Sanctions Alert: Iran’s New Financial Channel with Europe is Linked to Sanctioned Entities

Abdolnasser Hemmati, the head of the Central Bank of Iran (CBI), slammed the EU last week for its failure to operationalize a Special Purpose Vehicle (SPV) that would shield European transactions with Iran from U.S. sanctions. Europe’s hesitation may indicate that it recognizes the tremendous risks of cooperating with Iranian financial institutions closely tied to the regime and subject to U.S. sanctions.

In April, Tehran created the Special Trade and Finance Instrument (STFI) as a counterpart to the European SPV, formally known as the Instrument for Supporting Trade Exchanges (INSTEX). Set up by Germany, France, and the UK, INSTEX would avoid U.S. sanctions by enabling trade without using the U.S. dollar or going through U.S. banks. STFI was registered in April in Tehran’s Davudieh near the CBI’s headquarters.

According to the French Ministry of Economy and Finance, the STFI has eight shareholders. The largest is Faradis Gostar Kish, an informatics firm, with 23 percent of shares. The remaining 77 percent is equally divided among seven Iranian banks, all of which are on the U.S. Treasury’s list of Specially Designated Nationals (SDNs): Karafarin, Refah, Keshavrazi, Eghtesad Novin, Pasargad, Saman, and Middle East.

Faradis Gostar Kish is a subsidiary of the Informatics Service Corporation, which itself is a subsidiary of the National Informatics Corporation. The National Informatics Corporation is owned by four major banks, all of which are on the Treasury’s SDN list and subject to secondary sanctions. The four banks are the Central Bank of Iran (CBI), with 48.5 percent of the shares, Bank Melli with 21.75 percent, Bank Saderat with 21 percent, and Bank of Industry and Mine (BIM) with 4.75 percent.

CBI plays an active role in funding terrorism as well as money laundering and illicit finance. In 2011, Congress passed sanctions against the CBI as part of the FY 2012 National Defense Authorization Act. In May 2018, Treasury designated the previous governor of CBI for the role he and the bank played in moving millions of dollars on behalf of the Quds Force to Hezbollah. In November 2018, Treasury exposed a Russian-Syrian-Iranian network that transferred hundreds of millions of U.S. dollars to Syria, Hamas, and Hezbollah with the active collaboration of CBI.

Treasury added Bank Melli to its SDN list for a variety of reasons, including its role in supporting the Islamic Revolutionary Guard Corps (IRGC) and its Quds Force. According to Treasury, as of 2018, “billions of dollars in funds have flowed through IRGC-QF controlled accounts at Bank Melli.”

The seven banks that hold shares in the STFI have deep ties to regime-controlled entities, in addition to being on the SDN list. Karafarin Bank is effectively part of Supreme Leader Ali Khamenei’s $95 billion economic empire, the Headquarters for the Execution of Imam Khomeini’s Order (EIKO). Among Karafarin’s main shareholders are Tadbir Investment and its subsidiaries; Tadbir itself is a subsidiary of EIKO. Both Tadbir and EIKO are on the SDN list and subject to secondary sanctions.

Bank Refah and Bank Keshavarzi are both controlled by the government of Iran; the other four banks are privately held. Among their shareholders are entities such as Tamin Refah and Atieh Omid, a subsidiary of EIKO.

Finally, the STFI has four board members, three of whom represent firms controlled by the government of Iran. In other words, the government dominates the board.

The EU would be wise not to enter into any transaction with the STFI given its connection to sanctioned entities. Non-U.S. firms that are involved in legitimate trade with Iran can conduct it through Iranian banks that are not on the SDN list or not subject to secondary sanctions. Treasury can clarify the risks of dealing with the STFI by adding it to the SDN list, and issuing guidance related to the risks of doing business with proliferators and terrorist sponsors through the STFI. If the EU persists, Treasury could go a step further by threatening to apply secondary sanctions to the STFI.

Mark Dubowitz is the chief executive officer for the Foundation for Defense of Democracies, where Saeed Ghasseminejad is senior Iran and financial economics advisor. Both contribute to FDD’s Center on Economic and Financial Power (CEFP). Follow Mark on Twitter @mdubowitz and Saeed @SGhasseminejad. Follow FDD at @FDD and @FDD_CEFP. FDD is a Washington-based nonpartisan research institute focusing on national security and foreign policy.