Following the United States’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the re-imposition of U.S. sanctions previously lifted under the JCPOA, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, recently issued an advisory to help financial institutions detect transactions related to Iran that breach the U.S. sanctions.
The advisory aims to assist foreign financial institutions to avoid exposure to U.S. sanctions and address the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risks that Iranian activities may pose to the international financial system.
The advisory affirms that the Iranian regime has long used front and shell companies to exploit financial systems around the world to generate revenues and transfer funds in support of destructive conduct, which includes support to terrorist groups, ballistic missile development, human rights abuses, support to the Syrian regime, and other destabilizing actions targeted by U.S. sanctions.
The advisory highlights the Iranian regime’s exploitation of financial institutions worldwide and describes a number of typologies used by the regime to illicitly access the international financial system and obscure its activity.
The advisory describes some of the methods employed by the Iranian regime to access the financial system which includes using/abusing:
1. CBI Officials
The advisory describes how senior officials of the CBI have played a critical role in enabling illicit networks, using their official capacity to procure hard currency and conduct transactions for the benefit of the IRGC-QF and Hizballah.
On May 15, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated senior CBI officials for conducting transactions through Iraq’s banking sector for the benefit of the IRGC-QF and Hizballah, which has acted as a proxy for the IRGC-QF. Specifically, for moving millions of dollars, in a variety of currencies, through the international financial system to allow the IRGC-QF to fund its activities abroad and supporting the transfer of IRGC-QF-associated funds to Al-Bilad Islamic Bank, an Iraq-based bank that was also designated by OFAC.
2. Exchange Houses
The advisory describes how exchange houses may have exposure to Iran or Iranian persons, given that the Iranian regime, senior CBI officials, and the CBI have used such entities to conceal the origin of funds and procure foreign currency for the IRGC-QF.
On May 10, 2018, the United States, in a joint action with the United Arab Emirates (UAE), disrupted an extensive currency exchange network in Iran and the UAE. The network procured and then transferred millions of U.S. dollar-denominated bulk cash through the UAE to the IRGC-QF. As part of this joint action, OFAC designated six individuals and three entities. The CBI was found complicit in the IRGC-QF’s scheme, actively supported this network’s currency conversion, and enabled it to access funds that it held in its foreign bank accounts. To mask ties to Iran and particularly to the IRGC-QF, this network of cash couriers and currency exchangers established the abovementioned three front companies. At least one of these companies advertised its currency exchange and international money transfer business all over the world on its website and through social media in an effort to portray its activities as legitimate, while in reality its management was using the company to facilitate the transfers for the IRGC-QF. The managing director of another company also worked with the IRGC-QF to forge documents to conceal their illicit financial activities from UAE authorities. Using these front companies, these individuals procured and transferred millions in U.S. dollar-denominated bulk cash to the IRGC-QF to fund its activities and regional proxy groups.
During previous periods of heightened sanctions pressure, Iran relied heavily on third-country exchange houses and trading companies to move funds to evade sanctions. These practices include the use of third-country exchange houses or trading companies to act as money transmitters in processing funds transfers through the United States to third-country beneficiaries, in support of business with Iran that is not authorized by OFAC. These third-country exchange houses or trading companies frequently lack their own U.S. dollar accounts and instead rely on the correspondent accounts of their regional banks to access the U.S. financial system. Often these entities are located in jurisdictions considered high-risk for transactions implicating OFAC sanctions, and they appear to process primarily commercial transactions rather than personal remittances, which are authorized by OFAC.
3. Printing Equipment for Counterfeiting Currency
In November 2017, OFAC designated two individuals and four entities for their roles assisting the IRGC-QF to counterfeit currency. This network used two German-based front companies to deceive European suppliers, circumvent European export restrictions, and procure advanced printing machinery, security printing machinery, and raw materials such as watermarked paper and specialty inks. The network used these items to print counterfeit Yemeni bank notes for the IRGC-QF.
4. Equipment Procurement for Ballistic Missile Proliferation
In February 2017, OFAC designated multiple individuals and entities that are part of a criminal network for the procurement of dual-use and other goods on behalf of organizations involved in Iran’s ballistic missile programs. This network coordinated procurement through intermediary companies that concealed the final recipient of the goods. The network relied on another network of trusted China-based brokers and their companies to assist his procurement of dual-use and other goods.
