Evading Trump: How Iran circumvents sanctions
Iran experts have been taken aback at the rapidity with which new rounds of sanctions have impacted the Iranian economy, even before major oil and financial sanctions kick in from 4 November. Within a month of 7 August sanctions taking effect (outlawing dollar purchases, precious metals, and trade in certain industrial materials), the riyal plunged by 60 percent. With oil accounting for around 70% of Iran’s exports and 80% of tax revenue, recorded exports fell by around 900,000bpd, from around 2.5mbpd in April. However, as we shall see below, a significant proportion of this shortfall is already being offset by off-the-books exports.
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
(Article published in the 31 October edition of Aperio’s Financial Crime Digest)
As the world gears up for these November sanctions, European imports of Iranian oil fell by 46% between May and August to 226,000bpd, while exports to South Korea plunged to zero. In contrast, it took significantly longer for previous rounds of the UN Security Council-centred sanctions process to have a comparable effect; with a steady fall in Iran’s oil exports occurring between 2011 and 2014, from 2.4mbpd to 1mbpd. While the scale of this assault against Iran’s economy is perhaps unprecedented, Iran is accustomed to periodic bouts of isolation and has numerous options available to weather the storm.
A successful sanctions evasion strategy for Tehran means maximizing its ability to derive revenue from oil exports and other major income sources; finding ways to plug into the international financial system; while continuing to bankroll its expansive overseas agenda. In this report we draw lessons from Iran’s previous efforts at circumventing sanctions in order to contextualize measures which Iran’s leadership is already beginning to implement in response to the Trump Administration’s efforts to ratchet up the pressure.
Invisible ships and ghost companies
Between 2010 and 2015, as international sanctions intensified, Iranian tankers continued shipping millions of barrels of oil through the remarkably simple gambit of turning off their tracking beacon to efface any record of their voyage. In recent weeks, monitors have indeed observed Iranian tankers turning off their transponder signals to evade detection. Iranian oil was previously also diverted onto foreign tankers or registered under foreign flags using appropriate forged documentation. Discounted prices tempted purchasers to ask few questions, with smaller Chinese refineries being a notable destination. As of mid-October, the monitoring organization, TankerTrackers, estimated that Iran was actually sustaining exports of 2.2mbpd. This higher-than-expected statistic factored in satellite images of departing oil tankers which had disabled their signals. This may partly explain why oil prices for the month were significantly lower than expected.
Iranian businesses and exporters improvised a plethora of tricks to continue operations. Significant volumes of Iraqi oil are exported overland through Iran, and Iranian oil exporters were thus able to fake documentation so their own convoys appeared to be of Iraqi origin. The owner of an Iranian mining business in 2013 reported how he obtained equipment from Europe by agreeing with Western companies to export these products to Dubai. From there, middlemen arranged for the equipment to be diverted to the Iranian port of Bandar Abbas. He paid foreign suppliers via Iranian traders based in South Africa and Malaysia. Some businessmen resorted to the risky approach of travelling to-and-fro from the Emirates with suitcases of cash. Nevertheless, such activities significantly increased costs of doing business. In 2016 internal paperwork from the Chinese telecommunications conglomerate, ZTE Corp, showcased this company advising clients from Iran and other blacklisted states on how to circumvent sanctions through establishing front companies and other dubious methods.
In the pre-2015 phase of sanctions, Iran exploited a fluid network of front companies in diverse locations like China, the UAE, Iraq and Lichtenstein; giving rise to an endless game of cat-and-mouse by US agencies trying to identify these entities and apply pressure for their closure. As one compliance attorney explained: “Fifteen years ago some guy would set up a company in Dubai’s Jebel Ali port and load stuff from wherever and ship it to Iran and no one would notice. Now the detection systems and knowledge are leaps and bounds ahead.”
A cluster of businesses in a Hong Kong tower block had been given deliberately innocuous names like “True Honour Holdings” and “Alpha Effort Limited.” Yet according to the US Treasury in 2011, which simultaneously designated over 20 other Iran-linked entities, these were Iranian front companies surreptitiously purchasing military equipment.
Keeping oil and revenues flowing
Many states and importers previously operated in a grey area between passive defiance of US demands, and willingness to cast a blind eye to oil imports with forged documentation or circuitous payments regimes; tempted by Iran’s steeply-discounted black-market offerings.
