In their own words: Experts tackle the financial crime, terror risks in Iran as sanctions recede

By Brian Monroe
August 17, 2016

More than half a year has passed since the United States and European nations lifted certain trade and financial sanctions on Iran, releasing roughly $100 billion in assets after international inspectors agreed that the Islamic theocracy had kept its promises to scrap hefty portions of its nuclear program.

But there are still a bevy of sanctions in place for Iran tied to individuals and entities believed to be engaged in illicit or terrorist acts, or actively supporting them, causing a quandary for companies seeking to do business with Iranian parties and financial institutions attempting to reconnect Iranian entities with the international financial system.

Even if a U.S. or other bank working with an Iranian institution, or company in a trade deal, is able to steer clear of terror threats, there are still major stumbling blocks when it comes to Iranian anti-money laundering (AML) laws, implementation and expertise, in both private and public sectors.

Financial institutions outside Iran attempting to do their own due diligence dives may be thwarted due to a lack of available information, or have few means to verify the information they are given by Iranian sources. Likewise, Iranian banking operations may find it challenging to uncover beneficial ownership and other key risk ranking details.

Regardless of its AML expertise or related due diligence challenges, Iran’s terrorist financing risks remain the most serious cause for concern for many institutions. The Iranian government and military is widely considered to support terror groups, even after the creation and signing of nuclear and other accords and receiving sanctions relief.

Iran has been a “consistent supporter” of U.S.-designated Palestinian terrorist organizations, including Palestinian Islamic Jihad (PIJ) and Hamas, according to Matthew Levitt, director of the Washington Institute’s Stein Program on Counterterrorism and Intelligence.

He noted in his report that “although Iran and Hamas have argued at times over the latter’s refusal to support the Assad regime in Syria, they rekindled their broken relationship this year.” Levitt added, though, that, “elsewhere in the Levant, Lebanese Hezbollah remains Iran’s primary terrorist proxy.”

Last month, the group’s secretary-general, Hassan Nasrallah, bluntly declared that “Hezbollah gets its money and arms from Iran, and as long as Iran has money, so does Hezbollah,” according to Levitt, in the report. “Since the JCPOA was signed, the U.S.-designated terrorist organization has engaged in numerous criminal, espionage, and terrorist plots.”

It’s those continuing and persistent challenges that prompted ACFCS to ask sanctions experts what financial institutions could and should do if they are attempting to engage with Iran, or individuals and businesses with ties to the country. This is the latest “in their own words” series, where those in the trenches to give concise guidance on timely issues.

Even with certain sanctions related to Iran dropped, at least regarding the United States, what are some of the other sanctions, financial crime and terror risks tied to Iran? And, if possible, what are some of the AML and know-your-customer (KYC) challenges?

From Jim Slear, a partner and sanctions attorney in the Washington, D.C. office of Thompson Coburn LLP. 

There are number of factors. There is of course a continuing need to detect and filter out [U.S. Dollar] transactions and monitor for circumvention, to ensure no violation of continuing export controls and [weapons of mass destruction (WMD)] restrictions, and avoid dealing with/supporting [specially-designated nationals (SDNs)] and the [Islamic Revolutionary Guard Corps, or IRGC] and affiliates (due to residual secondary sanctions).

Concerns about the IRGC and the lack of transparency about companies that they own or control are probably high on most lists, and is compounded by a lack of trust in Iranian institutions. All of these compliance concerns increase cost (and resources) and risk.

From Erich Ferrari, a sanctions and trade attorney in Washington, D.C.

I think as an initial point, it’s important to understand that the majority of the sanctions relief afforded to Iran under the Joint Comprehensive Plan of Action related to suspension of secondary sanctions authorities. As a result, U.S. persons, including companies, still face a whole host of prohibitions in relating to transacting with Iran.

Moving past that, and relevant to those who can transact with Iran, the biggest problem relates to uncovering Ultimate Beneficial Ownership (“UBO”) of the parties involved in the transaction.  In Iran there are still a number of parties designated pursuant to OFAC sanctions programs.  Those designated parties (SDNs) have ownership interests in a wide variety of companies and organizations.

