November 15, 2010 | Atlantic

How Egypt Is Helping Iran to Circumvent Sanctions

If you ever find yourself in downtown Tehran, it’s hard to miss the five-story-tall mural commemorating Khaled al-Islambouli, the man who assassinated Egyptian President Anwar Sadat in October 1981. The mural has long been a symbol of Iran’s deep disdain for Egypt’s secular rulers, particularly their peace with Israel and their alliance with the U.S. The mutual animosity has endured over the years, from Egyptian support for Iraq during the Iran-Iraq War to the 2009 arrest of 26 members of an Iran-backed Hizbullah cell in Egypt. In recent years, Cairo has also expressed its staunch opposition to Iran’s nuclear program, which Egypt and other Arab states view as a threat.

But Egypt-Iran relations are not as black-and-white as they may seem. Egypt is expanding its financial ties with Iran through a jointly owned financial institution: the Misr Iran Development Bank. MIDB was founded in 1975, four years before Iran’s Islamic revolution, and has somehow endured the tumult since. Today, the MIDB may have become a vehicle for Iran to circumvent economic sanctions with extensive help from Egypt, one of America’s closest allies in the region. It is a testament to how difficult it can be for the U.S. to enforce international sanctions, even among countries that appear to be natural allies in the effort to deter Iran.

Egypt controls 59.86 percent of MIDB, split evenly between the state-owned National Investment Bank and Misr Insurance Company, which is partially owned by the state. Iran’s 40.14 percent share in MIDB, worth about $80 million, is held by the Iran Foreign Investment Company. The IFIC is the investment arm of Iran’s Oil Stabilization Fund, a sovereign wealth vehicle that generates profits for the Iranian government, with investments in the Middle East, Africa, South America, and beyond.

Tehran created the stabilization fund in 1999 to help insulate it from the gyrations of the oil market. When oil was up, the regime threw money into the fund and invested it through the IFIC. When oil was down, Iran withdrew money from the IFIC’s investments to make up the shortfall. In the face of severe international sanctions, Iran has been withdrawing heavily of late. This August, when it became clear that the stabilization fund enabled the Iranians to resist international sanctions, the U.S. Treasury Department placed it on the Iranian Transactions Regulation (ITR) list, an administrative designation that made it unlawful for Americans to do business with the company because it is “wholly owned by the Government of Iran.”

The Iranian regime looks to exercise similarly direct influence in the MIDB. The bank’s website reveals that one of four members Tehran named to the board is “Dr. Davood Ebrahim Danesh Jafari.” More commonly known as Davud Danesh-Jafari, he was Iran’s minister of economy and finance affairs under Iranian President Mahmoud Ahmadinejad from 2005 to 2008.

The IFIC may now be positioning the Egyptian bank as a vehicle to circumvent international sanctions. In 2009, as the international community began to discuss ways to punish the Islamic Republic for its illicit nuclear program, the bank transferred $50 million to Iran, according to the government-controlled Tehran Times.

Then, as the U.S., European Union, and UN enacted sanctions on Iran in July of this year, the same state-owned paper reported IFIC managing director Mehdi Razavi announcing that the MIDB would open its first official branch in Iran. This enables Iran to make unfettered transfers. Egypt’s cooperation implies that the two nations’ economic ties are only going to deepen, despite the clear U.S. and UN desire to stop exactly these kinds of deals.

Egypt, one of America’s closest allies in the Middle East and the recipient of more U.S. foreign aid than any country in the world save Israel, is certainly not planning on becoming a rogue state allied with Iran. If nothing else, the quiet nature of this economic cooperation suggests Egypt would prefer to remain in good U.S. graces. But Egypt is clearly hedging between Iran and the U.S. Egyptian President Hosni Mubarak’s regime is likely concerned about growing Iranian influence in the region. Perhaps the decision makers predict that U.S. influence will wane after leaving Iraq, or perhaps they simply see an opportunity for a profitable joint venture.

Whatever motivates Egypt’s deal making, the U.S. will need to address both the MIDB and the Egyptian leadership if the international sanctions regime against Iran is to remain intact.

President Obama’s first choice will probably be to dispatch State Department diplomats to quietly coerce Egypt to divest from its Iranian joint venture. However, that could take a while. When Hamas began importing weapons from the Sinai Peninsula to the Gaza Strip through smuggling tunnels Tehran was financing, it took six years for the State Department to convince Cairo to crack down. And that was when the threat was right on Egypt’s doorstep.

The White House could also handle this through the Treasury Department (where I used to work as an intelligence analyst). According to a report on Iran’s global banking network by Red Cell Intelligence Group, a company owned by a former U.S. Treasury official, the MIDB has correspondent relationships with three U.S. banks: New York Mellon, Citibank, and JP Morgan Chase.

If Treasury were to place the MIDB on its list of Iran-controlled institutions with which Americans are banned from doing business, it would effectively sever all ties between MIDB and these American banks. This could be done relatively quietly, allowing Iran and Egypt to haggle over the bank behind closed doors.

Whatever path the U.S. takes to the MIDB, the White House (and perhaps Congress) will need to look at the bigger picture of Iran-Egypt collaboration. Shutting down the MIDB is one thing, but it will be quite another to determine–and, hopefully, to correct–the economic, political, or military concerns that led Egypt to expand this disconcerting joint venture.