As Iran’s access to the international market narrows in the face of sanctions, money laundering in and out of Iran is evolving. Compliance regimes need to keep pace.
In March 2018, US authorities arrested the Iranian banking executive Seyed Ali Sadr Hasheminejad, a Maltese resident and owner of a private Maltese bank. New York Southern District prosecutors allege that Hasheminejad spearheaded an international money laundering scheme between 2006 and 2014 through which he funneled USD 115 million from a Venezuelan housing project to Iranian-owned enterprises, unbeknownst to the US and European banks that Hasheminejad used to transfer the money. US authorities believe that Hasheminejad took several measures to hide his ties to Iran, including establishing Turkish, Swiss, and offshore accounts to store the money, using a Saint Kitts and Nevis passport and establishing residency in the United Arab Emirates to hide his identity. The complexity of Hasheminejad’s scheme reflects elements of Iranian money laundering techniques that date back to the early years of the Islamic Republic of Iran. Yet the current state of Iranian money laundering is actually far more complex, as launderers face increasing regulatory and political pressure both inside and outside Iran.
History of Iranian Money Laundering Networks
The period that followed Iran’s 1979 revolution and the Iran–Iraq War was marked by economic recession – a result of Western sanctions, war, and the country’s own policy of isolationism. By the 1990s, however, Iran had developed complex international financial networks built on two of its remaining international connections. The first were large criminal networks that responded to Iran’s international isolation by taking a more active role in facilitating the opium trade between Afghanistan and Europe. These later helped form the basis of international money laundering schemes intended to evade the tightening sanctions Iran faced during the 1990s and 2000s. Of note, Iranian criminal networks gained experience navigating in and out of the EU and regional borders and, overtime, established roots all along the opium trade’s route. Also, in the early 1990s, the moderate Iranian President Akbar Hashemi Rafsanjani worked to open up the economy and restore ties with Gulf Cooperation Council (GCC) countries. As a result, Iranians gained access to the GCC’s financial system. This created opportunities for Iranian banks and businesses to engage internationally in a limited but theoretically legitimate way.
However, this also meant that Iranian banks faced both limited opportunities and pressure to provide funds both inside and outside Iran to borrowers, including those with alleged connections to criminal networks and opium smugglers or influential politicians and families in Iran. With few ways to reliably vet or reject clients, Iranian banks often made loans to politically-connected clients whom they had little ability to force to repay. Meanwhile, by the 2000s, media reports alleged that money was being driven in trucks across the Iranian-Turkish border to Iranian-affiliated currency exchange houses — often affiliated with influential political or criminal elements in Iran — that would then deposit funds into GCC banks, which could in turn were then able to facilitation interactions with the rest of the global financial system. But in the late 1990s, these channels became more difficult as the US government issued new rules that prohibited American companies from engaging with Iranian companies entirely. Then in 2008, the US Treasury went a step further by banning US financial institutions from processing transfers passing through the US that could benefit Iran.
Crackdowns Inside and Outside Iran
In the past few years, several banks in the country have collapsed, in part because of major loan defaults and losses incurred from their roles in these money laundering schemes, in some cases even triggering protests from bank depositors who have lost their money. That in turn had led to a crackdown on money laundering within Iran itself. In December 2018, Iranian Supreme Leader Ayatollah Khamenei sentenced 50 individuals to up to 20 years for various financial crimes. The month prior, two individuals were executed for money laundering. In 2019, Iran issued an amended anti-money laundering law, which criminalizes the procurement and currency conversion of laundered money – obtained both knowingly and unknowingly. Neighboring countries have also put pressure on Iranian money launderers. In July 2018, the United Arab Emirates shut down seven currency exchange houses. Three months later, Turkish authorities arrested hundreds of individuals allegedly affiliated with Iranian-linked currency exchange houses.
Evolving Techniques in Money Laundering
In response, Iranian money launderers are now going even deeper underground to move money in and out of Iran. As borders have tightened, especially with Turkey, launderers are now using new techniques to transfer money into and out of Iran in physical hard currency. Intermediaries in Iran now hire people to physically sail money across the Persian Gulf in small ships, which exchange the money with currency exchange houses in the GCC. These exchange houses, in turn, forge fake invoices that allow the funds to be deposited in local financial institutions and sent to banks all around the world. When sending money back to Iran, launderers will often do so from the United Kingdom, Malta, and Switzerland through front companies that send payments through European banks to institutions in the Gulf under the guise of a Europe–GCC transaction. From there, the money is then physically transported back to Iran. Intermediaries are also exploring new routes, including trucking hard currency into Iraq due to its proximity to GCC countries. Overall, the trend is that launderers are taking more risks by operating through highly volatile channels.
On a smaller scale, individuals are bringing money in and out of Iran through wider Iranian diaspora communities. For example, an individual in Germany might pay someone in euros in Germany, who in turn has a relative in Iran who can make a cash payment on their behalf in Iranian tomans to an end recipient. In this way, individuals are able to skirt sanctions by operating entirely outside of the international banking system.
Iranian money laundering has always been a multi-jurisdictional issue. From the currency exchange houses in neighboring countries to the widespread networks in Europe, the standard for anti-money laundering compliance has been to screen all possible angles. What is new to Iranian money laundering is simply a shift in emphasis – illicit activity is beginning and entering into banks outside of Iran, and there is a whole new host of players involved. Intermediaries continue to play a pressing role in the Iranian money laundering process and, given new developments, are often now the first signs of illicit activity. Unlike in the past, it has become harder to prevent crime solely by screening known or suspected Iranian money launderers. What this means is that efforts against money laundering should also focus on actors outside of Iran. More specifically, screening efforts should expand even wider in terms of regional coverage and more attention should be paid to transactions happening in places known for their ties to Iranian money laundering.