Sanctions Busting 101

Courtesy of Foreign Policy, an article on doing business with countries under sanction:

There’s been a whole lot of head-scratching since it emerged — smack in the middle of the London Olympics — that Standard Chartered, one of the crown jewels of the British financial industry, may have been violating U.S. sanctions against Iran for the better part of a decade. The U.S. accounting firm Deloitte, which was hired to do an “independent” review of the bank’s transactions, claimed to be in the dark, as did Standard Chartered executives. Even the U.S. Department of Justice and the Federal Reserve were caught off guard by the allegations, apparently unable to come to a consensus about the extent of the misconduct.

So just how easy is it to dupe the authorities? Are sanctions really just a game of cat-and-mouse where the devious mice can simply hide bank routing information from the slow-witted cat and make off with billions of dollars worth of cheese?  Or have sanctions against Iran become sufficiently airtight so that even the most creative of evasion techniques won’t immunize you if you’re abetting a rogue regime in the crosshairs of U.S. government officials?

It turns out that Britain’s once venerable Standard Chartered Bank, which stands accused of moving $250 billion in illicit funds and netting hundreds of millions in banking fees in the process, is not the only bank to run afoul of regulators recently. In recent years, U.S. authorities have imposed more than $2 billion in penalties on other sanctions evaders, including ING, Barclays, Credit Suisse, Lloyds Bank, and ABN Amro for similar activities also having to do with Iran. Just two weeks ago, the Treasury Department also sanctioned China’s Bank of Kunlun and the Elaf Islamic Bank of Iraq for transacting with designated Iranian banks.

Standard Chartered’s approach to sanctions busting was a simple process known as “stripping” — the term for removing identification information from wire transfers (in this case, to hide the involvement of Iranian entities). But that’s just one example of the many ways in which companies and their Iranian business partners evade sanctions.

Would-be sanctions busters beware: Any and all profits derived from Iran’s lucrative energy sector are now officially illegal unless you have received a waiver from the Obama administration. Congress and the White House recently closed significant loopholes in Iran’s energy, finance, shipping, insurance, and nonproliferation-related sanctions. The bottom line: Anyone doing business with Iran is putting themselves and their businesses at risk.

That said, no sanctions regime is ironclad. Here is a partial sanctions-busting playbook of 16 other techniques that Iran and its business partners could still use to cover their tracks — and potentially help the mullahs cross the nuclear finish line before they run out of cash.

1. Start with the oldest trick in the book: Bribe or blackmail high-ranking officials to look the other way while your business works with Iran. A proven method is to send bags of cash to officials in places like Moscow, Beijing, or Ankara, where corrupt bureaucrats may be willing to front for you worldwide.

2. Create front companies producing innocuous goods. Set up companies manufacturing laundry detergent in China, Pakistan, Ghana, Mexico, and Nicaragua, and forget about the soap. Use them as merchant banks to launder funds through over-priced and under-priced receipts. Tip: This also works with baby blankets.

3. Use front companies to buy banned goods from the West and ship them through countries with strong economic and transportation links to Iran. Create one company in the Netherlands and another in Turkey. Find an Iranian national with a Dutch passport and make him the owner of a Dutch company. Then procure sensitive technology from Europe, pay for it through the Dutch bank account, and sell it to the Turkish company, which pays for it through a Turkish bank account. (Is your head spinning yet?) Deliver the technology through the Turkish port of Borusan, conveniently located in Bursa, on the southern shore of the Sea of Marmara, within easy shipping distance from Europe. From there, it’s easy enough to use Turkey’s excellent rail and highway links to deliver the goods to Tehran via train or truck.

4. To hide the Iranian origins of its shipping fleet, reflag IRISL and NITC to places like Tuvalu and Tanzania, with corporate fleet owners based in the Seychelles or the British Virgin Islands. Set up a post-office box in the middle of the Pacific Ocean, and relabel the ships with innocuous, non-Farsi names like Freedom, Truth, Honesty, Justice and Leadership. Renaming the ships will not fool anyone (each ship, regardless of its name, has a unique and visible International Maritime Organization identifying number). Nevertheless, you’ll find greedy people the world over for whom the color green causes willful blindness.

5. Stop fussing around with global insurance coverage for Iranian ships or foreign ships docking in Iranian ports. Set up the “Not Iran Insurance Company” and use it to do direct backroom deals with businesses in countries where you’re already trading and laundering funds. Focus particularly on the Asian insurers looking to pick up maritime insurance contracts for the shipping of covert Iranian oil sales. Many will only be too happy to join your insurance syndicate.

6. Discover Europe’s many private airports, where export and customs controls are less stringent. Germany is a good place to source the goods you need, and it has a network of private airports from where you can fly to third countries, and then onto Iran. Find Russians or Eastern Europeans willing to front for your Iranian business. Diaspora Iranians are more likely to raise suspicions.

