A small Hamburg bank was at the center of a clandestine financial network Iran relied on for years to funnel money to its terror proxies in the Middle East, including Hezbollah in Lebanon and Yemen’s Houthi rebels, officials from two western intelligence agencies say.
POLITICO can reveal that western intelligence flagged evidence to German financial authorities that the Islamic Republic was using Varengold Bank AG to fund its terror affiliates, leading to a sweeping investigation that has forced the bank to all but shut down its commercial banking operations.
Iran’s military complex relies on European banks to launder the proceeds of its illicit sale of oil and other goods, western intelligence officials say, in order to get it hands on hard currency, which is easier to move through the global financial system without detection.
If the authorities’ suspicions about Varengold’s Iran business are borne out, the bank would serve as a glaring example of the relative ease with which Tehran has circumvented western sanctions, while also underscoring the high risks firms face when they fail to adhere to the highest standards of money laundering prevention.
Money laundering concerns
German financial regulator Bafin announced an investigation into Varengold last year, citing money laundering concerns, but did not disclose the suspected links between the bank and Tehran’s terror network.
Varengold denies any wrongdoing and insists that its dealings with Iran were limited to the shipment of humanitarian aid, including medical equipment and food.
“Our customers in the commercial banking or payment transaction business are mainly producers and global wholesalers of food and pharmaceuticals,” a Varengold spokesperson said in a statement to POLITICO. “In this context, the bank supports, for example, exporters and importers in processing payments for urgently needed humanitarian goods that were not subject to EU or US sanctions.”
Yet according to western intelligence sources, some of the Iranian front companies that used Varengold are linked to Iran’s Quds Force, an affiliate of the Islamic Revolutionary Guard Corps (IRGC) that trains and finances Iran’s terror proxies in the Middle East.
Instead of handing the IRGC and Quds Force cash to fund their clandestine operations, Iran’s central government grants them allotments of oil which they then sell, primarily to China, via a labyrinthine underground financial network in order to skirt sanctions. The advantage for the buyer is that the price of the sanctioned crude is significantly lower than market rates.
Bank transfers and invoices viewed by POLITICO detailed some of the dealings between Varengold and known Iranian front companies that are part of the secret network, including two firms sanctioned by the U.S. government for their connections to the Quds Force.
The Varengold spokesperson said the bank was not aware of any links between its customers and the Quds Force.
The affair has also raised questions about why Varengold’s auditor, PwC, gave the bank a clean bill of health. A spokesman for PwC declined to comment.
“No one ever connected the dots,” said one of the intelligence officials, adding there had been ample reason to suspect something was amiss at the bank. “In recent years Varengold has become a financial hub for the Iranians to transfer funds to Europe.”
In search of a niche
Founded as a small asset management firm in Hamburg in 1995, Varengold did not become a fully fledged bank until 2013, when it received a German banking license.
With total assets of just €600 million in 2015 — tiny by German standards — the bank needed a niche. It found one by focusing on international payments involving the Middle East and Eastern Europe.
“The board is of the opinion that Varengold Bank AG has an advantage here,” the bank wrote in its 2015 annual report. “As a result of its modest size it can acquire customers who do not appear profitable to traditional providers.”
At first glance it appeared to be a good call. Varengold’s commission income from international payments surged from just under €4 million in 2015 to nearly €45 million in 2021.
“This gain was achieved though consistent new customer acquisition as well as higher business volume with existing customers,” Varengold said in its annual report that year.
Yet according to the intelligence officials, Iranian front companies were the main drivers of the business, especially after the U.S. reimposed sanctions on Tehran in 2018, when demand for the bank’s payment services surged. A typical commission for the kind of services Varengold offered is around 1 percent, suggesting the bank’s international payment arm was handing billions of euros of transactions. It’s not clear what percentage of those transactions involved Iran, however.
Signs of trouble
The first signs of trouble at Varengold emerged last year.
On June 2, Varengold announced that Bafin had begun a probe into its commercial banking division and issued a profit warning. The news had a devastating impact on Varengold’s share price, triggering a more than 70 percent collapse. With its core payments business all but paralyzed, Varengold was forced to lay off about 20 percent of its workforce of some 100 employees.
On August 3, Bafin said in a press release it had discovered “high money laundering risks and grave deficits” with Varengold’s compliance safeguards.
“Credit institutions like Varengold Bank must ensure that they are not abused for money laundering or terror financing,” Bafin said, without making specific accusations that such abuse had occurred.
The danger of terror financing was not a theoretical one, according to the western intelligence officials, all of whom spoke to POLITICO on the condition that they not be named in order to discuss privileged information. By the time the authority began investigating the bank, the officials said, Varengold had already laundered billions in illicit transactions.
