Avi Jorisch
Wall Street Journal
04 November '09
With a financial mechanism reminiscent of the Oil For Food scam, it seems Iran is using a United Nations office headquartered in Tehran to skirt U.S. sanctions. Once again, a rogue regime appears to be abusing a U.N. body in obtaining access to hard currency. The White House and the Financial Action Task Force - set up by the G-7 to combat money laundering and terrorist financing - have so far failed to identify this threat.
The Asian Clearing Union was established in Iran in 1974 as a U.N. initiative to expand trade and forge closer banking relations among ACU members. The organization's primary goal is to "facilitate payments among member countries," which include the central banks of Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka, the Maldives and Burma.
Iran has used the organization to route over $13 billion overseas in 2008 and over $5.6 billion so far in 2009 to pay for many of its goods and services, according to the ACU's financial documentation.
The danger is that the ACU is potentially being used as a classic money laundering instrument. Iran might be using the U.N. body as a third party to circumvent the U.S. sanctions program, which prohibits with limited exceptions, such as for certain foodstuffs, textiles and medicine, American-Iranian business deals. The sanctions program does not only target domestic companies, however. Unless specifically allowed under the sanctions act, U.S. financial institutions are supposed to freeze all Iranian dollar transactions - including those involving Iran's non-American business partners.
The ACU mechanism is deceptively simple and described in detail on the ACU Web site (www.asianclearingunion.org). An Iranian company or government office initiates a transaction for the purchase of a foreign product or service by remitting Iranian rials via a local Iranian bank. The money is then transferred to the Central Bank of Iran, which then sends the funds to any ACU member using "Asian Monetary Units," the currency of the ACU. Each of these units is equal to either one U.S. dollar or euro, depending on the customer's preference. Once the Iranian money is in the ACU pot, it is difficult, if not impossible, for foreign banks to know whose money it is. Unlike the Iranian Central Bank, the other ACU members' central banks can transact freely with any U.S.-based correspondent bank.
Imagine the Iranian regime wants to buy machinery from an Indian company that insists on getting paid in dollars. A U.S. correspondent bank should theoretically be involved because the American government owns the greenback. Normally, the money would be sent from an Iranian bank via a U.S. correspondent bank to the company's account. But because this type of transaction is not specifically allowed under the sanctions regime, the U.S. correspondent bank would be obligated to freeze the money instead of sending it on to the company.
With the ACU system, though, Iran could send the money to its Central Bank, which then sends it to the ACU. There the funds are converted into the "Asian Monetary Units." Iran can then use the funds as a line of credit and effectively circumvent the sanctions regime. Or alternatively, the money could be transferred to the Indian Central bank for example, which uses a U.S. correspondent account to send the dollars to the account of the company that sent the machinery to Iran. As a result of this complex mechanism, American banks would have no reason to suspect that Tehran is involved.
Until this year, the ACU's 'Asian Monetary Units were only transacted in dollars. This means that unless the underlying business deals were specifically allowed by the U.S. Iran Sanctions Program, the funds Iran sent through the ACU before 2009 circumvented the sanctions regime. Starting this year, the ACU allowed its members to also transact in euros. The ACU public records do not specifically track the transactions that take place in dollars and euros. It is probably safe to assume that at least some, if not a good deal of the transactions Iran has been carrying out since 2009 to pay its foreign vendors, are denominated in dollars. Given the nature of international trade, it is unlikely that Iran has now shifted all of its ACU transaction to the euro. Through the ACU, Iran likely has a significant supply of dollars it can use to buy goods and services that would otherwise be prohibited by U.S. law.
India, in particular, might be helping Iran sidestep U.S. sanctions. In both 2008 and 2009, Iran was India's biggest creditor in the ACU. These two countries together transacted close to $12 billion in 2008 using this mechanism. From January through September 2009, Iran once again carried out the bulk of its ACU transactions with India, with the amount totaling just under $5 billion (and close to $1 billion in September alone) in trade. Not a small amount of money, given the international sanctions regime against Iran.
The ACU's website does not articulate the potential role it is playing for the Islamic Republic of Iran. It is interesting to note, however, that the contact page of the ACU provides an email address that is directed to the Central Bank of Iran (acusecret@cbi.ir). My attempts to contact the ACU for comment revealed a very close relationship between the ACU and Iran's central bank but no answers to my questions. When I first called the number provided on the ACU Web site last month with the help of a translator, we were told that we had in fact reached the Central Bank of Iran. When calling back a few days later, I was directed to a different number where a member of the ACU Secretariat informed me that the only information available was on the ACU Web site. For further information I was directed back to the Central Bank of Iran.
What can the international community do to stop these types of transactions from taking place? The U.S. Treasury Department has quietly warned foreign banks and companies that do business with Iran that they could lose access to U.S. markets if they deal with entities connected to terrorism or the Islamic Republic's nuclear industry. The U.S. government may want to make clear to both India and the ACU that helping Iran circumvent sanctions has consequences. The ACU should be asked to make public a detailed list of the exact transactions Iran has been conducting through the organization. If the ACU cannot demonstrate that all transactions have complied with the U.S. government's Iran economic sanctions program, the U.S. could consider using a special provision of the Patriot Act - Section 311 - to designate the ACU a "Primary Money-Laundering Concern." At a minimum, a U.S. Treasury advisory to financial institutions informing them of the services the ACU is providing to Iran is more than warranted. It's also time for the U.S. State Department to complain to the U.N. that it is likely facilitating Iranian banking transactions. Previously, the U.N. itself has raised alarm bells on Iran and its banking sector, issuing three rounds of sanctions and calling on member states to "exercise vigilance in...banking with Iran."
While the U.N. remains largely invertebrate on targeted financial measures, one international organization that can play a helpful role is the Financial Action Task Force. The FATF's official policy is to blacklist countries that pose a significant risk to the international financial system. In 2007, Iran was placed on that blacklist and the FATF instructed its members to carry out enhanced due diligence on transactions taking place with Iran.
For several years, India has been aiming to get membership in the FATF. In its next meeting, the FATF may want to impress it on India that the road to membership rests, in part, on its ability to ensure that no Indian financial entity is facilitating Iran's efforts to avoid U.S. sanctions.
The U.S. government and FATF have made clear that there is a cost for doing business with Iran. India and the ACU should be made to understand the same goes for them.
Mr. Jorisch, a former U.S. Treasury official, is a senior fellow at the Foundation for Defense of Democracies and the author of "Tainted Money: Are We Losing the War on Money Laundering and Terrorism Finance?" (Red Cell Publishing, 2009).
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