WASHINGTON—The Obama administration agreed to back the lifting of United Nations sanctions on two Iranian state banks blacklisted for financing Iran’s ballistic-missile program on the same day in January that Tehran released four American citizens from prison, according to U.S. officials and congressional staff briefed on the deliberations.

The U.N. sanctions on the two banks weren’t initially to be lifted until 2023, under a landmark nuclear agreement between Iran and world powers that went into effect on Jan. 16.

The U.N. Security Council’s delisting of the two banks, Bank Sepah and Bank Sepah International, was part of a package of tightly scripted agreements—the others were a controversial prisoner swap and transfer of $1.7 billion in cash to Iran—that were finalized between the U.S. and Iran on Jan. 17, the day the Americans were freed.

The new details of the delisting have emerged after administration officials briefed lawmakers earlier this month on the U.S. decision.

According to senior U.S. officials, a senior State Department official, Brett McGurk, and a representative of the Iranian government signed three documents in Geneva on the morning of Jan. 17.

One document committed the U.S. to dropping criminal charges against 21 Iranian nationals, and Tehran to releasing the Americans imprisoned in Iran.

Another committed the U.S. to immediately transfer $400 million in cash to the Iranian regime and arrange the delivery within weeks of two subsequent cash payments totaling $1.3 billion to settle a decades-old legal dispute over a failed arms deal.

The U.S. agreed in a third document to support the immediate delisting of the two Iranian banks, according to senior U.S. officials. In the hours after the documents were signed at a Swiss hotel, the different elements of the agreement went forward: The Americans were released, Iran took possession of the $400 million in cash, and the U.N. Security Council removed sanctions on Bank Sepah and Bank Sepah International, these officials said.

“Lifting the sanctions on Sepah was part of the package,” said a senior U.S. official briefed on the deliberations. “The timing of all this isn’t coincidental. Everything was linked to some degree.”

A documentary published by Tasnim News Agency, an Iranian media outlet affiliated with the elite Islamic Revolutionary Guard Corps, claimed in February that Iranian government officials had demanded that Sepah be taken off the sanctions list as part of a deal to release the prisoners.

The Obama administration, under the nuclear deal reached in July 2015, agreed to lift Treasury Department sanctions on Bank Sepah, but U.N. penalties were to remain in place for eight years.

But after the nuclear deal was forged, U.S. officials said, there was a continued dialogue with Iran about the status of the two banks before the deal went into effect in January.
Tehran argued that the banks were critical to the country’s economy and international trade. Bank Sepah is Iran’s oldest bank and one of its three largest in terms of assets. Bank Sepah International, based in London, was key to financing Iran’s international trade before sanctions were imposed.

U.S. officials said there was a desire in Washington to harmonize the U.N. sanctions list with the U.S.’s. And they said Washington believed Iran had earned more sanctions relief because Tehran had been implementing the terms of the nuclear agreement, which called for a major scaling back of its infrastructure and production of nuclear fuel.

“The issue of Bank Sepah has been one of many topics we discussed with Iran in our overall diplomatic discussions,” said a second senior administration official briefed on the deliberations.

Another senior administration official said lifting sanctions on Bank Sepah and its London affiliate was in the spirit of the commitment by the U.S. and other world powers to provide Iran with sanctions relief.

Administration critics and some congressional officials said they believed the move broke the commitments the administration made to Congress about the deal.

The Obama administration had told Congress that under the deal the U.S. would lift sanctions only on companies and individuals tied to Iran’s nuclear development. Sanctions on those involved in missile development were to remain in place, these critics said.

The Obama administration has repeatedly said it is committed to rolling back Iran’s ballistic missile program.

“By agreeing to remove U.N. and EU sanctions eight years early on Iran’s main missile financing bank, the administration effectively greenlighted their nuclear warhead-capable ballistic missile program,” said Mark Dubowitz, a top critic of the Iran nuclear deal at the Foundation for Defense of Democracies, a Washington think tank.

The U.S. Treasury Department sanctioned Bank Sepah, Bank Sepah International and its then-chairman in 2007 for their alleged role in backing Iran’s missile program. The designation didn’t mention what direct role the entities allegedly played in helping Iran’s nuclear program.

At the time, the Treasury said that Bank Sepah and Bank Sepah International had provided financial support to Iranian-state owned companies and organizations developing Iran’s missile program. These included Iran’s Aerospace Industries Organization and the Shahid Hemmat Industries Group.

“Bank Sepah is the financial linchpin of Iran’s missile procurement network and has actively assisted Iran’s pursuit of missiles capable of carrying weapons of mass destruction,” the Treasury said in a January 2007 statement.

Iran has conducted up to 10 ballistic missile tests since the forging of the nuclear agreement in July 2015. The U.N. Security Council has condemned Tehran’s actions but hasn’t moved to impose any new sanctions on the country.In March, the Treasury Department imposed sanctions on two Iranian companies it said were working with Shahid Hemmat Industries.

U.S. officials said the Obama administration closely vetted the activities of all individuals and entities tied to Bank Sepah before supporting the lifting of U.S. and U.N. sanctions.

“We have the ability to quickly reimpose U.S. sanctions if Bank Sepah or any other entity engages in activities that remain sanctionable,” said the second senior U.S. official.

The Obama administration’s decision to send such large amounts of cash to Iran has fueled charges in Congress that the White House paid ransom to Tehran to secure the release of the American prisoners. The White House has repeatedly denied the charge, saying the $1.7 billion settlement saved the U.S. as much as $8 billion that it could have owed Iran if it lost, as was expected, a court proceeding that was taking place in The Hague, Netherlands. The administration has said the cash was used as “leverage” to make sure the American prisoners were released.

The dispute in Washington has only deepened in recent weeks, as senior Pentagon officials, including Secretary of Defense Ash Carter, told Congress in a hearing that they weren’t notified by the White House about the cash transfer. The chairman of the Joints Chief of Staff, Marine Gen. Joe Dunford, said at a hearing last week that he found it “troubling” that the U.S. provided Tehran with so much cash, which he argued could be used for “spreading malign influence.”

By The Wall Street Journal