For more than 40 years, leading democracies including the United States and members of the European Union and international organizations such as the United Nations have worked to thwart Iran’s regional ambitions by obstructing the regime’s access to the international financial system.
The most stringent and far-reaching sanctions imposed since the 1979 Islamic Revolution have targeted the country’s banking and energy sectors.
By restricting Tehran’s access to international banking systems and global energy markets, the international community effectively isolated Iran economically and politically, curbing the regime’s nascent nuclear program and curtailing its ability to finance international terrorism and regional proxy organizations.
As a result, Iran’s economy has been stifled. Deprived of access to conventional banking and financial institutions and reeling from the loss of more than US$100 billion in frozen assets, the Iranian regime’s ability to advance its nuclear program and fund regional proxies like Hezbollah has been significantly constrained.
However, the current sanctions regime has proved to be an imperfect stopgap against Iran’s belligerent activities. Regulatory gaps and a lack of adequate global cooperation have allowed the Islamic Republic to skirt international sanctions and sidestep banking embargoes.
By exploiting these loopholes, the Islamic Republic has been able to continue to operate a lucrative shadow banking system, which allows it to funnel tens of billions of dollars in illicit funds through a network of offshore shell companies and financial intermediaries.
This system has allegedly enabled Tehran to launder narcotics profits, finance terrorist activities, prop up oppressive regimes, and further develop its nuclear program.
More important, it has allowed the Iranian government to retain an extensive export trade in petroleum products, undermining one of the main sources of international leverage against the regime.
Indeed, Iran has been violating sanctions. A Wall Street Journal article exposes the scandalous nature of Iran’s lucrative financial antics and its use of international banking system through private financial accounts in order to aid Iran in evading sanctions and ease the economic pressure on the regime.
Despite Iran’s brazen defiance of international restrictions, key regulators and policymakers in both the US and the EU have had limited success in cracking down on Iran’s illicit banking activities. For instance, an ongoing dispute between Iran and Bahraini banks showcases the limits of US and European efforts to clamp down on Tehran’s increasingly sophisticated shadow banking operation.
After uncovering extensive evidence of money-laundering and other sanction infractions, Bahrain’s Financial Investigation Directorate recently filed lawsuits against 13 Iranian banks, including the Central Bank of Iran (CBI).
The dispute follows the high-profile closure in 2015 of Bahrain’s Future Bank, a jointly owned bank that allegedly facilitated more than $1.3 billion worth of covert transactions originating from Bank Saderat Iran, Bank Melli Iran, and the CBI.
According to documents uncovered by The Washington Post, bank officials deliberately leveraged alternative transaction infrastructure and informal delivery schemes, including wire stripping, cash transfer, and cryptocurrencies, in order to safeguard the transactions from automatic detection and sanctions enforcement systems.
Though these practices constitute clear violations of anti-money-laundering and sanctions protocols, the banks were later cleared of wrongdoing by a Hague-based arbitration panel, which accused Bahrain’s regulators of expropriating Iranian funds and acting on regional animosities rather than legal mandates.
The panel’s ruling is a microcosm of a broader failure of international cooperation and an international legal system that has riddled Iran’s sanction regime with precedent loopholes and regulatory contradictions.
The Bahraini case also stands out because of the central involvement of the CBI, the agency ostensibly responsible for maintaining the integrity of the Iranian financial system and supervising its internal banking and credit institutions. Yet over the past four decades, the CBI has been directly implicated in the systematic concealment of billions of dollars of Iranian assets.
According to reports from the Financial Crimes Enforcement Network, senior CBI officials have traditionally acted as the primary conduits for Iran’s illicit financial transactions. For instance, as Iran’s representative to such organizations as the International Monetary Fund, the CBI is able to leverage its membership – and the access it affords to regulatory arbitrage opportunities and banking networks – to develop and deploy new concealment mechanisms for Iranian assets.
Unsurprisingly, the Islamic Republic’s non-compliance with anti-money-laundering regulations and its well-documented history of sanction evasion has led to Iran’s blacklisting by the Financial Action Task Force (FATF), an international watchdog group that monitors and tracks money-laundering and terrorist financing.
In addition to making a mockery of the laws and regulatory frameworks designed to protect international markets, the continuation of these practices encourages other rogue state actors to adopt a similarly opaque position in the global financial system.
Ultimately, continued complicity and toleration of Iran’s shadow banking network not only creates a more vulnerable financial environment for other entities in adjacent capital markets, but it also introduces a significant threat of reputational damage and loss of trust for investors and institutional partners attached to the associated banks.
Meanwhile, the international community must develop an effective and robust framework to sanction non-compliant financial institutions, including the CBI. Otherwise, Iran will continue to reap the benefits of its financial crimes and the international community will be left to pick up the tab.
