 180 more Iranian officials and companies and threatened more sanctions on Iranian oil sales, financial institutions and governmental entities.

Internal pressures

Now it is emerging that the multi-billion US dollar L/C fraud allegedly perpetrated by a politically connected business mogul may have been facilitated by the Islamic republic's poor regulatory and supervisory framework and endemic corruption.

Iranian media reports of corruption in the banking sector abound, with one banking analyst and former member of parliament declaring, "it would be surprising if no corruption occurs in the current banking system."

More fraud

Analysts blame the alleged L/C fraud on lack of banking sector oversight, low capital adequacy requirements and lax lending procedures.

One banker told local media that he expects similar frauds to be revealed but warned this may take time, because Iran's banks may take up to a year to reconcile their borrowings and loans to and from other banks.

In the alleged US$2.8 billion fraud, Bank Saderat claims it could not readily detect that forged L/Cs amounted to 20 per cent of its capital, while Bank Melli failed to notice it had paid out approaching US$2 billion on apparently fake L/C documents.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.