Recently leaked documents from the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) indicated the participation of the Central Bank of the United Arab Emirates in the money laundering activities that allowed Iran’s Central Bank to evade sanctions. An investigative report by the New York Center for Foreign Policy Affairs shows that there is increasing evidence, accumulating over decades, of continuous practices that defy US sanctions against Iran. Despite some US government and lawmakers’ efforts, these practices still exist and set a perilous precedent that poses a threat to American national security and economic interests, experts say.
Previous Iran sanctions were supported by the international community and the United Nations. The pressure resulted in the Joint Comprehensive Plan of Action that limited Iran’s nuclear program. The agreement was signed by Iran and six world powers (China, France, Germany, Russia, the United Kingdom, and the United States) on July 14, 2015. Iran signed that agreement in exchange for relief from nuclear sanctions and the return of money from regular business held since their revolution, and funds accumulated from seized illegal transactions.
In the meantime, despite having grudgingly recertified Iran’s compliance with the 2015 nuclear deal, the Trump Administration unilaterally imposed sanctions on Iran in 2017. The new US administration insisted that Iran was not in compliance with the agreement and misled the international community. According to President Trump, “At the heart of the Iran deal was a giant fiction that a murderous regime desired only a peaceful nuclear energy program. Today, we have definitive proof that this Iranian promise was a lie”
These newly imposed Iranian sanctions were controversial. The European Union was against these sanctions since the beginning and still is. The EU even wanted to create a Special Purpose Vehicle (SPV) to avoid US sanctions. Moreover, the EU authorities in 2018 discussed the idea to make direct money transfers to Iran’s central bank to avoid US penalties. According to Reuters, that “would be the most forthright challenge to Washington’s newly reimposed sanctions.” However, in the face of inevitable sanctions from the US, the EU decided to step back, as well as the EU companies that resigned to the loss of their investment in Iran. According to the Associated Press, European companies such as France’s Total, Anglo-Dutch Royal Dutch Shell, and Italy’s Eni lost billions because of the new US sanctions.
Publicly, most of the international community, and most American allies are demonstrating solidarity with the US (even in the case of the recently imposed and controversial Iran sanctions). However, other countries, like the UAE, continue to work with Iran by using shadow financing schemes and money laundering processes which not only violate these sanctions designed to put economic pressure on the Iranian government in Tehran, but may also violate criminal law in the United States. Surprisingly, these facts do not prevent them from being called US allies and receiving benefits from it.
DECADES OF EVASION
Recently, the BBC reported on the possible United Arab Emirates and UAE Central Bank violation of sanctions against Iran. According to the leaked documents, “Dubai-based Gunes General Trading processed $142m (£110m) in suspicious transactions through the UAE financial system in 2011 and 2012, and UAE Central Bank was involved in this transaction.”
A former senior US official who worked on US sanctions enforcement for the federal government explained to the NYCFPA that this potential violation would have preceded the nuclear deal of 2015 and the nuclear sanctions that the Obama Administration put in place in the lead up to the nuclear deal.
“Whether the activity was sanctionable would depend entirely on what secondary sanctions were in place at the time of the transaction,” he said. Meanwhile, he noticed that since 2010 the US Treasury “negotiated with half a dozen companies out of Iran, including companies from France, Japan, and the UK. Certainly, there were companies from the UAE sanctioned for failing to terminate business with Iran.”
Further investigation exposed that ignoring the US sanctions against Iran is not an unusual practice, but almost routine for UAE financial institutions. This is a view that is common for the business community globally. Similarly, American businessmen perceive any business with the United Arab Emirates conducted in this context as a very risky one.
According to President/CEO at Navigator Principal, Kyle Shostak (involved in a project in Dubai), the topic of anti-Iran financial sanctions that recently re-surfaced in the UAE Central Bank is not new. For example, the cases involving Standard Chartered Bank go back to 2011 and 2012. “Dubai has mastered the art of adapting to changing sanctions and their enforcement to continue business with Iran and support private businesses to circumvent the limitations by using no-name companies in countries other than the Middle East region, private citizens other than Iranians, and banks other than necessarily present in Dubai,” he said.
