The Central Bank of Iran and Its Role in Bypassing Sanctions

The Central Bank of Iran and Its Role in Bypassing Sanctions
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The sanctions imposed on Iran’s financial sector have built up over time. One of the key tools utilised by Tehran’s adversaries has been the disruption of its access to the global financial system and to convertible foreign currencies, mostly the US dollar, which is dominantly used in international trade, oil sales including. The main target of the restrictive measures at all international, regional and national levels has been Iran’s commercial banks that process transactions for government bodies related to the country’s nuclear and ballistic missile programmes. The culmination was in March 2012 when SWIFT disconnected Iranian financial institutions sanctioned by the European Union (EU).

The Central Bank of Iran (CBI) was not spared either. It was established in 1960 and among its responsibilities is the formulation and regulation of foreign exchange policies and transactions and domestic currency and gold transactions. It also keeps the accounts of the Government of Iran and grants loans and credits to state-owned enterprises and agencies.

The CBI became subject to punitive measures due to its central role in financing the activities of the Islamic Revolutionary Guard Corps (IRGC) and its Qods Force’s operations abroad. Besides, the CBI has transferred money to Iran’s regional partners such as Lebanese Hezbollah, Palestinian Hamas, and other organisations in the Middle East that are considered “terrorist groups” by the USA and some of its allies in the region but are central to Iran’s national security interests. Another reason for sanctioning the CBI was because it conducted transactions on behalf of Iranian entities that were already blacklisted, thus helping them to circumvent the restrictions.

The first US sanctions on Iran were enforced in relation to the hostage crisis in 1979-81. Then-President Jimmy Carter issued executive orders that blocked nearly all Iranian assets in the USA. Generally, Iran is barred from having direct access to the US financial system. Certain transactions are allowed through banks in third countries and under different licensing regimes. Non-US financial institutions processing transactions involving Iranian subjects also have to comply with limitations.

The CBI was designated pursuant to US Executive Order 13224, adopted in September 2001 to block property and prohibit transactions with persons who commit, threaten to commit or support terrorism, and Executive Order 13599, which was issued in February 2012 in response to “the deceptive practices of the Central Bank of Iran and other Iranian banks to conceal transactions of sanctioned parties”, and blocks US-based property of the Government of Iran and Iranian financial institutions. In addition, in November 2011, Iran was declared a “jurisdiction of primary money laundering concern” under Section 311 of the USA PATRIOT Act, which requires domestic financial institutions to take special measures against Iranian subjects willing to access the US financial system.

Following the drone attacks on Saudi Aramco oil facilities in September 2019, in which Iran was suspected to be involved, that same month, the US Treasury sanctioned Iran’s Central Bank and other Iranian entities because of their facilitation of payments for military goods. In October 2019, the Financial Crimes Enforcement Network (the US financial intelligence unit) issued a final rule banning correspondent accounts in the US for and on behalf of Iranian financial institutions.

CBI’s access to financial services was restricted in the EU as well. In October 2010, the EU adopted Council Regulation No 961/2010 that prohibited EU credit and financial institutions from opening a new bank account, establishing a correspondent banking relationship, or a new joint venture with financial institutions domiciled in Iran, including the CBI or entities controlled by it. Additionally, the latter was banned from opening a representative office, branch, or subsidiary in the EU. In January 2012, the Council adopted Decision 2012/35/CFSP, by which it added the CBI to the sanctions list of the EU for its involvement in activities to circumvent sanctions.

These restrictive measures of the EU are no longer in force; however, the majority of US sanctions remain in place, which explains why the CBI is trying to find a way around them.

In February 2008, the Wall Street Journal reported that the CBI was investigated by the US Treasury Department for helping other Iranian financial institutions evade US sanctions. More specifically, the CBI handled dollar transactions on behalf of Iranian private banks that were already blacklisted by US authorities, including supporting their dollar-denominated letters of credit.

In order to move hard currency abroad and finance the activities of the IRGC's Qods Force and Iran’s partnering organisations in the Middle East, the CBI relied on its senior leaders who were personally involved in some of the transactions. For example, in May 2018, OFAC added then CBI governor Valiollah Seif and the assistant director of CBI’s International Department, Ali Tarzali, to the List of Specially Designated Nationals and Blocked Persons (SDN List) for directing the transfer of tens of millions of euro from the CBI to Iraq. The recipients of the vast sums were the IRGC's Qods Force and – ultimately, the Lebanese movement Hezbollah, both of which operate against US interests in the region. Valiollah Seif and Ali Tarzali also became subject to secondary sanctions.

Iraqi Al-Bilad Islamic Bank was used to conduct the transfers to Hezbollah and was blacklisted as well. This designation revealed another common practice adopted by the CBI – the reliance on “clean” banks in friendly countries to execute suspicious transactions or act as intermediaries whose access to the global financial system is not restricted.

To transmit funds abroad, the CBI has also used exchange houses, especially prior to the implementation of the Joint Comprehensive Plan of Action (JCPOA). These are institutions licenced to deal in foreign currencies and transmit funds on behalf of individuals and businesses. Exchange houses often do not have their own US dollar accounts and resort to the correspondent accounts of their regional banks to access the US financial system. So how does the venture work? The CBI releases the currency to couriers who deliver it to exchange houses outside Iran. Afterwards, the currency is converted to US dollars and sent to its final recipient.

When processing such transactions, exchange houses usually omit details that indicate the involvement of Iranian subjects, such as addresses in Iran and Iranian names of companies and persons. This method has also been adopted by the CBI and Iranian commercial banks. When trying to bypass sanctions and engaging in international transactions, they would remove their names from the sender and beneficiary fields in the accompanying documents so that monitoring systems would not detect and block the transfers. US financial institutions have susceptible filters when it comes to sanctions to the point that transactions are blocked even for false-positive matches.

In addition to being involved in providing foreign currency to the IRGC and its external wing, senior CBI officials have also taken part in evading the oil export restrictions levied on Iran by setting up the following scheme – the CBI officials transfer funds to another Iranian company which subsequently forwards them to a financial institution abroad. After that, the payments are sent to a foreign company that arranges the shipment of Iranian oil to ally countries like Syria. Moreover, IRGC's Qods Force is known to rely on front companies in order to arrange the return of the funds generated from the sales of Iranian oil by using the foreign bank accounts of the CBI, which during different periods, depending on the circumstances, has maintained such with major international banks.

Being the most important financial institution in Iran, the CBI has used its privileged position to “protect” the interests of the country’s commercial banks and has equally played an instrumental role in supporting the national security strategy of Iran by providing funds for its regional partners. The ongoing negotiations for the return of the USA to the JCPOA may lead to the complete or partial lifting of the sanctions on Iran’s financial sector as a confidence-building measure. Another gesture of goodwill to Tehran may be the unfreezing of Iranian funds, including assets belonging to the central bank. Until there is clarity on this matter, the CBI will continue to look for ways to advance Iran’s interests, even if this means crossing the line.