By Yeganeh Torbati, Anna Yukhananov and Karen Freifeld
WASHINGTON/NEW YORK, May 14 (Reuters) - Major banks wary of heavy U.S. penalties will be reluctant to restore ties with Iran even if sanctions are lifted in a possible nuclear deal, bank executives and advisers say, likely denting Iran's ambition to attract foreign investment to revive its crippled economy.
After years of being frozen out of the global banking system and most trade with the West, Iran is eager for sanctions to be lifted so it can draw in foreign companies and attract investment to upgrade its long-neglected energy sector.
Yet without more bank financing and a means of transferring funds in and out of Iran, that commercial potential could remain largely untapped, stunting hopes for a post-agreement investment boom. Banks' reluctance to deal with Iran highlights the risk that its economy will not get quick relief, possibly eroding support for the nuclear deal among Tehran's leadership.
Lured by the world's fourth-largest oil reserves and second-largest natural gas reserves, oil majors such as Shell have expressed interest in entering Iran
Airlines and automakers are also interested, according to diplomatic sources and people close to the industries, eyeing Iran's 80 million population -- more than that of the combined six-nation Gulf Cooperation Council.
But about a dozen international banks, mostly European, have been stung by U.S. penalties for sanctions-busting totaling nearly $14 billion since 2009, raising industry fears that the risk of engaging Iran would overshadow any gain.
Banks recently hit by penalties include BNP Paribas and Commerzbank while several others including Deutsche Bank, Societe Generale and Credit Agricole are under investigation, according to people familiar with the matter. BNP Paribas had to forfeit $8.9 billion.
"Given all the anti-money laundering issues, anyone who thinks they can go into Iran has got to be insane," an executive with a major U.S. bank said, asking not to be identified given the sensitivity of the topic.
"There's just not enough business in Iran" to risk one payment causing a massive penalty, the executive added.
Under a framework agreement reached between six major powers and Tehran in April, Iran agreed to limit its sensitive nuclear activity in exchange for sanctions relief. Crucial details, including the timing of sanctions removal, still need to be worked 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 to human rights and Tehran's support of militant groups in the Middle East.
The U.S. Treasury's designation of the entire Iranian financial sector as a "primary money laundering concern", alleging terrorism financing and pursuit of weapons of mass destruction, would likely remain. While that itself does not prohibit transactions, it would discourage banks from re-opening business with Iran, bankers and sanctions experts said.
Standard Chartered, among the few international banks with a license to operate in Iran, is not looking to go in, according to its spokeswoman, Julie Gibson.
In 2012, New York's financial regulator threatened to revoke Standard Chartered's state license, calling it a "rogue institution" that hid $250 billion in transactions tied to Iran. It ended up paying U.S. and state authorities $667 million in fines that year for sanctions violations, and deferred prosecution 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 well as on how the bank would react if sanctions are lifted as part of the nuclear deal. A Credit Agricole spokeswoman said the investigation was ongoing but declined further comment. Lloyds Banking Group, ING Group, Unicredit, and Societe Generale did not respond to requests for comment.
Banks targeted by U.S. authorities have generally been accused of knowingly moving millions of dollars through the U.S. financial system on behalf of Iranian, Sudanese, and other entities subject to economic sanctions. The banks hid the transactions, in part by stripping wire information identifying sanctioned entities so they would not raise red flags.
Companies have already experienced difficulties operating in Iran due to banking problems.
MTN Group, a South African mobile phone operator, has struggled to get money from its Iran unit out of the country since 2012 due to sanctions.
It still has about $1 billion in accumulated dividends and a loan repayment stuck in the country.
CHINA, DUBAI TO THE RESCUE?
Banks based in countries such as China and India are likely to be less worried about the risks, because they have less business in the United States and do not believe their own countries would re-impose sanctions on Iran. These banks could expand their Iran business in the event of a deal, said Gary Hufbauer, a former Treasury official and sanctions expert at the Washington-based Peterson Institute.
Iran last month became a founding member of the new China-led Asian Infrastructure Investment Bank, whose remit is to finance infrastructure development in the region, although the 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 always been very good" and its business will continue regardless of a nuclear deal.
But many others remain cautious.
Banks have shied away even from legitimate trade with Iran. The existing sanctions include waivers for food and medicine imports.
State Bank of India, the nation's top lender and the only Indian lender to have presence in Iran, said it does not have immediate plans to expand in Iran, or convert its representative office in Tehran into a branch.
Among Gulf banks, memories are fresh of a U.S. sanctions crackdown that forced Dubai-based Noor Islamic Bank, now known as Noor Bank, to stop channeling billions of dollars from Iranian 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 will be banks that move in first, it will be our customers going in and we will follow."
A spokesman for Emirates NBD, Dubai's largest bank, declined to comment on potential opportunities in Iran, noting the ongoing nuclear negotiations.
The kind of long-term investments crucial to revamp oil infrastructure will be difficult without the participation of major international financial institutions, experts said.
In the country's most recent five-year plan, Iranian officials called for $230 billion of investment in the petroleum sector, mostly to expand oil and gas production.
Western sanctions have cut Iran's oil exports by more than half to around 1.1 million bpd from a pre-2012 level of 2.5 million bpd, hurting investment in new development.
Development of gas reserves has also been long delayed. Iran shares the world's largest natural gas field with Qatar. The resource has made the neighboring Gulf country the world's largest 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 could help his country's major companies with payments and loans if they go into Iran. Other than that, the bank has no interest and will not pursue any private client business in Iran, he said.
"Am I waiting at the border to go in as soon as the ink is dry? No," he said, asking not to be identified.
(Additional reporting by Thomas Arnold in Dubai, Devidutta Tripathi in Mumbai, Engen Tham in Shanghai, Louis Charbonneau in New York, Joe White in Detroit, and Douwe Miedema in Washington, Editing by Soyoung Kim and Stuart Grudgings)
