The Islamic Republic of Iran promotes itself as a reliable business partner, hosts trade fairs and business forums in European capitals, and goes to great lengths to entice European businesses to invest in its economy. The governor of the Central Bank of Iran (CBI) traverses the continent, promoting the benefits of financial ties to the regime.
In May 2018, the United States designated Valiollah Seif, then-governor of Iran’s Central Bank, for covertly funneling millions of dollars to Hezbollah on behalf of the Islamic Revolutionary Guard’s (IRGC) Quds Force. The very individuals who seek to persuade investors also engage in illicit finance, an illustration of how complicity goes to the very top.
Businesses, however, must pull back the veil of Iran’s deceptive practices, front companies, and fraudulent activities to uncover the multitude of risks inherent in having Iran as a financial partner.
The Financial Action Task Force (FATF), an intergovernmental body that sets standards for anti-money laundering and counter-terror finance legislation, is one measure of Iran’s corruption and illicit finance. In 2008, FATF placed Iran on its “blacklist” of high-risk and non-cooperative jurisdictions, posing a barrier to its reintegration with the global financial system. In short, the organization counseled banks to apply “enhanced due diligence measures” to business relationships and transactions with Iranian counterparties.
FATF sought to work with the Iranian government on a reform plan, encouraging it to take concrete steps to bring its anti-money laundering and terror financing regulations to international standards. Instead, since 2016, seven times Iran failed to meet FATF’s deadline to complete its plan. Iran has inserted many exemptions for terrorist organizations into its anti-money-laundering laws, making its legislation full of holes that were contrary to FATF’s standards.
Moreover, Iran conditioned its acceptance of international conventions and protocols on whether FATF first removes it from its blacklist. In October 2018, FATF extended its deadline for Iran to complete its reform plan to February 2019. However, the question remains: Is it actually more time that Iran needs? Or does Iran need to make a strategic decision to abandon bankrolling terrorism through its financial system?
A new report by the Federal Association of German Banks (Bundesverbandes deutscher Banken, or BdB) reached conclusions similar to FATF’s. “Business with Iran is and remains risky for banks,” according to its report released on October 19, 2018. German companies may be tempted to do business with the Islamic Republic of Iran, but doing so involves “high initial investment with initially low profitability,” a risk that justifies what the report describes as “reluctant engagement” so far on the part of German banks. While noting that companies need to be mindful of American and international sanctions, the report concludes that the burden of mitigating this risk falls on “progress made by Iran itself.”
The lion’s share of the risks stems from Iran’s pervasive corruption, systematic money-laundering, legal risk, human rights violations, cyber security threats, persistent support for foreign terrorist organizations, and nontransparent corporate structures and shadow companies that seek to hide their true ownership interests.
Moreover, German intelligence detected Iranian attempts to procure German equipment and know-how for its weapons of mass destruction and nuclear programs, even after the 2015 nuclear deal.
With the U.S. withdrawal from the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), experts believe that Iran will increase its efforts to evade U.S. sanctions to fund malign activities and secure hard currency for the government of Iran. Thus, companies may think they are engaging with legitimate entities, but Iran uses a web of front companies to generate illicit revenues and finance nefarious activities. “Iran’s deceptive practices,” noted the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in October 2018, “have been orchestrated not only by elements of their government such as the IRGC-Qods Force, but also by Central Bank of Iran officials who were at the highest levels.”
Sigal Mandelker, the U.S. under secretary of the Treasury for terrorism and financial intelligence, outlined one example. Iran – working on behalf of the Qods Force – used German-based front companies to mislead European suppliers and surreptitiously procure advanced printing machinery, special inks and watermarked paper. Using these, the Qods Force printed counterfeit Yemeni bank notes potentially valued at hundreds of millions of dollars. European companies were used to further Iran’s subversive activities that undermine global security. “When we consider risks to the international financial system,” Mandelker said, “what action is more problematic than sending massive amounts of fake bank notes into the system?” She previously noted how “appalling” it is that Iran would risk destabilizing the currency of another country. The scheme, she said, “exposes how far elements of Iran are willing to undermine the laws of Iran’s European partners by actively circumventing European export controls.”
In August 2018, approximately 120 German businesses were active on the ground in Iran, while 10,000 German companies transacted with Iran. Since the United States announced its decision to withdraw from the JCPOA, major German companies, including Siemens, Daimler, and Allianz, have announced they will halt their business with Iran.
The purpose of this resource guide is to provide information about the many different kinds of risk that German businesses and financial institutions face when transacting with Iran. The information can be instructive for German businesses, policymakers, and national security community as well their American counterparts. The guide brings together independent rankings on the Iranian business environment, reports from German intelligence agencies, information about U.S. sanctions, reports from human rights monitoring organizations, major media coverage, and other sources. Readers may consult original material directly by following the links included in the guide’s footnotes.
This resource guide is not meant to offer legal advice, which should be provided by general counsel. However, it will provide governments, risk managers, and compliance officers with data sets to support enhanced and comprehensive due diligence before doing business with Iran.