Treasury's War Page 32
On one occasion, Levey had compiled information about Iran’s use of a German bank to move money for acquisitions for their operations, potentially for the nuclear program. When Levey met with the bank’s CEO and chief compliance officer, he asked them if they knew what was happening in their bank. The compliance officer seemed confident. The CEO less so and worried about what was to come. Levey then calmly explained what the US government knew about Iranian financial transactions and the use of cover payments and front companies to hide the real purpose for their banking. The IRGC was using bank accounts in Europe to acquire nuclear equipment and to develop its missile systems while lining their leaders’ pockets. Levey went on to explain that most banks did not realize this, but that it was happening. The banks thus far had had no way to know what was transpiring through Iranian front operations and accounts. Levey then put a file on the table that contained documents detailing those types of transactions happening in that very bank.
After absorbing this revelation, the CEO was stunned, the compliance officer sheepish and worried. The CEO took the documents and thanked Levey for the information. He said he would take the information under consideration and look into the matter. The meeting was over, and it had its effect. The bank began to close its accounts with Iranian customers and curtail its business with Iran. The quiet campaign was working without any government decree or international mandate.
There was much consternation in the banking community and among foreign government officials in response to this approach. Bank executives in money centers around the world took Levey’s briefings to be not-so-subtle threats of sanctions and enforcement actions to come if the banks did not conclude their business with Iranian clients. Some bankers—perhaps in a response reinforced over time by financial lore—recall an angry Levey pounding the table and threatening dire actions. Levey, a mild-mannered lawyer, does not recall pounding any tables, but does remember offering up an explicit warning of Treasury attention to come. The real effect was to expose Iranian behavior and to signal that it would not be ignored, especially if Iranian money was flowing through the banking system. The US Treasury Department was feared and respected for what it could do, which made bank executives listen and act.
Foreign government officials often did not like the fact that an American official was meeting with private institutions without their approval. In the case of countries that relied on the capital markets and banking sector as a major sector of their economy, there was particular resentment, especially since many of these banks were the most important private-sector companies in those countries. They also did not like the effects. Regardless of what the host government did or did not do, the banks had to listen to the Treasury Department and consider the risks attendant to doing business with Iran. It became common, without any official action at all from the governments in countries where banks were located, for banks to simply close accounts and begin to minimize their dealings with Iranian businesses. This was the ultimate application of American financial power extraterritorially—and it relied on the decisions and actions of the private sector.
The campaign was beginning to have an impact. The Swiss banking giants UBS and Credit Suisse announced in 2006 that they would stop or curtail their business with Iran. Other banks and companies would soon follow, including the European banking giants ABN Amro and ING. In 2007, Germany’s second-largest bank, Commerzbank, ended its dollar-clearing transactions with Iran.
These meetings were not the only step the Treasury needed to take. The Treasury also needed to set signals and guideposts for the private sector. To this end, a series of designations was designed to build like a financial crescendo, creating an international financial environment that would begin to reject, for its own sake, the risks of doing business with Iran. US executive orders would identify and target finance that supported terror and proliferation, which would be matched with designations at the United Nations.
Then Iran’s banks were exposed and targeted—one at a time. On September 7, 2006, the Treasury cut off Bank Saderat from the international financial system, pulling its ability to rely on a particular type of transaction exemption (the “U-turn” exemption, described later) to access the US banking system. Thus began the campaign to cut off Iran’s banks from the international financial system. The final rule noted: “Bank Saderat has been a significant facilitator of Hizballah’s financial activities and has served as a conduit between the Government of Iran and Hizballah, Hamas, the Popular Front for the Liberation of Palestine–General Command, and Palestinian Islamic Jihad. To cut off Bank Saderat from the U.S. financial system, OFAC is making three amendments to the ITR [Iran Transaction Regulations] that effectively prohibit all transactions directly or indirectly involving Bank Saderat.” The next day, the bank was designated as a terrorist financing institution under Executive Order 13224.
The Treasury next hit Iran’s Bank Sepah and its UK affiliate, Bank Sepah International PLC in London. The bank was designated in January 2007 under the counter-proliferation-finance executive order for providing financial services for Iranian entities engaged in proliferation activities. It designated Bank Mellat in October 2007, as well as the Mellat-linked Mellat Bank SB CJSC (Armenia) and Persian International Bank PLC (United Kingdom) (and later, in 2009, First East Export Bank in Malaysia), under the same authorities. Mellat and its subsidiaries were being singled out for their role in assisting the development of Iran’s nuclear program and for banking the Iranian entities that were attempting to acquire sensitive materials. In December 2008, Treasury similarly designated Bank Melli, along with its subsidiaries and affiliates Arian Bank (Afghanistan), Bank Kargoshee (Iran), Bank Melli Iran ZAO (Russia), Future Bank (Bahrain), and Melli Bank PLC (United Kingdom).4
The Treasury then began to use its authorities to hit other banks doing business with Iran. It designated Banco Internacional de Desarollo, CA (Venezuela) and the Export Development Bank of Iran in October 2008. The Treasury Department was making the case officially that Iranian banks were entangled in proliferation financing—a threat to both the integrity of the financial system and global security. It was also sending a clear signal that it would go after banks willing to cross the red line of doing illicit business with Iran.