7. Buy influence in as many U.N. departments and programs as possible. Use obscure U.N. agencies like the World Intellectual Property Organization to procure dual-use equipment and technology in the name of development aid. Use U.N. containers, which are rarely searched, to make these immune to customs inspections.

8. Use Iran’s national carriers like NITC and IRISL to move illegal items. U.N. sanctions on Iran, unlike tougher measures against North Korea, only permit searches within territorial waters of a nation if that nation has “reasonable grounds to believe that the … vessel is transporting goods prohibited.” And remember: Countries supplying or receiving those prohibited goods from Iran will naturally find no “reasonable grounds” for that search.

9. Set up charities, especially religious charities, to provide support for sick children, then use the charities to help move cash around to buy goods and influence. Protest loudly when anyone starts digging into such things.

10. Run extraterritorial financial operations out of foreign banks that have no business in the United States or Europe and don’t care less about Western sanctions. If one or two get designated (see Bank of Kunlun and Elaf Islamic Bank of Iraq), find another. There will always be another. Use the SWIFT global payment messaging system to move the money from these banks to the more than a dozen Iranian entities that the EU has not yet designated or ordered disconnected.

11. If you need to deal with more credible banks, look for those with a reputation for aggressive business practices in emerging markets. If wire-transfer stripping is becoming more challenging, try reassigning letters of credit via the account of a willing bank. Here’s how you do it: Make the payment look like it will go to the official business partner in a transaction, but, with a little cooperation from the folks inside those banks, direct the payment somewhere else on behalf of Iran.  Buy from Malaysia and pay someone in Africa. Don’t worry: On the books, it all adds up.

12. Place Iranian oil in a third-country storage facility and sell it through a “foreign” front company. Fujairah in the United Arab Emirates and Ain Sukhna in Egypt have good storage facilities and friendly officials looking for a piece of the action. You can re-export the Iranian oil as some other country’s oil by re-flagging or blending it. Cash-hungry refineries — try Greece or Indonesia — will be happy to make you an oil cocktail, and customs officials won’t know the difference. Next, deposit proceeds for that sale into an Iranian business that has not yet been blacklisted by the U.S./EU (minus a kickback to the friendly officials and a discount for the refinery, of course). If you’re feeling particularly brash, sell refined petroleum made from Iranian crude to the United States; there’s still a loophole in U.S. law that permits this.

13. Barter your oil. Sell oil to China, India, South Korea, or elsewhere, get paid in the local currency, then buy the goods and services you need from them. Persuade willing banks and officials to transfer some of those yuan, rupees, and won to foreign-exchange houses in the Gulf that will convert it into hard currency for a fee. By the way, the Turks will gladly pay you for Iranian oil in gold.

14. Swap oil with state-owned energy companies, preferably owned by Kremlin insiders. Give them big commissions for selling their oil to your customers. Restock their oil inventories through the Caspian or road tankers driving north through the ‘Stans or Armenia. Use the same technique with AKP insiders in Turkey. Don’t be too dependent on the Kremlin.

15. Order telecom and technology equipment for Iran from Asian, Western and African companies. Make sure you get the tracking, monitoring, and censorship features for “law enforcement” purposes but don’t tell anyone you’re targeting dissidents. Bundle in software and hardware from America’s best-known technology companies without their knowledge. Trade access to lucrative Iranian telecom licenses for other sanctions-busting or influence-peddling favors. Pay senior government officials, or others with real influence in key capitals, to deliver speeches on generic topics. Pay them well for those speeches.

16. And, if all else fails, see your personal banker at a famous international financial institution. They seem to have just what you need, and with a smile too.

These are just a few of the many ways in which sanctions evaders can and have helped Iran. But would-be evaders should be very careful. If your humble author has thought of these, you can be sure enforcement officials have imagined and examined many others. It is becoming increasingly difficult for sanctions-evaders to find loopholes in the U.S. sanctions regime against Iran. American officials are increasingly willing and able to crack down on sanctions violators from allies and politically sensitive countries alike.

Sanctions busting also depends on a decreasing number of players willing to take the risks. These players will exercise their increased market power by negotiating deep discounts or steep premiums for helping the Iranians evade sanctions. Indeed, the tougher the legislators, regulators, and enforcers are in cracking down, the more the evaders will have the Iranians over a barrel.

In the end, the success of the sanctions depends not on the sanctions busters, who may have little material impact on Iran’s ability to extend its economic day of reckoning, but rather on the one question that has yet to be answered about sanctions’ efficacy: whether the regime’s economic expiration date — when Iran’s Supreme Leader Ali Khamenei’s cash hoard falls low enough to set off a massive economic panic — occurs before it has developed the capability to cross the threshold to a nuclear weapon.

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