The international community has long used sanctions as a means of expressing its disapproval towards actions committed by certain regimes. While it is argued just how effective sanctions are in pressuring these regimes (often they are viewed as simply a collective punishment against the citizens of the sanctioned countries), the fact remains that sanctioned governments and local businesses are left with few direct options to transact internationally. Therefore, the onus is on international businesses to conduct proper due diligence to avoid direct and especially indirect dealings with sanctioned regimes and entities.
This article looks at some of the more indirect methods Iran is using to continue to conduct business with the international community and how this increases the overall risk of sanction exposure, and explores the recommended steps to mitigate such risks.
Key events in the sanctions against Iran:
- 1996: The United States introduces the Iran Sanctions Act (ISA) to penalise business with Iran’s energy sector
- 2006–2010: The United Nations (UN) Security Council passes several resolutions imposing certain bans against Iran to attempt to stop its nuclear activities
- 2010: The UN expands the scope of the sanctions against Iran
- January 2012: The European Union (EU) imposes an oil embargo on Iran and a freeze on Iran’s central bank’s assets, effective from July 2012
- March 2012: Iranian banks in breach of the EU sanctions are disconnected from SWIFT
- December 2012: The EU further tightens its sanctions against Iran by restricting more areas and methods of trade
- January 2013: The US extends sanctions to cover more industries, such as metals and software
The tightening of sanctions against Iran over the past year has forced Iran to devise some particularly-creative strategies to circumvent sanction controls.
The risk: Inadvertently dealing with parties with Iranian interests
Iranians living abroad. While the sanctions have caused huge negative impacts on many Iranians living abroad, the Iranian Government is allegedly utilising its network of elite Iranians living abroad to conduct business on its behalf.
Front companies in Dubai. The United Arab Emirates is allegedly a window for Iran to conduct business in order to sidestep sanctions. Individuals linked to the Iranian Government can easily set up private companies in the UAE and have purportedly been making money transfers through UAE banks. One source has said, “A surprisingly substantial number of companies in Dubai are backed by Iranian interests.”
The UAE is not the only country of choice where Iranians are setting up front companies. Other locations include northern Iraq, Oman, Lebanon and Syria.
Informal money transfers. Hawala (or havaleh in Iran) is an informal and paperless method of money transfer which is conducted through private exchange houses or trading companies. The system is founded on trust and word of mouth. Iranian hawala brokers typically charge 1–1.5 percent as a commission fee. One of the most popular exchange locations is the neighbouring UAE, where banks allegedly do not ask questions about the identity of the person making the transfer or the source of the funds.
Third-country banks. The Iranian Government is allegedly utilising the services of several banks around the world to conduct transactions, including banks from Iraq, Afghanistan and Armenia.
Metals, materials and industrial software
Both the EU and the US have widened the scope of restricted trade with Iran to include the sale, supply or transfer of precious metals and raw or semi-finished materials, and “software for integrating industrial processes”.
Such materials subject to the new sanctions include:
- precious metals (e.g. gold, which has been the basis of Turkey’s gold-for-gas trade with Iran)
- graphite and coal
- aluminium and steel.
Software subject to sanctions includes any enterprise resource planning software for industrial production.
Is your software subject to sanctions?
Your software will be subject to sanctions if it is used for:
- financial accounting
- management accounting
- human resources
- supply-chain management
- project management
- customer-relationship management
- data services
- access control,
and specifically designed for use in any of the following industries:
- gas and oil
Even before the imposition of the EU’s sanctions in July 2012, Iran’s state-owned oil tanker company, the National Iranian Tanker Corporation (NITC), was finding it difficult to offload its sweet crude oil to willing buyers. Insurers have cut off their services to tankers delivering Iranian crude, meaning that buyers struggle to find insurance providers with ties to the EU. Even in early 2012, Iranian tankers were seen docked off the Malaysian coast, sitting heavy in the water and unable to offload their cargo.
The risk: inadvertently trading with sanctioned Iran cargo.
Iran’s oil tankers are still crossing the oceans, in disguise. After the EU sanctions came into effect last year Malta and Cyprus were pressured to stop registering Iranian ships, so Iranian tankers began sporting flags from Tuvalu and Tanzania. The tankers have also been given new Western-sounding names: the Haraz has been renamed “Freedom” and the Sima is now “Blossom”.
Transmitting false satellite signals. Iranian tankers have been working together with Syrian tankers to transmit the same identification signal in order to confuse the true location of the Iranian tanker. By transmitting identical signals a vessel can appear in two locations at once, enabling one vessel to “cloak” the other’s activities.
Ship-to-ship transfers. NITC tankers have been known to unload their Iranian cargo via ship-to-ship transfers in the middle of the ocean. Buyers and traders can arrange to receive Iranian oil directly from an NITC tanker, far away from the guise of land ports. This way Iranian crude can be carried to various ports around the world, blended, and resold.
Case study: Supertankers
What happened: An international oil tanker company sold a vessel to a customer based in Dubai. Whilst they ran the purchasing entity through a sanctions list, they failed to conduct deeper due diligence into the identities of the key principals, i.e. the directors and shareholders, who ultimately had Iranian interests.
Sanctioned: The oil tanker company who executed the deal and its parent company were both sanctioned by the US Office of Foreign Affairs Control (OFAC) for two years. The broker who introduced the transaction was also sanctioned.
The damage: Even though neither the oil tanker company nor its parent conduct business in the US or via US banks, being listed as a sanctioned entity has severely damaged its reputation and therefore cost it business.
Remediation steps: The oil tanker company has since implemented a compliance programme around sanction controls. Deeper due diligence is now conducted on each transacting entity and on any agents involved in brokering the deal before each transaction.
There is also the on-going risk of inadvertently trading Iranian cargo. Training has been implemented down to the operations level so ship captains are versed in recognising Iranian vessels or cargo that might have Iranian origins.
Managing your exposure to sanctions risk
With the chance of indirect exposure to sanctions risk being so high it is recommended that proper and effective due diligence is conducted prior to making a large business investment.
Go beyond simple “watchlist” searches
Look out for newly-formed companies
Look out for transacting parties with paper offices in locations, such as the United Arab Emirates, Syria and Turkey
Be careful of one-off or “urgent” deals
Check the identities and backgrounds of the directors and shareholders
Check the identities and backgrounds of agents or brokers
Conduct on-the-ground reputational testing of entities and their key principals
Ensure that the ultimate beneficiaries behind a transaction are clear via due diligence on the corporate structure and other reputational intelligence
Ensure that the transacting parties match correctly to the source of the funds