Money Laundering Bulletin
Iran is labouring under United Nations, US and European Union sanctions. Last year the US tightened the screws further by a series of executive orders: as President Barack Obama said following his re-election in November, 2012: “We’ve imposed the toughest sanctions in history.” Circumvention might also be tougher than ever but even so, some jurisdictions are not cracking down as much as Washington would like. Paul Cochrane reports from Beirut.
Iran has been subjected to US sanctions since the Islamic Revolution in 1979, when the the US blocked Iranian government assets, while the first financial sanctions started in 1980, with an Executive Order prohibiting certain transactions with Iran. Over the last three decades, the US has slapped more sanctions on the country, and in the last few years adding more sectors, ostensibly to reign in Tehran's support for terrorist groups and to stop the development of nuclear weapons.
In 2011, the US renewed the Iran Sanctions Act of 1996 and under Section 311 of the USA Patriot Act 2001, Iran was identified as a jurisdiction of primary money laundering concern. The National Defense Authorization Act of 2012, Sec 1245, ratcheted up the pressure; in effect, “foreign financial institutions that knowingly facilitate significant financial transactions with the Central Bank of Iran or with Iranian financial institutions designated by [the US] Treasury...risk being cut off from direct access to the US financial system.”
In July 2012, sanctions were extended to freeze property of the government of Iran, Iranian financial institutions, and the energy sector; they apply to both US and non-US individuals, companies and other entities. Executive Order 12622 of December 26, 2012, at section 218, prohibited a non-US entity owned or controlled by a US person from engaging in any transaction with the Iranian government.
On the other side of the Atlantic, the EU imposed restrictive measures against Iran in 2007, and again in 2010 and 2012 – targeting the financial sector, energy and the trade in dual-use goods – all designed to frustrate its nuclear ambitions. There have also been four UN Security Council (UNSC) Resolutions (1737 in 2006, 1747 in 2007, 1803 in 2008, and 1929 in 2010), ordering actions against Iranian interests, although only the last dealt with the financial sector and asset freezes. The effects are clear. “I come across dozens of companies a day that are doing due diligence related to Iran – in Dubai, the UK, everywhere, and I've seen many business deals stopped due to the involvement of third party Iranian companies,” said Ghanem Nuseibeh, founder of London-based political risk analyst group Cornerstone Global Associates.
Pushing compliance are the fines for sanctions breaches levied by the US authorities, including Credit Suisse, which paid US$536m in 2009; Barclays US$298m in 2010; Dutch bank IMG setlled an action for US$619m; last year also saw Standard Chartered penalised US$674m and HSBC US$1.92bn (which also covered extensive and persistent Bank Secrecy Act/ AML offences).
“Let's face it, it is only the US regulator that has shown some teeth and has levied serious fines for non-compliance. Regulators in other jurisdictions follow a light-touch approach to non-compliance for money laundering. Punishment of senior management members for failing to take action has been scarce, if any. Plus, there is a lot of pretension around. How many central banks are compliant themselves to AML provisions? And they're the ones - in most cases - that are supposed to audit financial institutions for non-compliance,” said Dr Dionysios Demetis, head of the Anti-Money Laundering and Counter Terrorist Financing Group at Syntax IT Inc., an Athens based consultancy.
Such wide ranging sanctions have caused legal and due diligence complexity for financial institutions and businesses around the world to make sure they are in compliance.
“Client enquiries have increased following the recent rounds of sanctions, executive orders in the US, and council decisions in the EU - which are extraterritorial in their reach,” said Ibtissam Lassoued, Senior Associate heading the Global Economic Sanctions Practice at Al Tamimi & Company, a law firm registered with the Dubai International Financial Centre in the United Arab Emirates. “There is still some misunderstanding on how global economic sanctions apply to the UAE as, legally speaking, there is no legislation related specifically to the UAE, although the UAE Central Bank has implemented UNSC Resolution 1929/2010. Clients think that as they are far from the EU or the US, they are not caught up in the sanctions, but lately they've started to understand that this is something they have to seriously look into and should be very cautious and take preventive actions, even if the company or individuals are based in the UAE.” The delayed response is explained by geographical proximity to Iran and close commercial ties: Dubai, in particular, serves as a major re-export hub for the country; trade between them was US$9.8 bn in 2011, according to Dubai Customs. Half a million Iranians live in the UAE with some 8,000 Iranian traders registered in Dubai.
