17/09/2018

Whatever happened to Iran’s frozen assets?

What happened to an estimated $100-120bn of frozen Iranian assets which at the time of the 2015 Iran nuclear deal were reportedly being held by banks and institutions around the world? This is an edited version of an interview I conducted with leading Arabic newspaper, Al-Sharq al-Awsat, published in their 29 August edition.

Following the money: This is my Middle East-focused blog series focusing on my areas of specialisation: Money laundering, financial crime, sanctions evasion and funding for terrorist and militant groups. Barry Marston, Senior Consultant, Aperio Intelligence

 

Do we know how much money Iran has in foreign banks, Europe for instance? Can Iran move these monies freely, or are they under sanctions?

This is a challenging question to address because it refers to a broad range of governmental, commercial and personal assets which were frozen in a variety of contexts: For example; partially-implemented arms deals prior the 1979 fall of the Shah. This also included impounded assets, like the former Iranian embassy building in Washington; with contradictory estimates of value, accumulated rent and net interest. A similar situation also applied for oil revenues accruing to Iran which couldn’t be repatriated due to sanctions. $100-$120bn was the ballpark figure touted by officials and experts as of 2015 for worldwide frozen Iranian funds. Additionally, the US Treasury’s 2016 terrorism assets report cited the IRGC Quds Force as being the entity with the largest pool of frozen terrorist assets in the US ($14.3m).

Around $50bn of frozen funds (mainly oil revenues accruing to Iran) were reportedly held in East Asian central banks. It is understood that prior to 2015 Iran had already succeeded in freeing up some of these assets, simply by treating these funds as down-payment for goods purchased from China, South Korea, Japan, India and elsewhere. Some of these funds merely existed on paper. For example; Iran’s Oil Ministry lent $22.4bn to Chinese entities as a means of securing energy projects – but Iran’s Central Bank later acknowledged that the borrowers “do not have the ability to repay them”.

One of the reasons for escalating tensions between the US and Turkey is the discovery of a massive scheme between 2012-14 which [as found by a major US trial ending in May 2018] laundered an estimated $13bn of funds frozen in Turkish and foreign banks back to Tehran, often by simply converting these funds into gold. This scheme involved a number of Turkish banks, including state-owned Halkbank. US prosecutors have sought to indict former Turkish Economy Minister Mehmet Zafer Caglayan for allegedly accepting $50 million in bribes for facilitating the scheme on behalf of Iran. Dozens of global banks, mostly prior to 2015, were fined billions of dollars for facilitating the movement of Iranian funds; not least an astronomic $8.9bn fine for BNP Paribas. If Turkish banks were to face a comparably large fine, then the current Turkish financial crisis could be about to get exponentially worse.

After 2015, frozen oil revenues around the world were among the least contentions assets. These mostly were repatriated quickly, occasionally being transferred through circuitous routes to avoid remaining US financial sanctions. The US released the $400 million (plus $1.3bn interest) from the Shah-era arms deal as a “goodwill” gesture – claiming that the simultaneous release of four US citizens from Iranian detention was coincidental! However, other funds have been subject to litigation. For example; the US Supreme Court upheld that Iran was financially liable to families of the 241 Marines killed in the Hezbollah attack on their barracks in Beirut in 1983. In consequence, $2.1bn held at a Citibank account are currently being contested at the International Court of Justice.

The current US move towards reimposing sanctions has provoked urgent efforts by Iran to try and repatriate as much of its frozen assets as possible, as fast as possible. Hence the recent attention to $300m held by the European-Iranian Commercial Bank in Hamburg. Earlier this year, Iran’s Central Bank filed a suit in Luxembourg, seeking to access $1.6bn which was refrozen by a Luxembourg judge in the context of a claim by US victims of 9/11.

As of mid-2017, Iranian Central Bank officials described remaining funds frozen overseas as “insignificant.” These Iranian banking sources refer to having repatriated around $30bn [which seems to be the right order of magnitude], with around $1.5bn of the $3.7bn remaining overseas as being “inaccessible” [this $3.7bn presumably encompasses the Citibank, Luxembourg and German blocked funds]. The logical conclusion is that a huge amount of the $120bn assets excitably discussed by Iranian and Western sources never physically existed in the first place, or were simply meaningless numbers in account books.

The Americans intend to put more pressure on Iran’s economy by depriving it of foreign currency. The Iranian riyal has seen a sharp drop of its value lately. Do you think Iran has the ability to shore up the riyal on the long run, if the American pressure continues?

The Iranian economy is guaranteed a grindingly tough period over the coming couple of years. However, the Islamic Republic has shouldered some comparably difficult phases during the 1980s and in the context of post-2006 UN sanctions. The currency is likely to continue plunging (the riyal having already lost 70% of its value between May and August); imports are becoming prohibitively expensive; basic services like water and electricity are under pressure; already sky-high youth unemployment will worsen; and some financial institutions may effectively cease to function. Yet Iran knows how to function as a war economy – as long as it can contain widespread public discontent. Iranian citizens will face intense economic pain; not least because the regime consistently prioritizes its military and overseas commitments when it comes under pressure.

All segments of the Iranian political spectrum appear to be pulling together and digging in for confrontation, with Supreme Leader Khamenei saying that Trump’s revocation of the deal is proof that the Americans should never have been trusted in the first place. From such an entrenched posture, it’s difficult to envisage sanctionary pressures alone creating a situation anytime soon where Tehran meekly returns to the table and recommences negotiations in good faith.