India’s readiness to comply will be a major determinant of success for Trump’s punitive measures. To retain customers Iran has been offering sharp discounts, extended credit terms, free cargo insurance, and cheap shipping. Despite recent cuts in India’s oil imports from Iran (from an average of 773,00bpt in early 2018, to 523,000bpd by August) this was still 56% higher than for August 2017. States like Italy, Greece and Turkey likewise temporarily boosted imports of Iranian oil to capitalise on these discounts. The US and GCC states may try weaning India away from Iranian oil with discounted rates of their own. The current India-Iran trade in Euros via the SWIFT system provides some insulation from US pressures, with talk of an imminent shift to trading in rupees and riyals. However, India’s Central Bank is set to halt processing Iranian oil payments from November.
In 2013 around 45% of India’s payments to Tehran were made through the Kolkata-based USO Bank which lacked significant US exposure; the remaining 55% of payments were transacted via the Turkish Halkbank. Halkbank was furthermore at the centre of an “gold-for-oil” laundering scheme which between 2012 and 2014 allowed Iran to repatriate $13bn of frozen funds through the Turkish banking system. Over the past two years the US authorities have implemented measures against several East Asian banks whose imperfect compliance procedures were exploited by Iran to illegally launder revenues and frozen funds. The Kunlun bank in China’s semiautonomous Xinjiang region was earmarked as an entity exploited by Iranian banks to launder hundreds of millions of dollars. Given that Kunlun bank is covered by US Treasury sanctions and has already modified its business model to mitigate these pressures, it is increasingly difficult for US officials to craft new penalties to target such institutions, whose appeal to certain clients is precisely that they act as a shadowy parallel network to the mainstream global financial system.
Western banks have fared little better, with a succession of well-known high-street outlets facing stiff penalties for transactions which infringed sanctions, often for unintentional due diligence failures. BNP Paribas in 2015 was hit with an eye-watering $8.9bn fine after prosecutors claimed that information had been deliberately stripped from wire transfers to expedite their movement through the US financial system without raising red flags.
China, the biggest importer of Iranian oil (800,000bpd in July), has reduced its dependence on Tehran over the past couple of months; but will only comply reluctantly with US sanctions which Beijing claims lack the legitimacy conferred by the UN. Given the fractious nature of China and Turkey’s current relationship with the US, they are readying themselves for renewed threats and pressures, and perhaps American offers to soften tariffs and other economic measures targeting them both in the event of full cooperation.
With the devalued Iranian riyal increasingly unattractive to traders and obstacles to dealing in dollars, Iran may negotiate barter deals, or trade in gold and local currencies. Prior to 2015, Iran used around $50bn of frozen oil revenues held in East Asian banks as security or down-payments for goods purchased from China, South Korea, Japan and India. Between 2012 and 2016, India agreed to buy Iranian oil with rupees, allowing Iran to use the proceeds to import goods from India.
Barter economies and shifts into local currencies may be challenging for the US to outlaw. Furthermore, the risk of a protracted sanctions regime without a clear endgame is that over time, through a shift towards non-dollar payments and networks of institutions resilient to US pressure, Iran evolves a diminished but sustainable economic equilibrium, leaving it relatively immune to future attempts to influence its behaviour.
Iran’s Oil Ministry is also planning to relaunch its domestic energy exchange (or ‘bourse’), through which it anticipates selling up to 1 million bpd of crude to local buyers who could then export the oil though private transactions. However, some Iranian officials are concerned that this risks fuelling an informal black market from which the state budget would only derive limited benefit.
The imposition of sanctions may benefit entities like IRGC Quds Force, which are well-placed to profit from this shift towards clandestine sanctions circumvention activities. As of 2007 it was estimated that the IRGC was reaping around $12billion from off-the-books oil smuggling, which expanded significantly in the ensuing years as sanctions intensified. To put this in context, Iran’s total military budget for 2018 was $8bn.
Lebanon, Syria and Iraq – The “axis of resistance”
Iran is also afforded significant strategic depth through its paramilitary, economic and political assets in Lebanon, Syria and Iraq; all three of which are coming under substantial pressure to resist US measures. Iranian entities and affiliated proxies are already carving out major roles in reconstruction in Syria and Iraq, with paramilitary groups which have been accused of war crimes sectarian killings capitalising on their position on the ground to diversify into various economic sectors. As one Iraqi paramilitary leader argued: “We were volunteers. We liberated these areas and now we should stay on to rebuild them.”
