FDD Resource Guide Documents Risks Facing German Companies that Do Business with Iran

(Washington, D.C., November 5, 2018) – In the most extensive public report compiled on the risks facing German entities doing business with Iran, a resource guide published by the Foundation for Defense of Democracies (FDD)’s Center on Sanctions and Illicit Finance, outlines the vulnerabilities companies and financial institutions may encounter doing business with the Islamic Republic which may entangle them in a web of front companies or bad actors with no easy exit.

“Risks of Doing Business with Iran: A Resource Guide for Germany” comes on the eve of the re-imposition of far-reaching Iran sanctions by the United States, which will necessarily affect the business calculus of any German company transacting with Iran. However, as the guide documents, the risks for businesses are largely the result of Tehran’s own misbehavior, including terror financing, money-laundering, and overall systemic opacity.

The publication, authored by FDD Senior Vice President for Government Relations and Strategy Toby Dershowitz and Government Relations Analyst Serena Frechter, follows several other noteworthy recent developments. On October 19, 2018, the Federal Association of German Banks issued a policy paper concluding that doing business with Iran “is and remains risky for banks,” and entails “high initial investment with initially low profitability and [high] risk.” This reality justifies what the bank association’s 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, this report concludes that the burden of mitigating these risks falls on “progress made by Iran itself.”

In addition, on October 19, the Financial Action Task Force (FATF) issued its “Public Statement” maintaining Iran on its “blacklist,” reiterating its concern with “the terrorist financing risk emanating from Iran and the threat this poses to the international financial system.”

Similarly, in the World Bank’s 2019 Ease of Doing Business Index on protecting minority investors, published on October 31, Iran ranked 173 out of 189 countries. Since 2016, Iran has fallen 23 places in this ranking. Foreign investors can hold only up to 10 percent of shares in an Iranian company. The sum of all shares held by foreign investors can comprise only up to 20 percent of shares in a company.

The risks outlined in the guide include those associated with banking, economic, credit and investment risk, the aviation and maritime sectors, procurement risk, due diligence risk, cyber security risk, human rights risk, and national security risk. The guide leverages the most important reports and rankings by the Federal Association of German Banks, FATF, the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, the Institute for Science and International Security, U.S. Treasury’s Financial Crimes Enforcement Network, Transparency International, and German intelligence agencies, among others.

“While Iranian officials spend much capital seeking to entice European banks and businesses to invest in Iran,” explain Dershowitz and Frechter, “German entities 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 guide provides case studies that are instructive for German entities. For example, in 2017, Iran – acting through its foreign operations arm, the Islamic Revolutionary Guards Corps Qods Force – used German-based front companies to mislead European suppliers and surreptitiously procure specialized machinery, ink and paper. Tehran used these items to print counterfeit Yemeni bank notes potentially valued at hundreds of millions of dollars.

The guide describes examples of the humanitarian risks of doing business with Iran. One case study demonstrates that material from the German company Krempel was unknowingly used in two Syrian chemical weapons attacks that took place in 2018.

The guide also cites the procurement risk Iran poses. German intelligence detected Iranian attempts to procure German equipment and know-how for Tehran’s weapons of mass destruction and nuclear programs, even after the 2015 nuclear deal.

Germany is the fourth largest economy in the world and the European Union’s economic engine. The report identifies 18 German companies and an additional 20 European and Asian firms in the Global 500 that have reportedly decided to halt, slow, or terminate their business in Iran.

The resource guide aims to provide information to banks and financial institutions, businesses, risk managers, compliance officers, policymakers, and the national security community with data sets to support enhanced and comprehensive due diligence as they assess doing business with Iran.

The full report can be found here:  Risks of Doing Business with Iran: A Resource Guide for Germany

About FDD

The Foundation for Defense of Democracies (FDD) is a Washington, DC-based non-partisan research institute focusing on foreign policy and national security. Visit our website at www.fdd.org. Follow authors at @tobydersh and @serenafrechter.

About The Center on Sanctions and Illicit Finance (CSIF)

The Center on Sanctions and Illicit Finance (CSIF) expands upon FDD’s success as a leading think tank on the use of financial and economic measures in national security. The Center’s purpose is to provide policy and subject matter expertise in areas of illicit finance, financial power, and economic pressure to the global policy community.

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