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
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the exportation, re-exportation, sale, or supply,
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directly or indirectly, from the United States, or a United States Person,
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of goods, technology, or services
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to the Government of Iran, whereby the U.S. Government set a list of entities constituting the Government of Iran,
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including business affairs with a third country knowing that such goods, technology or services were destined to Iran or the Government of Iran,
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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
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indicating references such as “transfer to MAPNA” [Mapna Group, the Iranian construction and power plant company] in the subject heading of the wire transfer;
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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:
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Indictment dated December 15, 2015
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Indictment dated March 21, 2016
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Superseding Indictment dated November 7, 2016
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Sealed Complaint dated March 17, 2017
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Superseding Indictment dated September 6, 2017
