The Big Business Behind Iran’s Proliferation

In preparing to expand sanctions on Iran this week, the governments of the European Union face a critical choice. They can carry on with their current strategy of relying chiefly on pinpoint designations against suspected nuclear proliferators—an approach that, to judge by the latest report of the International Atomic Energy Agency, is failing to stop Iran's drive toward nuclear weapons. Or, in concert with the U.S., the EU can shift to a stronger, more comprehensive approach, targeting not only those directly involved in proliferation, but the networks to which they belong.

Some such measures are on the agenda this week, including imposing a ban on Iranian crude oil and sanctions against Iran's central bank. But most likely, the EU will simply expand its sanctioned-entity list based on the old paradigm of restricting proliferators without harming Iran's economy. The reality of the state's involvement in the national economy makes this a distinction that is nearly impossible to implement.

Take the case of Iran's powerful Islamic Revolutionary Guard Corps. The IRGC is deeply entwined in Iran's nuclear and missile proliferation ventures, and with Iran's overseas terrorist clients and web of domestic repression. The IRGC can afford this mischief because it has also become one of the biggest economic interests in Iran, with a commercial empire encompassing hundreds of companies and financial holdings involved in everything from auto manufacturing to pipelines, petrochemicals and port logistics.

On Oct. 14, David Cohen, the U.S. Treasury Department's under secretary for terrorism and financial intelligence, told the U.S. Congress that “The IRGC has expanded its reach into critical sectors of Iran's economy, displacing ordinary Iranians, generating revenue for the IRGC and conducting business in support of Iran's illicit activities.” He also reaffirmed that the IRGC plays a “central role” in “all forms of Iran's illicit conduct, including Iran's nuclear and ballistic missile programs, its support for terrorism, and its involvement in serious human rights abuses.”

Accordingly, the U.S. has been raising the bar by blacklisting not only IRGC entities dedicated chiefly to proliferation, but other IRGC-linked outfits that help enable and sustain Iran's proliferation activities.

The EU, however, has been reluctant to take broader action. To date, EU sanctions architecture relies on three relatively slim pillars: disrupting Iranian procurement networks, restricting and monitoring Iran's financial transactions, and interdicting Iranian transport companies with a proven record of assisting the nuclear program. Only since July 2010 has the EU begun to expand its measures by targeting Iran's energy sector, expanding previous sanctions and adding restrictive measures against human-rights violations. This has included singling out the IRGC and some of its companies and commanding officers for both proliferation activities and human-rights abuses.

But Iran's patterns of evasions and deceit are making it increasingly difficult to draw a neat line between its legitimate economy and its proliferation rackets.

A prime example of this difficulty is Tidewater Middle East PLC, an Iranian port operator blacklisted by the U.S. in June as an entity “owned by the Islamic Revolutionary Guard Corps that has links to Iranian proliferation activities.”

Among its activities, Tidewater runs Iran's most important container terminal, the Shaheed Rajaee Port Complex at Bandar Abbas, at the mouth of the Strait of Hormuz. Some 90% of Iran's container traffic passes through the Shaheed Rajaee complex. As operator of such a crucial port, Tidewater has long had close ties with the Islamic Republic of Iran Shipping Lines (IRISL) Group, the regime's main shipping fleet. Both the EU and the U.S. have identified the IRISL Group—along with scores of its ships, shell companies and subsidiaries—as one of the regime's main nuclear-arms conduits.

Tidewater's throughput has included some troubling items. According to a May 2011 report by the U.N.'s Panel of Experts on Iranian sanctions, six ships have been seized since 2009 with large Iranian cargos of weapons concealed inside containers. The weapons were destined for insurgents in the Niger Delta and for members of Hamas and Hezbollah. Of those six shipments, five originated from Bandar Abbas, where the lethal cargo was loaded in containers and hidden behind innocent merchandise such as cotton. Tidewater was the container-terminal operator that handled those shipments.

EU officials know that Tidewater is problematic. The Hamburg Port Authority canceled a cooperation deal with Tidewater in January 2010. Tidewater does not even bother to conceal its IRGC connections. Its history section indicates that the company was managed during the 1980s by the Foundation for the Oppressed and the Foundation for Martyrs' and Veterans' Affairs, two Iranian governmental foundations headed by an IRGC senior commander and staffed by IRGC veterans.

Tidewater has numerous subsidiaries that pad the résumés of some of its IRGC-linked board members. The board of directors of Efthekhar Saham, an investment and import/export company owned by Tidewater, includes Mohammad Saeed Garoosi, a former adviser for the Sepah Investment Company—a holding company of the IRGC's Bank Sepah, which is sanctioned by EU, U.S. and United Nations—and Mohammad Bidgeli, who also worked for Sepah Investment and later for Omid Investment Management Company, another holding of Bank Sepah.

Despite such evidence, which persuaded the U.S. to go after Tidewater, many European governments are demurring. They claim that shutting down business with a port operator will not stop proliferation efforts but will instead damage business, much of which they see as legitimate. No doubt some of it is. But failing to take action for the sake of these businesses comes at the cost of enabling and enriching the IRGC. If the EU is serious about sanctions, it must stop pinpoint measures and target the IRGC's entire commercial empire.

—Mr. Ottolenghi is a senior fellow at the Foundation for Defense of Democracies and author of “The Pasdaran: Inside Iran's Islamic Revolutionary Guard Corps” (FDD Press, 2011). Ms. Rosett is a journalist-in-residence with the FDD and heads its Investigative Reporting Project.