Iran’s sanctions evasion went East

The U.S. effort to put Iran in a financial vice was working. European banks were paying big fines and closing off its money flows, and severe sanctions on the country’s banking and energy sectors were forcing it to the table on a nuclear deal. But as U.S. enforcement officials would soon discover, Iran had found a new channel for its illicit transactions: Asia.

Lenders in South Korea, Taiwan and elsewhere in the region may have played a part, knowingly or otherwise, in helping Iran evade trade sanctions before the nuclear deal and turn some of its oil proceeds into U.S. dollars, according to court testimony, legal filings and people familiar with the matter.

Now that U.S. enforcers have extracted billions of dollars from European banks over sanctions violations, their focus is turning to Asian banks, according to several former U.S. Treasury Department officials who specialize in sanctions work.

“The regulatory gaze and enforcement attention is facing east,” said Juan Zarate, a former Treasury Department and White House official who co-founded the Financial Integrity Network, a consulting group that specializes in preventing illicit financial activities. Many Asian banks “haven’t been leading the pack in terms of financial risk management,” he said.

The shift underscores how difficult it can be to enforce international sanctions and keep bad actors out of the U.S. financial system. When one door is closed, another one inevitably opens.

A window on these Asian banks’ transactions comes from court documents and testimony in recent Iran-related cases in Alaska and New York, which included references to how Iran siphoned $1 billion of its funds from escrow accounts at Woori Bank and Industrial Bank of Korea, state-owned South Korean lenders that are among the largest in the country. Under terms of the U.S. sanctions, those funds were supposed to be off limits for all but a handful of purposes.

An IBK representative declined to comment. A Woori Bank spokesman acknowledged the bank was under investigation and said it was awaiting the results. He declined to comment further.

In the last two years, New York’s Department of Financial Services has taken action against several Asian banks for various compliance lapses, including the Agricultural Bank of China, NongHyup Bank of South Korea and Mega International Commercial Bank of Taiwan. In 2013 and 2014, Bank of Tokyo-Mitsubishi UFJ paid more than $560 million in two settlements with New York banking regulators over its relationship with Iran.
Nuclear Deal

The scrutiny of Asian banks’ Iran ties is coming from across the U.S. law enforcement and regulatory spectrum. Over the last year, the Treasury Department has blacklisted 20 people and entities in Asia. They all had ties to Iran’s Islamic Revolutionary Guard Corps and the country’s support for terrorism, human rights abuses and other criminal activity, Sigal Mandelker, the Treasury’s undersecretary for terrorism and financial intelligence, said in a speech in New York last week.

The transactions under examination occurred before a 2015 multilateral agreement that let Iran resume some normal trade and collect revenue from oil sales while placing limits on Tehran’s nuclear activities. But the newly disclosed Iranian efforts to sidestep international sanctions may feed into President Donald Trump’s claims that Iran can’t be trusted — and his threats to scrap the agreement.

For years the U.S. has scrutinized European banks for facilitating Iranian access to the U.S. financial system. After nearly a dozen enforcement cases resulting in more than $16 billion in fines, those banks have been largely closed off as a conduit for Iran, former U.S. officials say.
Trading Partners

Iran’s access to Asian financial institutions has been made possible, in part, by continued close ties with several Asian countries that remain robust trading partners — and consumers of Iranian oil exports — despite Iran’s years in the international doghouse.

“Oil revenue is big business for a resource economy such as Iran, so they have a balance of trade with all these countries,” said Elizabeth Rosenberg, a former Treasury official who is a senior fellow at the Center for a New American Security.

Under the strict sanctions leading up to the nuclear agreement, Iran was allowed to sell oil and gas to overseas buyers. But the proceeds had to be deposited at designated accounts in those countries and could be withdrawn only for limited purposes — such as paying for humanitarian shipments of food and medicine.

To evade the restrictions, Iran falsified records and created front companies to make transactions appear to be for allowable purchases, according to testimony and filings in the Iran-related cases. Of the roughly $200 billion in Iranian oil and gas funds that wound up in escrow accounts at banks around the world, researchers estimate that more than $50 billion was laundered out and illicitly made available to Iran.

“Iranians were desperate to get this money out of these accounts,” said Mark Dubowitz, founder of the Foundation for Defense of Democracies, a nonpartisan national-security research group.
Red Flags

Iran was able to extract its $1 billion from the two South Korean banks in less than six months during 2011, before U.S. officials raised red flags about the transactions, according to court documents. But even after those efforts were shut down, the officials said they feared the banks would find other means of continuing to do business as usual with Iran, according to the filings.

Woori Bank sought to establish a relationship with Turkiye Halk Bankasi AS, the lender known as Halkbank that was designated to hold Iran’s funds in Turkey, in what authorities suspected was an attempt to allow Iran continued access to the South Korean oil proceeds, according to the testimony.

“We were worried about Woori Bank and IBK, and we were concerned about the transactions that they were engaged in,” David S. Cohen, a former senior Central Intelligence Agency and Treasury official, testified during the recent prosecution of a Halkbank banker, Mehmet Hakan Atilla, who was convicted of helping Iran get its money out of Turkey. “One of the issues that sort of spun off from that was whether they would try to use Halkbank as their entrée into Iran if other mechanisms and connections were cut off.”

Iran and its enablers portrayed the withdrawals as part of allowable trade between the two countries, according to the testimony and filings. U.S. prosecutors have charged Kenneth Zong, a dual South Korean-American citizen who allegedly executed transactions on Iran’s behalf, with aiding the scheme.

Atilla is in federal custody in New York and will be sentenced later this year.
Extradition Request

Zong, whose attorney didn’t respond to a request for comment, is imprisoned in South Korea for unpaid taxes tied to his work for Iran. U.S. officials have filed an extradition request for his return to face charges in Alaska, where he lived and owned property, after his sentence is complete.

According to an Internal Revenue Service agent’s affidavit in the case file, Zong sent emails to his co-conspirators saying that South Korean government officials and executives at the two banks “know well our transactions are based on fabricated and fake documents” and that he had agreed to pay kickbacks to “bankers and authorities,” calling it an allowance.

Western officials and bank experts say that Iran was taking advantage of Asian banks’ reputation for weak compliance.

Asian banks “don’t differentiate providing financial services for Iran so much as the rest of the world does,” said Jeremy Paner, a Washington lawyer who previously worked for the Treasury Department’s Office of Foreign Asset Control. “Their distinction is, ‘We’re not doing it for an armed forces group, so what’s the big deal.’”

Source » bloomberg

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