Financial institutions

Iran exploits gullible financial institutions

For more than 40 years, major democracies, including the United States and members of the European Union and international organizations such as the United Nations, have worked to thwart Iran’s regional ambitions by obstructing access of the regime to the international financial system.

The toughest and most extensive sanctions imposed since the 1979 Islamic Revolution have targeted the country’s banking and energy sectors.

By restricting Tehran’s access to international banking systems and global energy markets, the international community has effectively isolated Iran economically and politically, curbing the regime’s nascent nuclear program and limiting its ability to finance international terrorism and the mandated regional organizations.

As a result, the Iranian economy has been stifled. Denied access to conventional banking and financial institutions and shaken by the loss of more than US$100 billion in frozen assets, the Iranian regime’s ability to advance its nuclear program and fund regional proxies like Hezbollah has been undermined. considerably limited.

However, the current sanctions regime has proven to be an imperfect stopgap against Iran’s belligerent activities. Regulatory loopholes and lack of adequate global cooperation have allowed the Islamic Republic to circumvent international sanctions and banking embargoes.

By exploiting these loopholes, the Islamic Republic has been able to continue to operate a lucrative shadow banking system, which allows it to funnel tens of billions of dollars in illicit funds through a network of offshore front companies and financial intermediaries.

This system would have allowed Tehran to launder drug profits, finance terrorist activities, support oppressive regimes and further develop its nuclear program.

More importantly, it allowed the Iranian government to retain a vast export trade in petroleum products, undermining one of the main sources of international pressure against the regime.

Indeed, Iran has violated the sanctions. A Wall Street Journal article exposes the outrageous nature of Iran’s lucrative financial antics and its use of the international banking system through private financial accounts to help Iran evade sanctions and ease economic pressure on the system of government.

Despite Iran’s brazen disregard for international restrictions, key regulators and policymakers in the US and EU have had limited success in cracking down on Iran’s illicit banking activities. For example, an ongoing dispute between Iran and Bahraini banks shows the limits of US and European efforts to crack down on Tehran’s increasingly sophisticated shadow banking operation.

After uncovering extensive evidence of money laundering and other sanctions violations, Bahrain’s Financial Investigation Directorate recently filed charges against 13 Iranian banks, including the Central Bank of Iran (CBI).

The dispute follows the highly publicized 2015 closure of Bahrain’s Future Bank, a jointly owned bank that allegedly facilitated more than $1.3 billion in secret transactions from Bank Saderat Iran, Bank Melli Iran and of the CBI.

According to documents uncovered by the Washington Post, bank officials deliberately operated alternative transaction infrastructure and informal delivery systems, including stripping, cash transfer and cryptocurrencies, to protect transactions. against automatic detection and enforcement systems.

Although the practices are clear violations of anti-money laundering and sanctions protocols, the banks were later cleared by a Hague-based arbitration panel, which accused Bahrain’s regulators of expropriating Iranian funds and acting on regional animosities rather than legal mandates.

The panel’s decision is a microcosm of a broader failure of international cooperation and an international legal system that has plagued Iran’s sanctions regime with legal loopholes and regulatory contradictions.

The Bahraini case is also notable for the central involvement of the CBI, the agency ostensibly tasked with maintaining the integrity of Iran’s financial system and overseeing its internal banking and credit institutions. Yet, over the past four decades, the CBI has been directly implicated in the systematic concealment of billions of dollars in Iranian assets.

According to reports from the Financial Crimes Enforcement Network, senior CBI officials have traditionally acted as primary conduits for Iran’s illicit financial transactions. For example, as Iran’s representative to organizations such as the International Monetary Fund, the CBI is able to leverage its membership – and the access it provides to regulatory arbitrage opportunities and to banking networks – to develop and deploy new mechanisms for hiding Iranian assets.

Unsurprisingly, the Islamic Republic’s failure to comply with anti-money laundering regulations and its well-documented history of sanctions evasion led to Iran being blacklisted by the Financial Action Task Force (FATF), an international watchdog group that monitors and tracks money laundering. and the financing of terrorism.

In addition to making a mockery of laws and regulatory frameworks designed to protect international markets, the continuation of these practices encourages other rogue state actors to adopt an equally opaque stance in the global financial system.

Ultimately, the continued complicity and tolerance of Iran’s shadow banking network not only creates a more vulnerable financial environment for other entities in adjacent capital markets, but also introduces a significant threat of reputational and loss of confidence for investors and institutional partners attached to the associated parallel banking network. banks.

Meanwhile, the international community must develop an effective and robust framework to sanction non-compliant financial institutions, including the CBI. Otherwise, Iran will continue to reap the rewards of its financial crimes and the international community will have to foot the bill.