Treasury Secretary Steve Mnuchin announced today that the global financial messaging service SWIFT “would be subject to U.S. sanctions” if it does not remove designated Iranian banks from its system “as soon as technologically feasible.” He noted that humanitarian transactions with non-designated Iranian entities are permissible but warned, “People need to be careful that those are real humanitarian transactions,” not illicit transactions disguised as food and medical trade. The warning is well deserved, as that is exactly how the Islamic Republic exploited the humanitarian exemption after its banks were “de-SWIFTed” in 2012.
Six years ago, in response to congressional initiatives threatening to sanction SWIFT, the organization removed sanctioned Iranian banks from its network. The ban, however, was not total. The U.S. Treasury and EU regulators intentionally left a few Iranian banks connected as a humanitarian channel to avoid measures that would unduly harm the Iranian people. Officials had committed to monitoring Iran’s transactions to prevent illicit funds from moving through the SWIFT system.
Despite these assurances, a December 2013 corruption scandal in Turkey revealed that Iranian banks were using SWIFT for illicit financial transactions. A leaked prosecutor’s report showed SWIFT transaction receipts as Iranian banks processed sanctions-busting transactions. Turkish-Iranian businessman Reza Zarrab, at the center of the scheme, pleaded guilty in U.S. court last year to facilitating billions of dollars in illicit transactions.
The elaborate scheme detailed in the prosecutor’s report allegedly involved numerous money-laundering techniques including the falsification of invoices to obscure the nature of the transactions. For example, a luxury yacht company invoiced Iranian Pasargad Bank for 5.2 tons of brown sugar at $240 per pound in order to hide banned transactions under the guise of humanitarian trade.
The regime in Tehran will no doubt argue that Washington’s latest sanctions are preventing the Iranian people from accessing pharmaceuticals and medical supplies. During previous sanctions, Tehran tried to make the same arguments. At the same time, the regime was enabling the Islamic Revolutionary Guard Corps and its affiliated hospitals access to drugs that its own Health Ministry could not get. In December 2012, the Iranian government fired Minister of Health Marzieh Vahid-Dastjerdi after she scolded the government for withholding approximately $2 billion in funding, saying on state television, “I have heard that luxury cars have been imported with subsidized dollars, but I don’t know what happened to the dollars that were supposed to be allocated for importing medicine.” State Department Special Representative for Iran Brian Hook also noted today that Tehran “uses fake companies disguised as humanitarian organizations to divert purchases that should go to food, medicine, and medical devices, and they use that to enrich the regime and support revolutionary activities overseas.”
After November 5, when sanctions go back into place, purchasers of Iranian crude oil must deposit payments into escrow accounts in local banks. To deny Iran hard currency, U.S. sanctions dictate that funds in the accounts can only be used for humanitarian and other non-sanctioned trade. But as a result, the regime will have billions of dollars to buy food and medicine for the Iranian people. With SWIFT’s humanitarian financial channel and more than enough funds in escrow, the regime will owe its people an explanation if their pharmacies and hospitals lack medicine and their grocery stores are empty.
Washington should have a zero tolerance policy on abuses of the humanitarian channel. SWIFT should automatically and permanently expel any Iranian bank using the humanitarian channel for illegal purposes. Any non-Iranian bank or company caught engaging in money laundering, corruption, and illicit financial transactions should face the full weight of Treasury’s sanctions and the Justice Department’s law enforcement capabilities.
Mark Dubowitz is the chief executive officer for the Foundation for Defense of Democracies, where Annie Fixler is a policy analyst at FDD’s Center on Sanctions and Illicit Finance. Follow Mark on Twitter @mdubowitz and Annie @afixler. Follow @FDD and @FDD_Iran. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.