Have we seen an impact to these economic pressures on Iran’s behaviour in the region? (a reduction. for instance, in the money Iran gives to its proxies, Hezbollah and other groups in Iraq and Syria) (and do we know how much money Iran gives usually to its proxies)

The 2005-2015 decade of increased sanctions coincided with a progressive increase in Iranian spending on paramilitary assets overseas [see below]; so there’s little reason to expect a fundamentally different response this time around. The 2018 Iranian state budget increased military spending ($22.1bn defence budget, from a total budget of $104bn), including funds for the Revolutionary Guard and Quds Force. Meanwhile, over the past decade the Revolutionary Guard exploited its economic and political position to profit from sanctions. For example, an estimated 20% of Iran’s stock exchange is made up of IRGC companies. Off the books funding is likewise available through the IRGC and Hezbollah’s involvement in the international narcotics and arms trade. For example; the network of Hezbollah operative Ayman Jumaa was sanctioned by the US Treasury in 2012 for a narcotics and money-laundering operation with an estimated turnover of $200m per month.

Iran’s funding of paramilitary forces is notoriously opaque. However, over the 2005-2015 decade – while Iran’s economy was supposedly buckling under sanctions – experts estimate that transfers to Hezbollah steadily increased from around $100 million, to somewhere in the region of $700 million [according to official US estimates] in the context of Hezbollah’s heavy involvement in Syria. Meanwhile Iran’s spending in Syria – including transfers to the regime and funding for domestic and foreign paramilitary forces in Syria – is estimated annually at between $6bn and $20bn [according to various US, Western and local sources].

Prior to 2014, Iran was bankrolling a plurality of Iraqi paramilitary forces, like Kata’ib Hezbollah, Asaib Ahlulhaq and Badr – as acknowledged by senior personnel from these organizations themselves. Thus, adding these to the Iraqi state payroll under the Al-Hashd al-Shaabi umbrella could be seen as a major achievement for Tehran. The PMU Commission, under Falih al-Fayyadh and Abu-Mahdi al-Muhandis, wields an annual budget of around $1.6 billion. However, when you follow closely how this budget is spent; the non-Iranian forces (like the Atabat-funded Abbas Combat Division, and Muqtada al-Sadr’s Peace Brigades) have been consistently deprived of funds [for example; see this Washington Institute report]. Meanwhile, the largest Iran-backed entities (like Badr, which may have up to 40-50,000 affiliated troops) dominate the PMU budget and have no problem getting paid on time. They also have ready access to Iranian weapons – in violation of international sanctions.

Can the Americans succeed in their promise to make Iran’s oil exports ‘zero’? How can this happen? Iran, for instance, has started exporting oil to China via its own tankers, so the Chinese can continue buying the oil without using their own tankers (which need insurance that becoming more and more difficult and more expansive)?

As you point out, Iran already has ready markets further east which it will seek to cultivate. It is more difficult for the US this time, because the Administration is trying to enforce these sanctions unilaterally, rather than through the Security Council. The Chinese, Europeans, India and others will at best comply reluctantly and partially.

However, as the US widens the remit of sanctions, Iran will progressively become worse off, because those willing to buy Iran’s oil (legally or via the black market) will force Tehran to sell at a discounted price. The Total oil company pull-out is also indicative of how Iran’s ability to produce oil and develop new fields are likely to deteriorate over time; due to chronic underinvestment, flight of foreign companies and experts, and dearth of spare parts.

Thus, US-led sanctions can undoubtedly cause intense economic pain for Iranians. The question is whether the Trump Administration has a coherent strategy for forcing Iran to change its regional behaviour. For Tehran it is largely a case of consolidating what it has already gained: Iran is certainly coming under sustained pressure to reduce the visibility of its assets in Syria; yet the Assad regime is deeply indebted to Iran (financially and politically); so we can expect Iran to hunker down and try to weather this pressure. In Iraq, Tehran enjoys massive paramilitary and political assets and Qassim Soleimani is exerting intense efforts to broker a Cabinet dominated by its allies. Likewise, in Lebanon, it seems unlikely that the US enjoys the necessary leverage for diminishing Hezbollah’s entrenched position.

One could thus conclude that while sanctions are inarguably having a crippling impact – the US Administration appears far from having a coherent and holistic strategy for regional containment of Iran.

 

Barry Marston — Senior Consultant

At Aperio, Barry specialises in Iran, Saudi Arabia, the wider Gulf region; capitalising on 20 years of experience in working across the Middle East. His portfolio includes corporate intelligence, money laundering, financial crime, sanctions evasion and funding for militant and terrorist groups.

Barry spent six years working as the British Government’s Arabic and Persian Spokesman. He also held responsibility for the UK Foreign Office’s communications policy for the Middle East and Islamic world, specialising in counter-extremism, sanctions, international law and trade issues.

Between 2011 and 2018, Barry was based in the GCC region, working for Weber Shandwick and Fortune Promoseven as a media consultant and project director. His portfolios included work for some of the largest privately-held and state-owned organisations in the Middle East region. Barry also conducted political and economic forecasting and analysis for commercial clients. He is a fluent Arabic and Persian speaker and has operational capability in Hebrew, Russian and French.