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VIENNA, May 7 (Reuters) - The United States said on Tuesday that European powers are unlikely to live up to a pledge to prevent their conduit for trade with Iran being used to launder money or finance terrorism, raising the prospect of further U.S. sanctions.
France, Britain and Germany have set up the special purpose vehicle called Instex, a conduit for barter-based trade with Iran, in an effort to protect at least some of Iran's economy from sweeping U.S. sanctions and keep alive a big-power nuclear deal that Washington is about to quit.
The three European Union members have been trying to get Iran to keep its commitments under the deal to cut back its nuclear program - which Washington distrusts - by helping it to circumvent the trade sanctions that Washington has reimposed.
They want Instex to meet norms for legitimate financing set by the Paris-based Financial Action Task Force, even though Iran as a country is not yet fully compliant with them.
But U.S. Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker said this would be hard for the Iranian side of Instex, with much of Iran's economy both opaque and connected to institutions under U.S. sanctions such as the Revolutionary Guard Corps (IRGC).
"I question how that's even remotely possible ... with a country like Iran where the IRGC is so endemic within the economy but also hidden in many different respects," said Mandelker, one of the chief architects and enforcers of U.S. sanctions against Iran.
Washington has already accused the Europeans of undermining its efforts to isolate Tehran since President Donald Trump announced a year ago that it was pulling out of the big-power deal.
Iran is still complying with the restrictions imposed by the deal, which have increased the time it would need to build a nuclear bomb if it chose to.
But with the United States introducing new sanctions aimed at crippling its economy, many European officials fear the deal will soon crumble anyway.
On Tuesday, the state news agency IRNA said Iran's Foreign Ministry would announce Tehran's "diminished commitments" to the nuclear deal to the five remaining signatories on Wednesday.
A failure by Iran to comply fully with FATF standards by June will bring enhanced FATF scrutiny of banks there, and possibly punitive measures, which are now suspended.
One European official said that the "absence of transparency and due diligence in Iran's financial system is clearly a problem in cooperation with the EU."
"With regard to Instex, we didn't say it was a prerequisite for it to conform (with FATF standards), but what is clear is that anything the Iranians would do to facilitate transparency in the economy would help Instex," he said. He added, however, that so far there had been little movement by Iran.
Nevertheless, Iranian Foreign Minister Mohammad Javad Zarif told the Russian news agency RIA on Tuesday that Iran was close to a deal to sell oil to the European Union, avoiding U.S. sanctions.
Mandelker repeatedly declined to specify what future action Washington might take, but said it would enforce sanctions strictly.
The U.S. Treasury has said Iran's central bank has transferred funds to Lebanon's Hezbollah, an armed Shi'ite political grouping that Washington considers a terrorist group.
"How can you engage in a trade vehicle with an entity that itself is supporting the movement of money for terrorist organizations?" Mandelker said.
"I think it's extremely complicated for the Europeans to think that they're going to be able to do that ... Where we see sanctionable activity, we're going to take action to confront it."
The United States and the U.N. nuclear watchdog believe Iran once had a nuclear weapons program but abandoned it, while Iran denies ever having had one. (Additional reporting by John Irish in Paris; Editing by Kevin Liffey)