As part of Bafin’s intervention, the authority barred Varengold from carrying out transactions with entities and persons connected to Iran — a pillar of its business. Bafin also installed a special auditor to supervise the bank’s activities and ensure it didn’t violate the regulator’s orders.
Underground economy
Many of the transfers under scrutiny involved what Bafin referred to as “payment agents” — suspected Iranian front companies — that held accounts in Varengold.
Iran relies on front companies to launder the proceeds from the sale of oil and petrochemicals, primarily to China and Russia, the officials said. Those transactions are often disguised as humanitarian aid, which isn’t sanctioned.
Under U.S. sanctions imposed on Iran in connection with its nuclear program, foreign companies and banks that conduct business with the Islamic Republic outside of humanitarian aid risk severe penalties, including being barred from the U.S. market.
One of the front companies that appears in transaction records related to Varengold is Hong Kong-registered Hua Gong HK Trading Ltd. It was founded in October 2018, shortly after the U.S. began to reintroduce sanctions against Iran. Western diplomats say Hua Gong is a front company operated by the Tahayyori Guarantee Society, one of Iran’s biggest “money exchange houses,” or clearinghouses for illicit foreign transactions.
On June 5, 2020 Hua Gong submitted a request to Varengold to transfer €201,617 to Geneva-based Royys Capital, which officials said is also controlled by Iran. The transfer request is part of a trove of financial documents published by WikiIran, an opposition website, and independently verified by POLITICO.
Neither Hua Gong nor Royys could be reached for comment. Royys went into liquidition in July, just weeks after German authorities moved in on Varengold.
Organizations like Tahayyori, which number in the dozens, operate a network of front companies abroad that are typically registered in China, UAE and Turkey, according to western intelligence officials and diplomats. The houses are under the close supervision of the regime.
If an Iranian firm needs to undertake a foreign transaction prohibited by sanctions, its local bank can turn to one of the houses to filter the payment through a labyrinth of front companies, making it extremely difficult to trace its true origin.
Another Varengold transaction to catch investigators’ attention involved two Turkey-registered firms. In April 2021, Istanbul-based Baslam Transport and Foreign Trade billed Rain Trade Gida Ic Ve Dis Ticaret Limited Sirketi, also of Istanbul, €5.5 million for “sunflower seed oil,” which the latter paid via its Varengold account. Investigators believe the deal really involved payment for Iranian crude.
On December 8, 2022, the U.S. government sanctioned Rain Trade “for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the IRGC-Quds Force.”
That same day, Washington also sanctioned Baslam for seeking “to facilitate the illicit sale of Iranian oil to purchasers in the People’s Republic of China.”
A history of abuse
Iran’s use of its clandestine financial network to circumvent western sanctions is well documented.
In 2022, the U.S. Treasury sanctioned Turkish businessman Sıtkı Ayan, a friend of President Recep Tayyip Erdoğan, after POLITICO published a lengthy investigation that exposed evidence he led a smuggling ring that sent Iranian oil to buyers in China and Russia to raise funds for Tehran’s terror proxies (both Rain Trade and Baslam were allegedly part of Ayan’s network).
POLITICO has also reported how Iran helped Russia erect an underground financial system similar to its own to dodge the sanctions Moscow faced after its all-out invasion of Ukraine.
Bafin has yet to complete its investigation into Varengold, and so far no individuals from the bank have been accused of any wrongdoing. A spokeswoman for Bafin declined to say when the probe would be concluded or if the authority has referred the case to Germany’s prosecutors.
The Iran business is not the first time Varengold has caught the eye of German authorities, however.
German prosecutors have accused the bank’s founder and former CEO, Yasin Sebastian Qureshi, of involvement in the so-called Cum Ex affair, a far-reaching scam by international banks, traders and hedge funds to defraud European governments of billions by claiming refunds for taxes they never paid.
Prosecuters allege Qureshi, who denies any wrongdoing, was involved in a series of Cum Ex transactions that defrauded the German government of €93 million. Qureshi stepped down as CEO in 2015, but the charges against him date back to his tenure running the bank. His trial began in a Bonn court in Germany earlier this week.
Meanwhile, Germany’s accounting supervisor, known as APAS, is reportedly investigating whether PwC, Varengold’s independent auditor, made any errors in its evaluation of the bank’s books. The firm’s accountants, who began auditing Varengold in 2016, raised no red flags about its international payments business other operations.
“We were satisfied that the systems and processes implemented, as well as the established controls, are appropriate overall and that the estimates and assumptions made by the executive directors for the proper recording and accrual of commission income are adequately documented and justified,” PwC wrote in its 2021 evaluation.
Source » politico