The financial pressure campaign continued to mount, with more designations and private-sector outreach. The UN Security Council unanimously passed three resolutions focused on Iran’s nuclear program as engagement faltered and leaders around the world looked for options between diplomacy and war. As of 2012, the US Treasury had targeted sixteen Iranian banks.
The campaign of financial isolation evolved quickly and began to target more than just Iranian banks and the military offices and front companies that were part of the broader proliferation network. In early 2006, Levey and the Treasury team began looking carefully at two sectors that would prove to be critical nodes for the Iranian proliferation networks as well as the broader economy: shipping and insurance. They were essential elements of Iran’s access to the international financial and commercial systems. Iran’s shipping line—Islamic Republic of Iran Shipping Lines (IRISL)—provided the means for Iran to ship weapons, parts, and equipment tied to its proliferation program and to support Hezbollah and other terrorist groups. In 2007, an Iranian ship was stopped off the coast of Israel delivering crates full of weapons to Hezbollah and Hamas. Though ships were not the only means of moving weapons or materiel—the Iranians also used planes and trains—they were the most efficient. IRISL and its subsidiaries would therefore become targets of US and UN actions.
On September 10, 2008, Treasury designated IRISL and eighteen of its subsidiaries under Executive Order 13382. The State Department press release noted:
In order to ensure the successful delivery of military-related goods, IRISL has deliberately misled maritime authorities through deceptive techniques. These techniques were adopted to conceal the true nature of shipments ultimately destined for MODAFL [Ministry of Defense and Armed Forces Log
istics]. Furthermore, as international attention over Iran’s WMD programs has increased, IRISL has pursued new strategies to maintain commerce which also afford it the potential to evade future detection of military shipments, including: Falsifying shipping documents in order to hide the true end users of shipments; Employing the use of generic terms to describe shipments so as not to attract the attention of shipping authorities; and Creating and making use of cover entities to conduct official IRISL business.5
Treasury also determined that shipping and commercial insurance were critical to most of Iran’s primary overseas engagements. For a ship to take part in legitimate commercial trade, it needed insurance—likely from Lloyds of London or major German maritime insurers. Ships without insurance could not legitimately carry goods, sail, or dock. Importantly, the insurance companies relied on the banking system to transact deals and needed to know the nature of the activity they were insuring. It was the very business of insurance companies to evaluate risk by determining what was being carried, where it was coming from and where it was going, and who was sending and receiving it. The more aware these companies were of Iran’s true activities, the higher the valuation would be of risk—and the costlier the insurance would become.
Levey’s visits expanded beyond bank headquarters and began to include insurance company CEOs and officers. These meetings, and the UN resolutions targeting Iran, highlighted the need for insurance executives to be suspicious of what was being insured for Iran as well as the importance of applying additional due diligence—common requirements by this time in the banking world. This was a natural expansion of the due diligence requirements that had arisen after 9/11. The Iranians found themselves squeezed on all sides, and the ripple effects of their financial constriction began to emerge. Even US officials were surprised at how effective these measures were and the impact they were having on Iran’s ability to do business around the world.
On July 31, 2006, the UN Security Council adopted Resolution 1696, requiring Iran to suspend its enrichment and reprocessing activities as well as its construction of a heavy water reactor—in addition to adhering to steps required by the IAEA board of governors. On March 3, 2008, a new unanimous resolution, UNSCR 1803, called for vigilance over financial dealings with Iran. The United States imposed targeted financial measures against Future Bank and made the relevant information publicly available.
With each designation and official action, the US government attempted to expose the work of the IRGC and its Qods Force and their use of financial and commercial vehicles to support their activity. The intent was not just to raise diplomatic concerns about the progress of Iran’s nuclear program, but also to pressure the banking world to suspect any financial transactions dealing with an Iranian bank or business.
On March 30, 2007, the State Department designated Iran’s Defense Industries Organization (DIO) under EO 13382. This step was part of the United States’ implementation of UNSCR 1737. The State Department press release noted:
DIO was sanctioned previously by the United States for WMD or missile-related activities under the Iran and Syria Nonproliferation Act (ISNA), the Arms Export Control Act, and the Export Administration Act. DIO also has been identified by the IAEA as involved in centrifuge component production for Iran’s nuclear program. A June 2004 report from the Director General of the International Atomic Energy Agency (IAEA) on Iran’s implementation of IAEA resolutions noted that Iranian authorities acknowledged that composite rotors for use in P-2 centrifuges had been fabricated in a workshop situated on a DIO site.6
The most important set of coordinated actions against the Iranians was put into place on October 25, 2007, when the State Department designated the IRGC and Iran’s Ministry of Defense and Armed Forces Logistics under EO 13382. The press statement said, “The U.S. Government is taking several major actions today to counter Iran’s bid for nuclear capabilities and support for terrorism by exposing Iranian banks, companies and individuals that have been involved in these dangerous activities and by cutting them off from the U.S. financial system.”7 The Treasury also designated nine IRGC-affiliated entities and five IRGC-affiliated individuals as derivatives of the IRGC, Bank Melli and Bank Mellat, and three individuals who were affiliated with Iran’s Aerospace Industries Organization (AIO). It designated IRGC-QF for its material support and Bank Saderat as a terrorist financier. There was no question that the United States was upping the financial ante on all parts of Iran’s economy.