5. Commercial Aviation Industry
The advisory describes how designated Iranian airlines and their agents and affiliates have used deceptive schemes to procure aviation-related materials using front companies. OFAC has issued numerous rounds of sanctions related to efforts by designated Iranian airlines to evade sanctions via the use of front or shell companies including prohibitions or strict conditions on their ability to open or maintain correspondent or payable-through accounts in the United States.
6. Shipping Companies
During previous periods of heightened sanctions pressure, OFAC identified Iranian or Iran-related companies using deceptive shipping practices to evade U.S. sanctions. These practices include:
- The use of falsified documents.
- The reflagging of vessels.
- The involvement of third parties, such as brokers and trading companies, to mask the underlying payments and business activity with Iran.
OFAC also identified shipping companies around the world that falsified documents to hide ships docking in Iranian ports and the accompanying trade-related payments. In addition, in the past, as the United States has added entities or individuals to OFAC’s SDN List, there have been instances where a vessel’s ownership or operation was transferred from a newly designated person to a front company or other person acting for or on behalf of the designated person.
The advisory highlights indications of these deceptive shipping practices which may be seen in the information contained in international wires, payment requests, and letters of credit. Documents may also be falsified, and include bills of lading and shipping invoices to conceal shipping routes, embarkation ports, or shipping agents. Financial institutions may find maritime databases and reports helpful when verifying trade-related documents. In addition, among other deceptive conduct, Iranian vessels may attempt to hide their origin and purpose by potentially fabricating vessel registration and flag credentials at ports of call and canal entrances.
7. Precious Metals
The advisory asserts that Iran has previously used precious metals, such as gold, to evade U.S. sanctions and facilitate the sale of Iranian oil and other goods abroad. In response to these schemes, the United States enacted sanctions specifically targeting Iran’s trade in precious metals, including section 1245 of the Iran Freedom and Counter-Proliferation Act of 2012.
8. Virtual Currency
The advisory claims that, since 2013, Iran’s use of virtual currency includes at least $3.8 million worth of bitcoin-denominated transactions per year. While the use of virtual currency in Iran is comparatively small, virtual currency is an emerging payment system that may provide potential avenues for individuals and entities to evade sanctions. Despite that the CBI has banned domestic financial institutions from handling decentralized virtual currencies, individuals and businesses in Iran can still access virtual currency platforms through the Internet.
New virtual currency businesses may incorporate or operate in Iran with little notice or footprint and P2P exchangers may offer services in Iran. These P2P exchangers may operate as unregistered foreign Money Services Businesses in jurisdictions that prohibit such businesses; where virtual currency is hard to access, such as Iran; or for evading the prohibitions or restrictions in place against such businesses or virtual currency exchanges and other similar business in some jurisdictions.
The Financial Action Task Force (FATF) has listed Iran as a jurisdiction with systemic deficiencies in its AML/CFT regime. Despite Iran’s commitment in June 2016 to an action plan with the FATF to address its AML/CFT deficiencies, the latter concluded that Iran has failed to complete the majority of its action plan. The FATF, therefore, continued to call upon its members and all jurisdictions to advise their financial institutions to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons from Iran.
In addition to keeping Iran on its Public Statement, on June 29, 2018, the FATF expressed disappointment with Iran’s failure to implement its action plan, and it reiterated its concern with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system. The FATF noted that Iran “should fully address its remaining action items, including by:
- adequately criminalising terrorist financing, including by removing the exemption for designated groups ‘attempting to end foreign occupation, colonialism, and racism;
- identifying and freezing terrorist assets in line with the relevant United Nations Security Council resolutions;
- ensuring an adequate and enforceable customer due diligence regime;
- ensuring the full independence of the Financial Intelligence Unit and requiring the submission of STRs [Suspicious Transaction Reports] for attempted transactions;
- demonstrating how authorities are identifying and sanctioning unlicensed money/value transfer service providers;
- ratifying and implementing the Palermo and TF [Terrorist Financing] Conventions and clarifying the capability to provide mutual legal assistance;
- ensuring that financial institutions verify that wire transfers contain complete originator and beneficiary information;
- establishing a broader range of penalties for violations of the ML [Money Laundering] offense; and
- ensuring adequate legislation and procedures to provide for confiscation of property of corresponding.”
Sources: FinCen; FATF; OFAC.