“For a long time Dubai has been one of Iran's doors to the global economy but it is being clamped down upon, and the federal government is taking it more seriously than a year ago,” said Nicholas Bortman, Head of Middle East Practice at the Dubai office of GPW, a corporate investigations and business intelligence firm. “You hear about local firms coming under pressure, and rumours of banks upping compliance procedures to make sure customer's onboarding are not acting on behalf of Iranians. It is all anecdotal but a while ago we didn't hear about that kind of thing.”
But a Lebanese banking consultant, who preferred not to be named, laughed at the idea of Dubai getting tough. “Dubai is a sanctions free zone, and the US knows it,” he said.
The figures suggest otherwise: the UAE's re-exports to Iran fell by US$3.6 bn in the first half of 2012, down 32% from the same period of 2011, while Dubai saw a 24% drop to US$3.45 bn, according to Dubai Customs. The decline is attributable, at least in part, to the reduced availability of Rials as the Iranian government seeks to halt the currency's depreciation: US$1 bought IRR10,280 in March 2011, now it buys IRR12,270. In February this year, the central banks of the UAE and Qatar told commercial lenders to stop financing trade with Iran.
Trade continues by different means: “We hear of cash-less bartering, trading in kind, deferred payment arrangements, and contracts done not in Iran rials but in other currencies, like Indian rupees,” said Bortman. “There's a general feeling of people sticking to the letter of the law but not necessarily the spirit, as the sanctions regime can be so difficult, even for lawyers, to understand.”
Other neighbouring countries have come under fire from the US for facilitating transactions with Iran, namely Armenia, Turkey and Iraq. In 2012, gold exports from Turkey to Iran surged by 10 times from the year before, to US$6.5 bn, and exports to the UAE rose to US$4.6 bn from US$280 mn, according to Turkish government data. But as of February 2013, US pressure has resulted in the gold trade drying up.
Iraq is also accused of operating as a major hub for Iranian trade and access to foreign currency, notably the Kurdish Autonomous Region. Seyed Azim Hossani, Iranian consul to the region, told the Iraqi press last year that at least 500 Iranian businesses were active in the Kurdish region; while reported trade between Iran and Iraq was officially US$7 bn, the real value was probably closer to US$10 bn, with 70% funneled through the Kurdish region.
Demetis, however, thinks it is a mistake to identify one country or region as especially prone to sanctions busting: “The whole Middle East region is a potential conduit and this is reasonable despite the fierce sanctions,” he said. “The reality of trading and the interdependencies that have been created over decades cannot be cut abruptly even if there are good intentions. Nothing has come to light that would suggest one country is considered more of a conduit than another.”
Indeed, Switzerland has been criticized for blocking sanctions on Iran, while in February 2013, the US urged the European Central Bank (ECB) to stop Iran from using the “Target2” clearing system for global Euro transactions. Some jurisdictions are not reporting on their implementation of sanctions, notably India, Russia and Malaysia, said Nuseibeh. “As the situation has developed and become more difficult, so people are looking for more innovative ways to get around them. Some countries don't use IBAN and those will be easier targets to do such transfers – Qatar for instance, but there is not much business between the two although Doha is trying to be a hub of Iranian travel,” he said.
Ultimately, stopping any Iran-linked transaction is exceedingly difficult. “There are so many different parameters to consider and sometimes transactions could get through by sheer accident, as the monitoring technologies themselves are seriously weak, operate in low True Positive Rate thresholds, and identity data is often incomplete so there is no such thing as proper KYC [know your customer],” said Demetis.
The Iranians have certainly had plenty of experience in getting around sanctions. As a senior Iranian official told the International Crisis Group last year, “After living under sanctions for three decades, we are now in a position to open up a consultancy and share our know-how with other countries facing a similar situation!”