Beirut Tribute Gives Trump an Opening to Push Iran Reparations

(Bloomberg) -- The Trump administration has an opportunity to showcase its opposition to Iran this week when families of U.S. Marines killed in the 1983 Beirut bombings visit the White House to mark the anniversary of the attack.

Kin of the 241 lost U.S. service members have already collected $1.7 billion in seized Iranian assets over the years and are pushing to unlock one more trove. Some of the relatives will meet Thursday with President Donald Trump, who could use the occasion to take a stand that would benefit the families.

At issue are some $1.68 billion in sovereign bonds owned by Iran’s central bank. The families are asking that those assets be seized as a reparation from Tehran, which the U.S. faults for the attack. But the securities aren’t physically located in the U.S., so Iran and its bankers have argued that the U.S. has no right to lay hands on them.

A years-long U.S. court battle over the bonds has worked its way up to the U.S. Supreme Court, which on Oct. 1 asked the Trump administration to present its view on whether it should hear a plea for immunity by Iran and its bankers. Iran claims that assets held in Europe aren’t subject to legal claims filed by U.S. terrorism victims.

Any response to the Supreme Court by the Trump administration would be filed by the office of U.S. Solicitor General Noel Francisco in the next few months. A spokeswoman for the office declined to comment.

The families oppose a Supreme Court review because they’ve already received a lower court’s blessing to go after the money.

“I am confident the administration will recommend that Iran’s petition to the Supreme Court be denied,” said Lynn Smith Derbyshire, a spokeswoman for the victims’ families whose brother, Marine Capt. Vincent L. Smith, was killed in the attack. “We can best honor the memory of the fallen by ensuring that Iran does not have the means to conduct more terrorist attacks.”

The case has attracted interest beyond the courtroom. If the Trump administration urges the Supreme Court to ignore Iran’s arguments, then global banks would be on notice that under certain circumstances, judges in New York could require them to turn over assets located abroad to recognized creditors.

In a summary of an appeals court decision in the matter, the law firm Sullivan & Cromwell LLP said the case “has significant implications for international banks, as the decision will encourage plaintiffs to seek to attach assets held by sovereign judgment debtors” abroad.

Trying to Collect

The Marine families have been trying for more than a decade to collect on a judgment they won against Iran in 2007. While the Washington, D.C., judge in that case said they should be able to collect $3.8 billion, seizing Iranian assets to fulfill the judgment has been difficult. The U.S. ultimately identified a cache of Iranian-owned sovereign bonds at Citibank, and lawyers for the families began going after them.

In the middle of the bond dispute is Luxembourg’s Clearstream Banking SA, a lender that specializes in the settlement and custody of international bonds and equities. Clearstream is a unit of the Deutsche Boerse AG, the Frankfurt-based stock exchange.

Clearstream served as the intermediary for sovereign bonds held by Bank Markazi, Iran’s central bank. Lawyers for the Beirut victims’ families obtained a lien on almost $2 billion worth of bonds parked in a Clearstream account at Citibank in New York almost a decade ago.

The families had rights to about $1.7 billion of those bonds, a federal judge in New York ruled in 2013. Clearsteam had been collecting interest payments on the bonds at Citibank, in violation of U.S. sanctions laws. Citibank, a unit of Citigroup Inc., wasn’t accused of wrongdoing.

The tougher legal challenge for the families has been getting access to a second tranche of bonds that Iran holds via Clearstream. That’s because the securities are held by Clearstream not in the U.S. but in Luxembourg. Interest payments on the bonds were deposited into a Clearstream account at JPMorgan Chase & Co. in New York.

Those bond proceeds were never transferred out the U.S., according to filings. Instead, after Clearstream received the payments into its general JPMorgan account, it made an offsetting bookkeeping entry in Luxembourg, crediting a payment to Iran’s unmarked account at an Italian lender, Banca UBAE, according to legal filings in the case.

According to the filings, Clearstream never informed JPMorgan that interest payments on the bonds were ultimately being credited to Iran’s central bank, by way of the account used by Markazi at UBAE.

Second Suit

Families of the Beirut victims sued Clearstream in 2013, demanding it hand over the bonds connected to JPMorgan. That case was heard by the same federal judge who presided over the suit related to Clearstream’s account at Citibank.

The judge ruled against the victims this time, finding that the bonds in Luxembourg were beyond their reach. The families appealed to the Second Circuit, which surprised some legal experts by ruling that the Iranian-owned bonds could be transferred to New York at the direction of the court under a specific set of circumstances.

After the Second Circuit’s decision, which raised questions about how the Foreign Sovereign Immunity Act should be interpreted, Clearstream, UBAE and Bank Markazi urged the Supreme Court to resolve the matter by overturning the ruling. This month’s request by the Supreme Court invited the U.S. solicitor general’s office to weigh in on the matter.

Clearstream, which filed its own brief asking the Supreme Court to reverse the appellate court’s ruling, declined to comment.

The Luxembourg bank was the subject of a previous U.S. Treasury Department settlement and has been investigated by federal prosecutors.

In 2014, the Treasury Department’s Office of Foreign Assets Control, known as OFAC, penalized the bank $152 million for violating Iranian sanctions by servicing Bank Markazi’s bonds in the Citibank account. Federal prosecutors in Manhattan later issued one or more subpoenas as part of an investigation into Clearstream’s conduct on the Iranian central bank’s behalf. That investigation has gone quiet in the past year.

Whatever happens in the courts or with any further enforcement in the matter could set the tone for other banks that provide services on behalf of sanctioned entities. For now, it’s an open question whether banks can provide certain arms-length dollar-related financial services to Iran’s central bank without inviting U.S. wrath.

The Trump administration has taken a hard line on Iran, pulling out of the nuclear non-proliferation agreement struck in 2015 by the Obama administration. Last week, Treasury Secretary Steve Mnuchin expanded Iranian sanctions to include businesses with ties to a unit of Iran’s Revolutionary Guard Corps.

©2018 Bloomberg L.P.