A Russia-Israel understanding for reducing the presence of Shia paramilitaries in southern Syria, was countered by Tehran through high-profile visits by officials to Damascus to discuss defence cooperation and Iran’s role in reconstruction. Iran’s Defence Minister signed a deal committing Tehran to a major role in rebuilding Syria’s armed forces. Meanwhile, Iranian companies are to be involved in rehabilitating Syria’s transport infrastructure, along with rebuilding 30,000 homes and plans for a railway connection between the two states. China has been sympathetic to such efforts as a means of facilitating its own overland access to the Mediterranean. While Syria is likely to remain isolated from the international system, facilitated access to Lebanon and the eastern Mediterranean offers Iran a range of additional options for circumventing sanctions.
Iran has made extensive use of Iraqi, Syrian and Lebanese financial systems. In May 2018, Iraq’s Al-Bilad Islamic Bank, and its CEO Aras Habib Karim, a prominent MP, were designated by the US Treasury for facilitating the movement of funds to the IRGC and Hezbollah. Financers and front companies have also been targeted to counter money laundering by entities affiliated with Iran.
Large volumes of weapons have been exported to affiliated forces in Syria, Iraq, Lebanon, Afghanistan, Yemen, Bahrain and other states in violation of international sanctions. Airlines like Mahan Air faced sanctions in 2011 (with additional measures applied in May 2018) for operating on behalf of the Revolutionary Guard to move weapons, personnel and funds for Hezbollah and forces in Syria. A US Treasury official described Mahan as the “aviation arm” of Quds Force. Iranian ally Hadi al-Amiri, as Iraqi Transport Minister, is understood to have facilitated overflights of Iranian munitions to Syria. Qeshm Fars Air has also been identified as flying circuitous routes to smuggle munitions into Lebanon.
Over the 2010-2013 period, Iran’s payments to Iraq-based proxy militias like Asaib Ahlulhaq and Kata’ib Hezbollah decreased as sanctions intensified and US troops departed Iraq. However, Iranian spending simultaneously surged for propping up the Damascus regime; with estimated funding for Hezbollah mushrooming from around $100m to $700m. Thus, although Tehran will seek to cut unnecessary expenditure to its proxy assets, past experience indicates that sanctions won’t automatically diminish its readiness to fund militancy overseas. It may indeed result in Iran’s leadership encouraging their paramilitary proxies to adopt a more aggressive posture, such as through recent transfers of missiles to Iraqi proxies.
Smuggling and sanctions evasion across Iran’s eastern borders
Afghan traders have been benefitting from a booming trade in dollars smuggled across the border from Herat province as the value of Iran’s riyal plunges, while Washington attempts to squeeze Iran out of dollar-denominated markets. Such was the scale of this trade that it contributed to a 3.5% drop in Afghanistan’s own currency this August, with an estimated $5 million in cash crossing the Afghan-Iran border every day.
Iran’s less heavily-policed border with Turkmenistan is a major narcotics smuggling route from Afghanistan towards Europe, doubling-up as a conduit for sanctions evasion activity. The fact that Iran has one of the highest rates of drug use worldwide (official and NGO estimates vary between 3.5 – 6 million users) is testimony to the scale of the problem of narcotics smuggling.
In the remote Baluchistan region, diesel smuggling into Pakistan has long afforded a livelihood for small-time smugglers. From 2010 onwards these fuel smuggling activities intensified as a means of evading sanctions. In 2013 it was estimated that tankers were exporting around 4 million litres per day via this route. US officials even became concerned that Afghan security forces were using US funding to purchase smuggled petroleum products of Iranian origin. One expert from FGE London estimated that after 2018 around 20,000bpd could be illegally transported overland through Afghanistan, Pakistan, Iraq and Central Asia. President Rouhani drew attention to the scale of smuggling of oil and other goods when he testified to the Iranian Majlis earlier this year that the authorities had reduced the annual value of such activities from $22bn to $12.5bn.
Drugs, crime and money laundering
Former President Mahmoud Ahmedinejad’s outreach to Latin American states – Venezuela in particular – to consolidate a united front against US-led pressures, gave rise to a remarkable increase in economic activity by Iran and Hezbollah across the American continent. One example was massive Iranian investments in real estate, for which much of the revenue was later laundered through the US banking system. Venezuela granted large tracts of isolated land to Iranian military firms for developing missile technology, as a route to avoiding sanctions against Iran’s ballistics programme. US-sanctioned Parchin Chemical Industries was just one Iranian company setting up facilities in Venezuela.
