* U.S. election outcome adding to uncertainty
* Banks still fearful of fresh fines (Writes through with comment, detail, background)
By Kylie MacLellan and Jonathan Saul
LONDON, Nov 2 (Reuters) - Trade between Britain and Iran is beginning to grow but the reluctance of large Western lenders is holding back a major expansion of ties and needs to be resolved, government and finance officials said on Wednesday.
Since the removal of international banking restrictions in January, Tehran has secured links with only a limited number of smaller banks as U.S. sanctions remain in force and large foreign institutions still fear potential fines.
Banks remain nervous after U.S. penalties including a $9 billion fine on France’s BNP Paribas in 2014, partly for violating financial sanctions imposed in 2012 to pressure Iran to abandon its nuclear programme.
Major global lenders like HSBC have reiterated they have no intention of doing any new business involving Iran, questioning why the United States is encouraging them to do so when U.S. financial firms are restricted.
British trade minister Liam Fox said on Wednesday that Anglo-Iranian relations had improved since Britain reopened its Tehran embassy last year and it would work to expand bilateral trade following the vote to leave the European Union.
“Slowly but with increasing enthusiasm, British companies are starting to do business with Iran again ... We are seeing the first signs of growing trade between the UK and Iran,” Fox told a City and Financial Global conference in London.
“The banking sector’s ongoing concerns about facilitating payments or providing financial services means that the benefits of sanctions relief are not yet being fully realised. Resolving these problems remains a priority for this government.”
Norman Lamont, Britain’s trade envoy to Iran and a former British finance minister, said the deadlock over progress on banking access to Iran was “profoundly unsatisfactory”.
“This is an embarrassing situation ... these difficulties only strengthen the critics of (Iranian) President (Hassan) Rouhani,” he told the event.
The administration of U.S. President Barack Obama has tried to promote deeper international trade for Iran while still limiting U.S. business engagement due to sanctions that bar U.S. banks from doing business with Iran and prevent transactions with Iran in dollars being processed through the U.S. financial system.
Fox said the government was working with the banking sector to find a solution for Iranian payments, and that Britain was well-placed to help private Iranian banks modernise.
Giles Thomson, deputy director of sanctions and illicit finance at Britain’s finance ministry, said while some progress had been made “it is something that is going to take time to really work through and for the full benefits to be realised”.
Iran’s ambassador to Britain, Hamid Baeidinejad, said the banking problems were “highly troublesome” for Iran, adding that the United States was “disappointed”.
U.S. Secretary of State John Kerry has spent months trying to encourage non-U.S. banks and companies to boost trade, although he has acknowledged the complications.
Last month the Obama administration updated its guidance that non-U.S. banks can do dollar trades with Iran, provided those transactions don’t pass through financial institutions in the United States.
Justine Walker, director of financial crime with the British Bankers’ Association (BBA), which represents the industry, said primary U.S. sanctions still in place could not be ignored.
“For any of the global banks, they do have a very strong U.S. presence and that is something that they need to get comfortable with in how they insulate their U.S. exposure and that is taking time and involving changing lots of policies,” she told Reuters.
Walker said banks were also watching for the outcome of next week’s U.S. presidential election.
Investors are rethinking long-held bets of a Nov. 8 victory for Democrat Hillary Clinton on signs that her Republican rival Donald Trump could be closing the gap. Trump has said he would tear up the nuclear deal reached with Iran.
“What we will see is gradual movements (by banks into Iran),” the BBA’s Walker said. “Unless the U.S. lifts primary sanctions, there is not going to be a set day ... banks will get to that stage at different times.”
Trade sources say many global banks are also trying to win more work in Saudi Arabia as it tries to diversify the economy and wean itself off oil. A perception of being too close to Iran could hamper banks’ prospects in Saudi, given hostile relations.
In June FATF, a global group of government anti-money-laundering agencies, decided to keep Iran on its blacklist of high-risk countries.
FATF welcomed Iranian promises and called for a one-year suspension of some restrictions, but this did little to ease the banks’ fears.
Iran’s politically powerful elite military force, the Islamic Revolutionary Guards Corps (IRGC) which has extensive business interests, including through front companies, remains sanctioned, posing more compliance worries for banks and companies.
Charles Blackmore, chief executive of advisory firm Audere International, said the IRGC represented a “shadow economy”.
“You have got to look at the transparency of local ownership of companies, you have to identify beneficial ownership. You will get penalised very, very hard if you get this wrong,” Blackmore told the conference.
Fox said that while this was an opportunity to put UK-Iranian relations on a new footing, the government was also “deeply concerned” about Iran’s record on human rights and a number of British-Iranian dual nationals detained there.
The British government is prioritising opportunities for exporters in sectors such as retail, healthcare, water, advanced manufacturing, mining, airports and aviation, Fox said, and will send a mining sector delegation to Tehran in December.
“Iran does remain, however, a challenging place to do business, and needs to do more to meet international banking standards and instigate reform if it is to enjoy a post-sanctions dividend,” he said. (Editing by Hugh Lawson/Ruth Pitchford)