The designations and regulations—coinciding with and prompting other international actions—were accompanied by additional financial diplomacy. On February 5, 2008, Levey again visited the Arabian Gulf to meet with officials and bankers in Qatar, Bahrain, and the UAE. His meetings in these and other capitals and financial centers had a single purpose. He sought cooperation and argued for voluntary steps by the banks and private-sector actors to cut Iran off from the international financial system.
It was also critical to weaken Iran’s ability to deal comfortably in the oil markets. We were trying to strike a balance—making it very costly for Iran and its oil customers to do business while not spooking the oil markets and spiking prices. A key point of access for the Iranians, still allowed under US law, was the “U-turn” financial transaction. For a number of years, this provision had existed as a realistic function of the oil markets. The world needed Iranian oil, and oil was transacted in dollars. The U-turn provision allowed for dollarized oil transactions through the US banking system—without the money ever sitting in a US bank or the bank serving as the originator or destination financial institution in the transaction. The transaction could literally do a U-turn from abroad, just transiting the United States to convert the transaction into dollars and then sent back out of the country. The decision was made to end this exception, despite concerns that oil prices would spike or the oil markets would be disrupted. Getting rid of the U-turn exception would cut off any dollar-clearing transactions for Iranian oil through New York.
On November 10, 2008, the United States revoked authorization for U-turn transfers involving Iran. This simple regulatory fix had an important impact. It now meant that the banks and institutions in Europe, the Middle East, and Asia facilitating the financing for Iranian oil deals could no longer access and use their American correspondent relationships to clear the dollar. With oil transactions traded and monetized in dollars, this was crippling to normal transactions for the Iranians. It made it costlier and more cumbersome for the Iranians to get their oil to market, and it added uncertainty into the Iranian oil markets for those considering long-term investments. The Iranians and their financial backers would adapt, beginning to engage in regional transactions using local currency or bartering for the oil (trading oil exports for the return of consumer goods). On December 3, 2008, the Treasury added to this pressure and expanded the list of companies identified as being owned or controlled by the government of Iran to include the National Iranian Oil Company, Naftiran Intertrade Company Ltd., and Naftiran Intertrade Company Sarl.
The European Union—led by a more aggressive French government under President Nicolas Sarkozy—began to follow with important EU regulations and designations that paralleled US actions. The banking communities in London, Frankfurt, and Amsterdam were not necessarily enthusiastic actors, but they had to react to the realities of the new environment. The risk calculus was changing, and doing business with Iran was becoming a costly venture, given the potential for sanctions within the European Union and by the United States. That sense of vulnerability would only grow, despite the allure of business opportunities in Iran being filled by others like the Chinese and Russians.
By now, it was not only the federal government in the United States that was waging a campaign against Iranian finance. The Manhattan District Attorney’s Office, led by the legendary Robert Morgenthau, began to investigate banks for lack of compliance with US banking restrictions and attempts to evade those controls by hiding the nature of financial transactions. In
January 2009, a British institution, the Lloyds TSB Group, paid $350 million in fines after it was found to have ignored US sanctions on Iranian institutions and dollar transactions.8 Morgenthau began to wade aggressively into waters that Levey and the Treasury Department thought to be their province. But the New York banking authorities have ultimate say in who does business and how in the New York banking system—a great power that would lead to conflicts of jurisdiction again and again.
Morgenthau became a leading voice on the issue of illegal Iranian financial flows through New York’s banking system. He was out to expose it and stop it by punishing those banks that appeared complicit in allowing the Iranians to access New York banks. He became noticeably passionate about the role that the Venezuelan banking system was playing as a back door into the US financial system by the Iranians. He was willing to use investigations and prosecutions to stop illegal access to the US markets, but he was just as willing to use his bully pulpit and the threat of future sanction by New York prosecutors as a sword of Damocles over the heads of bankers. In one of his final speeches as district attorney in May 2009, Morgenthau noted the problem of evasion of financial controls against the Iranians and highlighted the role of Venezuelan banks in this complicity.9 In a 2009 op-ed piece in the Wall Street Journal, Morgenthau argued that “in the past several years Iranian entities have employed a pervasive system of deceitful and fraudulent practices to move money all over the world without detection. The regime has done this, I believe, to pay for materials necessary to develop nuclear weapons, long-range missiles, and road-side bombs. Venezuela has an established financial system that Iran, with the help of Mr. Chávez’s government, can exploit to avoid economic sanctions.”10