Iranian and Hezbollah figures became deeply complicit in the narcotics trade. Lebanese businessman Ayman Joumaa collaborated with Mexico’s Los Zetas cartel to move “multi-tonne loads” of cocaine into the US, while laundering an estimated $200 million per month in criminal proceeds. The Lebanese Canadian Bank in 2011 was accused of being at the centre of a phenomenally complex international operation which saw Colombian cocaine exported into Western markets, while revenues were laundered through the US banking system and via African car dealerships, before being used to pay East Asian suppliers of imports back into Iran. In 2016 European police took action against a major Hezbollah cell involved in the narcotics trade, with revenues reportedly being fielded towards operations in Syria.
On 22 September 2018 it was announced that Brazilian police had picked up Assad Ahmad Barakat, a prominent Hezbollah member and “Specially Designated Global Terrorist.” Since the mid-2000s, the Barakat clan operated out of the notorious tri-border area (between Brazil, Argentina & Paraguay), laundering funds and smuggling weapons, narcotics and counterfeit US dollars. According to the RAND Corporation, this activity earnt Hezbollah around $20m annually, one of its principal sources of foreign exchange.
John Kelly, the former coordinator of these cases in the US’s Drug Enforcement Administration, observed that Hezbollah was “a paramilitary organization with strategic importance in the Middle East, and we watched them become an international criminal conglomerate generating billions of dollars for the world’s most dangerous activities, including chemical and nuclear weapons programmes and armies that believe America is their sworn enemy”.
Given that profits from such schemes habitually accrue to Iran’s proxy militias overseas, a paradoxical impact of Trump’s sanctions may be an uptick in such activities as a revenue-generating exercise. Large émigré Lebanese communities across the Americas, Africa and Asia have been exploited as a Trojan horse by Quds Force and Hezbollah for setting up front companies used for money laundering, drugs running, arms smuggling, terrorism and sanctions evasion. These communities are themselves a source of revenue. A plane which crashed in 2003 contained $2 million in Hezbollah contributions donated by the Lebanese diaspora in West African states.
Iran also evades international arms sanctions to profit from the global weapons trade. Conflict armament research identified substantial quantities of Iranian arms and ammunition being sold on the black market or in insurgent hands across Africa, including; Côte d’Ivoire, the DRC, Guinea, Kenya, Niger, Nigeria, South Sudan, Sudan and Uganda. One notable example included the 2010 seizure of 13 large containers of Iranian heavy arms at a port in Nigeria. Iran made common cause with other pariah states, such as North Korea, Syria, Venezuela and Sudan, for engaging in arms proliferation across continents. Iran owes much to Pyongyang and the Pakistani Abdul Qadeer Khan network for acquisition of much of its ballistic and nuclear technology.
The 2005-2015 decade of escalating international pressures upon Iran were closely correlated with a remarkable expansion of illegal revenue-generating activities, such as narcotics and weapons smuggling, money laundering and organized crime. This unfortunate side-effect of sanctions has enabled entities like the IRGC to strengthen their hold on the domestic and regional economy, while increasing expenditure on transnational paramilitary forces like Hezbollah.
In 2018, the critical question is how successful Tehran’s international strategy will be in thwarting Trump’s aspiration to reduce oil exports to zero. Through a range of legal and illegal methods, experts and Tehran-based Western diplomats assess that Iran could continue exporting in excess of a million barrels of oil a day, well into 2019. Such a scenario would certainly be crippling, without necessarily dealing the fatal blow.
The fact that these sanctions are being implemented unilaterally by the US, rather than via the UN, may limit international compliance. The EU for now is defying the US by trying to keep the nuclear deal alive through a posited mechanism for shielding companies from the impact of these sanctions. This may be a pyrrhic effort, given that leading Western companies – like Siemens, Total, Renault, Peugeot, General Electric, Boeing and Daimler – are already exiting the Iranian market in order to avoid jeopardizing their US operations. Recent tensions between Saudi Arabia and the West over the killing of Jamal Khashoggi also demonstrate how difficult it will be to retain a unity of purpose among key players in the anti-Iran alliance over a sustained period of time.
Ultimately, the impact of the latest round of sanctions may be determined by the response of the Iranian people. Will they stoically bear the consequences of sanctions in the hope that the 2020 US elections brings about a change in direction; or will the economic pain unleash forces which could overwhelm the regime or oblige it to change course?
About Barry Marston
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.
 See above Politico report