In the region, there are numerous schemes to avoid the sanctions against Iran according to several sources. There are many examples in the international business and banking community of these types of schemes. For example, a typical Iranian state-owned enterprise cannot effectuate any banking transaction involving US dollars or American banks as clearing entities. As a result, and to circumvent the ban, Iranian entities have employed help from various intermediaries. Quite often, these are entities owned or controlled by Iranian diaspora living abroad.
Reza Zarrab, an international gold trader, was one of them. Zarrab’s empire spanned across three continents and was operated out of a home base in Turkey. The 37 year-old Iranian born businessman was known in the international business community as a ‘source’ of conducting business in Tehran. His father, Hossein Zarraband, was a close ally of former Iranian President Mahmoud Ahmedinejad. Both the father and son, according to a report released by the Organized Crime and Corruption Reporting Project, sent a letter to the President of the Iran Central Bank stating that they were ready for “economic jihad” against sanctions imposed by the west. Reza Zarrab was arrested in 2016 while traveling to Miami, Florida. In a case led by U.S. Attorney for the Southern District of New York, Zarrab was charged with conspiracy to evade U.S. sanctions against Iran, bank fraud, and money laundering. In 2018, Zarrab was convicted and sentenced to 32 months, a sentence less than the 20 years requested by federal prosecutors.
Operators, such as Zarrab, are typically connected with the Iranian special services, who will recruit them for a fee based on the total funds channeled. Using financial institutions, such as the UAE Central Bank, these operators will bear most of the transactional costs. Over time, many non-Iranians got involved in such schemes as well, mostly Europeans and Asians.
The UAE continues to be a major center of conducting business with Iran and evading sanctions by the U.S. Today, two Iranian banks actually continue to operate in the open in Dubai: Bank Melli and Bank Saderat. These Iranian banks have a major stake (bordering on a monopoly) on handling the Iranian accounts under the strict supervision of the UAE Central Bank.
Sources also identify a popular scheme for misleading US regulators known as”triangle” financial transactions. In these transactions, the product is sold from one country to another, but is ultimately produced in Iran. These transactions, many times, are conducted in dollars. The transaction is cleared via correspondent banks in the United States. Documents provided by the companies involved do not show that Iran was the source of these goods or services. These transactions are undoubtedly in violation of sanctions. If the Office of Foreign Assets Control (OFAC) and the Department of Justice confirm the suspicious transaction between two entities violates the US sanctions, they aggressively enforce penalties against these companies.
International law enforcement continues to crack down on sanctions violators and those who finance them. NYCFPA has confirmed through officials in the U.S. Government close to the ongoing investigations that the Departments of Justice, Treasury, and Homeland Security are currently investigating these types of business transactions. According to the sources, these investigations include transactions that allegedly directly involve the UAE Central Bank as a key player and a possible conspirator organization.
This refuge for Iranian money resulted in double sanctions violations. The continued Iranian-Venezuelan gold trade with Iran has provided President of Venezuela, Nicolas Maduro, services and, in turn, Venezuela paying in gold. The gold sales are considered the final attempt to save the endangered Venezuelan economy, which was once the wealthiest in Latin America, the Wall Street Journal reported in July 2019.
Various media outlets have reported this type of ‘gold-laundering’ was made possible via African Gold Refinery Ltd. (AGR). The Uganda based company was founded in 2014 by Alain Goetz, 54, a Belgian businessman. Although the White House has imposed sanctions that ban Venezuelan gold sales, the underground gold trade was still active. Mr. Goetz played a significant role in gold laundering transactions between Iran and Venezuela. According to court documents, both AGR and another company operated by Goetz, Dubai based Goetz Gold, participated in Venezuela’s gold sales. A Belgian court earlier this year convicted Goetz and his brother Sylvain on charges of money laundering and fraud. According to media reports and court documents, the Goetz controlled companies established a scheme in 2010 for clients to sell gold anonymously for cash and established a black market trading mechanism. Goetz and his brother took advantage of leaks in the sanctions and were responsible for the underground gold trade. The Goetz brothers were sentenced to 18 months suspended sentence by the court.
After America publicly pressured the gold smuggling activity, the gold market worsened. The market shrunk tremendously, and the price experienced a decline. There are hardly any established buyers for gold from Venezuela, and the price is severely discounted.