Thus, without proper due diligence, one could find themselves dealings with companies that are 50% or more owned by SDNs.  Getting documentation from Iranian counterparts to definitively confirm the UBO is not in 50% more owned by an SDN, or a group of SDNs in the aggregate, is challenging.

These UBO concerns are not uncommon for those familiar with KYC requirements generally. Thus, those who are wishing to transact with Iran, face two legal hurdles: the first being whether they can actually engage in the transactions, and the second in identifying who they are really dealing with.

From Farhad Alavi, managing partner for Akrivis Law Group, a boutique firm that advises on international sanctions, export controls and anti-corruption compliance

Iran has two or three problems. There are sanctions still in effect. There is also the lingering psychological effect of ever having sanctions in place. There are still places, banks, and foreign countries that don’t want to touch Iran with 10-foot poll. But that view is more emotional than technical.

Thirdly, they have their own internal structural problems The atmosphere is not ready to absorb foreign investment. It’s also hard for companies to do business there aside from the banking problems. There is a lack of manpower in terms of [financial crime compliance] consulting and laws. Even dealing with the whole issue of sanctions relief, that’s not a panacea for Iran’s economic problems. Iran had a lot of problems before sanctions were in place.

As well, the red tape in Iran is exceptionally difficult. It borders on nonsense, but that’s really a local issue. It’s also important to keep in mind that the U.S. has a limited window of things we can do with them. This is a big problem for larger transactions and for doing KYC and knowing your customer.

The amount of information is pretty scant in terms of detail. And harder to obtain that information in Iran than on similar companies in Dubai, Brazil or Hong Kong.

In Iran, there is also a lot of the use of front companies. That creates a problem. Even though everything has to be announced in a newspaper, with notaries and recorded minutes, in reality it’s difficult to find out who actually owns a company.

Due to the tax laws, for a lot of companies in Iran, the assets are held by the shareholders and not in the company name. That means that if we have business, ACME office building, it is owned by individuals, so if you search on who owns the building, the information doesn’t show up.

Plus, because there are lots of uses of fronts companies, and front entities, it creates a lot of ambiguity that is not a hospitable environment for business.

But that should change. The more Iran opens up, both legally and its need to open up on the compliance end, the need to create jobs, this will eventually improve little by little. It has to if Iran wants to compete and do business.

But there is a vacuum when it comes to financial crime compliance. For instance, as part of compliance and trade compliance, one of the things you have to is audit your compliance program. And if you are not catching stuff, it’s often a sign that the program is not adequate and you are not finding potential violations.

Iran is reportedly authorizing US companies to offer that kind of advice, with private consultancies or on a government to government level, to ramp up AML and KYC procedures. That will take time and Iran’s regulatory culture is not there yet.

People see Iran as a fairly rich country. It has all the trappings [of a mature financial center]. People can send people money in different accounts, transact through cell phones and do ATM transactions involving different banks at one ATM. But in terms of regulatory stuff, Iran is still in the Flintstones era.

As for ties to terrorism, when dealing with the bigger, more sensitive industries, including some of the stuff allowed for U.S., such as commercial aircraft, banks do run certain risks. People need to realize, because of what the U.S. can do is limited, the bigger the deal gets, the more sensitive it becomes, because there’s a fair chance some sanctioned entity could be involved. But the U.S. company would not deal with them directly.

The reality is that there are certain swaths of the Iranian economy that are connected to certain types of groups. U.S. companies could be exposed to them and that increases the pressure to do due diligence, rather than just checking the names on a sanctions list, whether general or specific license.

That means a company might have to get a tier two search firm, [such as a private, vendor-driven firm with more details on Iranian individuals and their direct and in-direct counterparties].Or you try to find out what is the word on the street of that Iranian company. If you find out that so and so company is a front for so and so, you can’t take that lightly.

It’s just the case that when dealing with certain parts of the world, inherently, it’s important to be mindful of that.  In time, there will be heightened transparency on this stuff. The more Iran wants to hitch its wagon to western economies, the more it will find itself playing by the rules of the international order.