May 13, 2013 | Forbes

Iran’s Car Industry – A Big Sanctions Buster

Over the past six years, the United States and its European allies have imposed an impressive sanctions regime against Iran. Sanctions have successfully caused severe stress to Iran’s economy, curtailing the regime’s revenues and slowing down Iran’s nuclear progress – all the while, minimizing the collateral humanitarian damage that previous sanctions’ regimes unwittingly caused to civilian populations.

But Western efforts to discern between legitimate economic trade with Iran and illicit commercial and financial operations have left the sanctions’ ship leaking. Iran has suborned its entire economy to the purpose of acquiring nuclear weapons’ capability and is exploiting industrial sectors that are still free of sanctions to procure sensitive technology needed to complete its dash to a nuclear bomb.

One such sector is Iran’s automotive industry. Iran is the Middle East’s biggest car producer. Its car industry, comprised of companies such as the Bahman Group, Iran Khodro and Saipa, ranks 13th in the world for total production and 5th in the world in terms of fastest growth. With annual production at 1.6 million vehicles, Iran’s automotive industry accounts for 10 percent of Iranian GDP. And with official oil sales dwindling as a consequence of sanctions, the car industry’s importance to regime revenues is rising.

There are two reasons why Iranian cars – a basic middle class commodity that might normally not pose any proliferation concern – should in fact be sanctioned.

First, both technology and raw materials for car production can be dual-use. Increasingly, it appears that Iranian carmakers’ vast overseas procurement network is being used to supply the nuclear and missile programs.

And second, the car industry is an avenue for profit to Iran’s Revolutionary Guards, religious foundations, and political elite, who remain the car industry’s main shareholders, and who channel the revenues to finance the regime’s proliferation activities.

A recent Washington Post investigation of MCS International is a clear example of the dangers.  From 2003 to 2011, this Iranian-owned factory in Germany produced gas cylinders for hybrid cars. But the factory also offered access to dual-use technology for Iran’s nuclear designs.

That included carbon fiber and hardened steel – key components of Iran’s second generation nuclear enrichment centrifuges. It also had sophisticated machinery in its inventory, which can be used both to make cylinders and manufacture centrifuges.

According to company papers, Iran’s car industry companies and personnel were directly involved in owning and managing the factory. Behind them lurked sanctioned entities, known proliferators, Iran’s ministry of intelligence, and the nuclear program’s custodians – Iran’s Revolutionary Guards.

A joint venture of German fronts for Iran’s Bahman Group and Rey Investment bought the near-bankrupt factory in 2003. They appointed a dual Iranian-German national who at the same time managed IKCO Trading GmbH, Iran Khodro’s German subsidiary, as managing director

Iran’s Bahman Group’s main shareholder is the sanctioned Bonyad Ta’avon Sepah – a company linked to Iran’s Revolutionary Guards. As recently reported by Saeed Ghasseminejad in The Times of Israel, Rey Investment is closely associated with Iran’s Ministry of Intelligence, owns several spare car parts  companies, and has the exclusive dealership for German carmaker BMW in Iran. As for Iran Khodro, its main shareholder – Iran’s IDRO – is already under sanctions.

MCS, for its part, went bankrupt a second time in 2011 and was bought by two Canadian-Iranian businessmen who deny any link to the regime. Meanwhile, Iran’s car industry continues to run other import-export businesses and factories in Germany. Company papers show that Asghar Shori Khosroshahi, the former Iran Khodro board member who managed both MCS International and IKCO Trading for much of the past decade, went on to set up a number of other car industry businesses in Germany, Croatia and Turkey.

Other Khodro officials in Germany are linked to a highly complex network of companies up and down the Rhine valley and the Swiss Alps.

As if this was not enough, Khodro has set up production lines outside Iran to elude financial restrictions and procurement problems.

Saipa, another Iranian carmaker, maintains procurement companies in Switzerland, while the aforementioned Rey Investment has overseas branches in Canada and Germany, and at one point owned a company in Croatia.

While Western policymakers have rightly sought to calibrate sanctions against Iran to prevent collateral economic damage, they have been overcautious in their targeting. As a result, Iran’s car industry has been able to elude restrictions and become one of the principal conduits for nuclear procurement.

It is time to close that gap. The United States and the European Union – the main area of procurement operation for Iran’s carmakers – should add Iran’s automotive industry to the sectors already blacklisted under US and EU law.

Emanuele Ottolenghi is a Senior Fellow at the Foundation for Defense of Democracies, where Mark Dubowitz is the executive director.


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