However, with the increased law enforcement pressure occurring globally to stop ‘gold laundering’, there is still no guarantee that similar illegal activities are being deterred. There are some international financial experts who suspect transactions involving gold trade between sanctioned entities, formerly being laundered through Turkey, are now being processed through Dubai and the Emirates.
THE SIZE OF THE PROBLEM
The issue with the US sanctions against Iran and schemes involving financial institutions that enable the illegal business transactions needs immediate attention from US policymakers. Otherwise, it could become a broader problem. The money laundering refuge in Dubai and the other Emirates can grow more rapidly during the COVID-19 economic crisis. Economists project a recession in Dubai (around -6% of GDP) with a shallow recovery in both short and long term forecasts. The publicly held debt is expected to be doubled in the near future. It is hard to imagine that the UAE will show its readiness to stop using inappropriate practices by facing these difficulties. For now, it is hard to estimate even approximately the volume of Iranian-related transactions still flowing through Dubai. However, knowing that the trade volume between the two countries was about $1.6 – 1.8 bn in 2019, it is safe to say that the unofficial trade or simple money movement can easily rival that figure.
The recent release of FinCEN files indicated UAE’s participation in the money laundering activities that allowed the Iran Central Bank to evade sanctions. In 2019, Representative Emanuel Cleaver (D-MO) introduced a House Resolutions “Urging the United Arab Emirates to immediately end any activities enabling money laundering in violation of United States sanctions against Iran” While the legislation gave a strong signal about sanctions violations in the UAE, the legislation stalled in committee and there have been no further responses from the trading institutions that allowed the sanction violations.
While there is a vocal outcry for the cessation of the funding of these illegal business and financial transactions, there are no examples when the US sanctions were imposed on allies’ central banks. There are sanctions that have been implemented only on central banks of rogue countries such as Iran, Venezuela, and North Korea. According to the former senior government official on sanctions “The United States has never put the Central Bank on the SDN (Specially Designated Nationals and Blocked Persons) list unless the government of the country itself has not been blocked or was the subject of an embargo. If you look at the sanctions on the SDN list, you have North Korea and Venezuela, which are all the subject of very comprehensive sanctions. If you took the Central Bank of any country and you put it on the SDN list, the consequences are cataclysmic because it cuts off all the US dollar correspondents’ relations.” At the same time, the US needs to deploy its diplomatic tools to support sanctions enforcement. “In any implementation of secondary sanctions, the first step is a diplomatic approach. The goal is to deter business and activity and not to impose sanctions. It is a government to government contact that is most effective.” The US must have a strong position and arguments. For this reason, “the threat of secondary sanctions must be credible.”
Unfortunately, until now, these diplomatic efforts do not appear to be effective. “The US has intensified pressure on the UAE CB, having held a series of face-to-face meetings. Iranian entities have shifted their activities to other regional centers, such as Istanbul and Beirut, where they already had long historical ties. Meanwhile, the pressure seems to be spreading fear and is certainly reaching its intended audience. It is also clear that Dubai, having gone through multiple international crises, has emerged stronger and the mechanics of its official and unofficial banking each time became more and more sophisticated,” Shostak explains.
A Senior Fellow at the Center for International Policy and former State Department official Matthew Hoh, thinks that by setting these standards and precedents in the sanctions’ context, the US is putting itself in a dangerous position.
“The example of UAE violating sanctions continuously, and the US turning a blind eye, is just another example of hypocrisy. As long as the US-UAE relationship is good, as long as the money keeps flowing between the two nations, each government can do as they please. And it is not just morally wrong, but it sets a dangerous precedent,” he explains.
Hoh added that in ideal circumstances, these sanctions would be based on principles that were equally applied worldwide and would be done via the United Nations…not unilaterally by various nations. A mechanism is needed when sanctions are created, they would reflect the universal values and principles equally and not only one country’s agenda.
“The United States has this ability to do what it wants because it is so powerful now, and this is the biggest economy in the world. However, it is changing, and this approach can in the future play against the US,” Hoh emphasized. He concluded that by setting this dangerous precedent, the US shows a bad example to the others. For instance, China can do the same – selectively impose the sanctions. These double standards can also upset the EU, and they may no longer follow US leadership.