Wednesday, December 27, 2017

“Wheat doesn’t grow in Dubai.” – How Cikinova sidesteps U.S. Sanctions on Iran

For those working in trade finance, there is a readable case currently pending with the U.S. Southern District Court of New York. Reza Zarrab and his business comrades are accused of having disobeyed U.S. Sanctions Regulations against Iran.


U.S. / Iran Sanctions Regulation

Before spelling out how Reza  how to sidestepped the U.S. sanctions, let’s first start by briefly describing what U.S. authorities aim at:

Since 1979, the U.S. considers that Iran constitutes a threat to its national security, foreign policy, and economy. Opening sanctions were endorsed in 1995. Then, in 2013, the U.S. Government laid out further details and inhibited

  • the exportation, re-exportation, sale, or supply,
  • directly or indirectly, from the United States, or a United States Person,
  • of goods, technology, or services
  • to the Government of Iran, whereby the U.S. Government set a list of entities constituting the Government of Iran,
  • including business affairs with a third country knowing that such goods, technology or services were destined to Iran or the Government of Iran,
  • without a license from the United States Department of the Treasury, Office of Foreign Assets Control (OFAC), bearing in mind that such exceptions could be general (i.e. authorizing some general types of transactions such as food and medical sales and exports for humanitarian purposes) or specific (i.e. authorizing specific businesses only).

Let’s clarify the most important thing right away: The case is actually not about a U.S. company exporting stuff to Iran, in contempt of applicable sanctions. It’s actually about Iranian companies selling stuff (namely oil and gas) to people (not even U.S. citizens) and getting US Dollars in return. This is enough for the U.S. to consider that U.S. financial services have been provided, so triggering a sanctions violation.


Zarrab’s Sanctions Violation – Step 1 – Paying through a web of companies

Let’s assume the National Iranian Oil Company (NIOC) wants to sell crude oil to an international buyer for USD. A simple USD transfer from the Buyer to NIOC cannot work. Indeed, the U.S. Bank processing the USD transfer would block the money transfer right away because NIOC is a sanctioned entity. The solution is palpable: Set up some companies in different countries acting on behalf of NIOC but not declaring NIOC as recipient.

This is what Reza Zarrab and his associates are supposed to have set up. They held companies in Turkey, the United Arab Emirates, Switzerland, Canada, China, and the U.K. and routed payments through these entities.




But here is the catch: How can you track payments if you don’t pay the right beneficiary and don’t refer to the underlying contract while making the payment? Zarrab’s response is a mix of

  • indicating references such as “transfer to MAPNA” [Mapna Group, the Iranian construction and power plant company] in the subject heading of the wire transfer;
  • sending separate Emails defining the purpose of the payments.

The more sophisticated banks’ wire transfer tracking software becomes, the less efficient the first solution gets. This is what happened in the Zarrab case: U.S. banks repeatedly froze payments because they tampered with U.S. Sanctions.


Zarrab’s Sanctions Violation – Step 2 – Stretching Exceptions

As written above, sanctions usually come with exceptions for food, medical exports, humanitarian aid and the like. The Zarrab clan used such exclusions extensively – unfortunately too extensively. Indeed, the defendants are accused of having produced falsified shipping documents. In addition, the U.S. pretends that they have colluded with bank officials who, regularly ask for shipping documents to process the payments. The Turkish Halk Bank is not named as such in court but, due to the name of the defendants involved as well as their functions, easily recognizable.

Here are some illustrations the U.S. Attorneys have produced in court:

On March 16, 2013, Reza Zarrab wrote to Halk Bank’s Mehmet Hakan Attila: “They’re gonna stop the gold in about a month and a half […] do food! Wherever you can provide a document from, do it.”

Another quotation from Zarrab is even more outspoken: “Wherever you can provide a document from, do it […] whichever way you provide it, provide it. Provide it to Cikinova [coded language meaning false documentation] and Cikinova will send it; it is not a problem.”

When fine-tuning customs documents and bills of lading, “inaccuracies” occurred:

I’m thinking it would be slightly difficult to carry [goods] weighing 140-150 thousand tons in things that carry five thousand tons. That’s not physically possible.”

They want to be able to determine that the product is food. […] The wheat’s country of origin is Dubai… I mean, it’s impossible for wheat to be originated from Dubai. […] The man says wheat doesn’t grow in Dubai.”


Zarrab’s Sanctions Violation – Step 3– Getting caught

How do you get caught? You get caught because you are selling your services to Iran and because you exchange with your clients and partners. Supplemental to the above, here are some examples the U.S. prosecutors have presented:




You also get caught because you have to bribe politicians and bank managers. Indeed, the former Turkish Minister of the Economy and the former general manager of Halk Bank are accused as well and supposed to have accepted millions of USD as bribes.


One final word: The above are allegations. You may guess that the defendants dispute the case. Let’s wait and see what will be the final court decision.


Resources:


  • Indictment dated December 15, 2015
  • Indictment dated March 21, 2016
  • Superseding Indictment dated November 7, 2016
  • Sealed Complaint dated March 17, 2017
  • Superseding Indictment dated September 6, 2017