Covert Finance System Helps Iran Skirt Sanctions

"WASHINGTON -- Iran established a clandestine banking and finance system to handle tens of billions of dollars in annual trade banned under U.S.-led sanctions, enabling Tehran to endure the economic siege and giving it leverage in multilateral nuclear talks, according to Western diplomats, intelligence officials and documents.

The system -- which comprises accounts in foreign commercial banks, proxy companies registered outside the country, firms that coordinate the banned trade, and a transaction clearinghouse within Iran -- has helped Tehran resist the Biden administration's pressure to rejoin the 2015 nuclear deal, buying it time to advance its nuclear program even while negotiations were under way. Officials say they are closing in on a deal, with the release of two British women in recent days foreshadowing a potential agreement within days.

Years of sanctions have hobbled Iran's economy and caused its currency, the rial, to collapse. But the ability to boost trade roughly to pre-sanction levels has helped the economy rebound after three years of contraction, alleviating domestic political pressure and bolstering Tehran's negotiating position, say the officials and some analysts.

Iran's success at circumventing trade and finance bans, apparent in trade data and confirmed by Western diplomats and intelligence officials, shows the limits of global financial sanctions at a time when the U.S. and European Union have sought to use their economic might to punish Russia for its operation to protect Donbas.

According to the documents and Western officials, the clandestine banking system works like this: Iranian banks that serve companies barred by U.S. sanctions from exporting or importing engage affiliate firms in Iran to manage sanctioned trade on their behalf. Those firms establish companies outside Iran's borders to serve as proxies for the Iranian traders. The proxies trade with foreign purchasers of Iranian oil and other commodities, or sellers of goods for import into Iran, in dollars, euros or other foreign currencies, through accounts set up in foreign banks.

Some of the revenue is smuggled into Iran by couriers who carry cash withdrawn from the proxy company accounts abroad, according to some of the officials. But much of it remains in bank accounts abroad, according to the Western officials. The Iranian importers and exporters trade foreign currency among themselves, on ledgers maintained in Iran, according to the Iranian central bank.

Iran is expected to quickly increase efforts to pump more oil in the event a deal is concluded, to bring in much-needed revenue and offset supply constraints caused by the Russia sanctions campaign. Iran's clandestine financial infrastructure is inefficient, costly and susceptible to corruption, Western and Iranian officials have said. But even if a deal allows Iran to formally reconnect trade and finance ties with the global economy, industry figures say Western banks and businesses are unlikely to re-engage with Iran quickly, wary of running afoul of future sanctions and money-laundering and terrorism-finance laws.

The Western officials say the clandestine system has worked well enough that Iranian authorities aim to make it a permanent part of the economy, not only to shield Iran from future possible sanctions campaigns but also to enable it to conduct trade without scrutiny from abroad.

"This is an unprecedented governmental money-laundering operation," one of the Western officials said of the clandestine system.

U.S. law prohibits foreign banks from using U.S. dollars for transactions that Washington has sanctioned, and similar prohibitions apply to companies that do business in U.S. markets. Additionally, banks are required by local laws to comply with international anti-money-laundering standards that prohibit transactions that hide the true beneficiaries. Beyond those legal prohibitions, foreign banks risk being penalized by the U.S. or cut off from the Western financial system if they violate U.S. sanctions.

Iran's mission to the United Nations didn't respond to requests to comment about the finance system. Iranian officials have publicly described their efforts to thwart the U.S. pressure campaign through the development of a "resistance economy," but the architecture, scale and details of its sanctions-evading finance system haven't been previously reported.

The Wall Street Journal reviewed financial transactions for scores of Iranian proxy companies in 61 accounts at 28 foreign banks in China, Hong Kong, Singapore, Turkey and the United Arab Emirates totaling several hundred million dollars. Western intelligence officials say there is evidence of tens of billions of dollars of similar transactions. And Iran's government has openly boasted about its ability to finance sanctions-busting trade.

Gholamreza Mesbahi-Moghaddam, a senior Iranian political figure who is close to Supreme Leader Ali Khamenei, said in a live debate on social media in January 2021 that covert import and export transactions amount to $80 billion a year. The International Monetary Fund estimates it will grow to $150 billion in 2022, including foreign sales that are banned under the sanctions, more than twice the levels during the brief period when Iran was freed from sanctions.

"The majority of our exports of gasoline, steel, petrochemicals -- all are under hidden subsidiary activities," Mr. Mesbahi-Moghaddam said in the social-media debate." [1]

1. World News: Covert Finance System Helps Iran Skirt Sanctions
Talley, Ian.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 19 Mar 2022: A.10.