State Department Report 3: Iran's Illicit Financial Activities

September 28, 2018

State Department sealOn September 25, the State Department's Iran Action Group released a report detailing Iran’s support of terrorism, missile program, illicit financial activities, threat to maritime security, threat to cybersecurity, human rights abuses, and exploitation of the environment. “Today, the United States is publishing a full record of the Islamic Republic’s hostile behavior abroad and its repression at home beyond the continued threat of the nuclear program,” wrote Secretary of State Pompeo in the report’s introduction. “It is important for the world to understand the scope of the regime’s recklessness and malfeasance.” The following is the section on Iran's illicit financial activities. 

 

Chapter Three: Illicit Financial Activities in Iran 

Introduction

The Islamic Republic regularly seeks to use deception and subterfuge to fund its illicit activities, threatening the integrity and security of the international financial system. The regime primarily uses shell companies and other types of seemingly legitimate entities to exploit vulnerabilities that enable it to access financing. Although prompted for years by the international community to adopt a more stringent regulatory framework, the Iranian regime has failed to implement necessary reforms to comply with anti-money laundering and combatting the financing of terrorism standards.

MOVING MONEY FOR THE QODS FORCE 

The IRGC Qods Force (IRGC-QF), the IRGC’s extra-territorial branch responsible for supporting proxies in the region, continues to engage in large-scale illicit financing schemes to fund its malign activities. This includes its support for U.S.-designated terrorist groups like Hizballah and Hamas. In one case, IRGC-QF set up a network of front companies to exploit the currency exchange market in the United Arab Emirates (UAE) to procure and transfer hundreds of millions in U.S.-dollar denominated bulk cash. The network forged documents and disguised its conduct behind legitimate businesses. At least one Iranian front company, the Rashed Exchange, advertised its services online and appeared to be a legitimate broker. In May 2018, the U.S. designated nine targets to disrupt this activity. 

The IRGC-QF’s illicit financing schemes are facilitated at the highest levels of Iran’s government, including through the Central Bank of Iran (CBI). In May 2018, the U.S. Treasury revealed that the Islamic Republic’s then-CBI governor Valiollah Seif, and the assistant director of CBI’s international department, conspired with IRGC-QF to conceal the movement of illicit funds to its terrorist proxy, Hizballah. The scheme also involved co-opting the chairman and chief executive of Al-Bilad Islamic Bank in Iraq to act as an intermediary, which enabled the transfer of funds to Hizballah. This scheme by the IRGC not only fueled terrorism, it also undermined the integrity of Iraq’s financial system and therefore its ability to underwrite economic growth and development. In May 2018, the U.S. designated four individuals and one entity for this activity. 

The IRGC-QF’s efforts to exploit the international financial system are not limited to fraudulent documentation or front companies. In 2017, the IRGC-QF engineered a plot to produce counterfeit currency and flout the laws of our allies in Europe. It deceived European suppliers by using a series of companies in Germany to conceal its identity and end-user data to procure advanced printing machinery and other necessary materials. It then printed counterfeit Yemeni bank notes, which were used to support its destabilizing activities in Yemen. In November 2017, the U.S. Treasury designated six targets related to this operation. 

The IRGC-QF is also responsible for orchestrating an extensive plot to circumvent U.S. sanctions and export controls to illicitly procure aircraft parts. The scheme involved a series of front companies that assisted Mahan Air in procuring export-controlled, U.S.-origin goods. Following an investigation into this activity, the U.S. Treasury designated nine individuals and entities. Iranian commercial airlines, particularly Mahan Air, play a key role in ferrying IRGC-QF operatives, weapons, equipment, and funds that fuel regional conflicts. Mahan Air’s current chairman and chief executive, Hamid Arabnejad Khanooki, is closely associated with the IRGC. The U.S. sanctioned Arabnejad in 2013 for facilitating a shipment of illicit cargo to Syria on Mahan Air aircraft. 

FATF AND THE ISLAMIC REPUBLIC

The Islamic Republic has continually failed to implement international standards to combat money laundering and terrorist financing, as established by the Financial Action Task Force (FATF). Thus, for the past decade, the FATF has designated Iran as a high-risk and non-cooperative jurisdiction. Starting in 2016, the FATF suspended its countermeasures against Iran in response to a high-level political commitment from the country to implement certain reforms.

Despite the opportunities afforded to the Islamic Republic, the Iranian regime has failed to live up to its commitments. The FATF specifically documented Iran’s fundamental deficiencies, including its lack of adequate criminalization of terrorist financing. The Iranian regime’s failure to complete nine of its ten action items resulted in FATF’s specific expression of disappointment in June 2018. The FATF will decide upon appropriate action in October 2018, should Iran fail to make progress toward meeting its obligations. Iran’s Supreme Leader Ali Khamenei himself questioned Iran joining the required international conventions on terrorist financing and money laundering, which many hardliners argued might limit Iran’s ability to finance Hamas and Hizballah. 

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