HP-1258: Fact Sheet: Treasury Strengthens Preventive Measures Against Iran

November 6, 2008
HP-1258

Fact Sheet: Treasury Strengthens Preventive Measures Against Iran

On October 16, the Financial Action Task Force (FATF), which has members representing 32 jurisdictions and is the world's premier standard-setting body for anti-money laundering and counter-terrorist financing (AML/CFT), warned for the fourth time about the risks posed to the international financial system by continuing deficiencies in Iran's AML/CFT regime. The FATF called for all countries to strengthen preventive measures to protect their financial systems from this risk. Additionally, the UN Security Council called upon all states in March 2008 to exercise vigilance over the activities of financial institutions in their territories with all Iranian banks.

Consistent with these multilateral calls for action, the Treasury Department is revoking the "U-turn" general license today to protect U.S. financial institutions individually, and the U.S. financial system as a whole, from the significant terrorist financing and proliferation risks posed by Iran. This regulatory action will close the last general entry point for Iran to the U.S. financial system.

Iran's access to the international financial system enables the Iranian regime to facilitate its support for terrorism and proliferation. The Iranian regime disguises its involvement in these illicit activities through the use of a wide array of deceptive techniques, specifically designed to avoid suspicion and evade detection by responsible financial institutions and companies. Iran also is finding ways to adapt to existing sanctions, including by turning to non-designated Iranian banks to handle illicit transactions.

The Treasury Department is taking a range of measures, including today's action, to counter these deceptive activities. The Treasury Department encourages all jurisdictions to adopt robust preventive measures consistent with the FATF warnings and relevant UN Security Council Resolutions (UNSCRs).

Iran Misuses the International Financial System to Support Terrorism

Iran is the world's most active state sponsor of terror. The support provided by the regime to terrorist groups includes financing that is routed through the international financial system, especially through Iranian state-owned banks.

• Iran's Support to Terror. The Department of State designated Iran as a state sponsor of international terrorism in 1984, and Iran remains the most active of the listed state sponsors of terrorism, routinely providing substantial resources and guidance to multiple terrorist organizations. For example, Hamas, Hizballah, and the Palestinian Islamic Jihad (PIJ) maintain representative offices in Tehran to help coordinate Iranian financing and training of these groups.

• Iran's IRGC and IRGC-Qods Force Support Terrorist Groups. Elements of Iran's Islamic Revolutionary Guard Corps (IRGC) have been directly involved in the planning and support of terrorist acts throughout the world, including in the Middle East, Europe and Central Asia, and Latin America. The IRGC-Qods Force, which has been designated under Executive Order 13224 for providing material support to the Taliban and other terrorist groups, is the Iranian regime's primary mechanism for cultivating and supporting terrorist and militant groups abroad. Qods Force-supported groups include: Lebanese Hizballah; Palestinian terrorists; certain Iraqi Shi'a militant groups; and Islamic militants in Afghanistan and elsewhere. The Qods Force is especially active in the Levant, providing Lebanese Hizballah with funding, weapons and training. It has a long history of supporting Hizballah's military, paramilitary and terrorist activities, and provides Hizballah with more than $100 to $200 million in funding each year. The Qods Force continues to provide the Taliban in Afghanistan with limited weapons, funding, logistics and training in support of anti-U.S. and anti-coalition activities.

• Iran Uses its Banks to Finance Terrorism. In a number of cases, Iran has used its state-owned banks to channel funds to terrorist organizations. Between 2001 and 2006, Bank Saderat transferred $50 million from the Central Bank of Iran through Bank Saderat's subsidiary in London to its branch in Beirut for the benefit of Hizballah fronts that support acts of violence. Hizballah also used Bank Saderat to send funds to other terrorist organizations, including Hamas, which itself had substantial assets deposited in Bank Saderat as of early 2005. The Treasury Department designated Bank Saderat under E.O. 13224 for providing financial services to Hizballah, Hamas and PIJ. Australia has also designated Bank Saderat. Iran's Bank Melli, which has been designated by the United States under E.O. 13382 for proliferation-related activities, was used to transfer at least $100 million to the IRGC-Qods Force between 2002 and 2006.

• Iran Lacks a Counter-Terrorist Financing Legal Regime. In addition to its regime-directed support to terrorist organizations, Iran continues to lack a legal framework to counter the risk of terrorist financing and has not indicated a willingness to address this deficiency. The FATF's October statement on Iran notes that, while Iran has taken some steps towards implementing an anti-money laundering regime, there is a lack of even such a minimal "corresponding effort" by Iran in the area of counter-terrorist financing.

Iran Misuses the International Financial System to Facilitate Proliferation

• Iran Continues to Pursue Nuclear Capabilities and Develop Ballistic Missiles. In addition to its active support to terrorist and militant activities, Iran continues to defy the international community by pursuing nuclear capabilities and developing ballistic missiles in violation of five UNSCRs. Iran's failure to comply with these various resolutions has resulted in the UN Security Council's imposing sanctions against Iran. These have included specific provisions aimed at preventing Iran from abusing banks and the international financial system to pursue nuclear capabilities and develop ballistic missiles.

• Iran Uses its Banks to Finance its Nuclear and Missile Programs. Multiple Iranian financial institutions have been implicated in facilitating Iran's nuclear and ballistic missile programs.

➢ Bank Sepah. Iran's state-owned Bank Sepah has been designated in the United States under E.O. 13382 and by the UN Security Council under UNSCR 1747. Bank Sepah has provided direct and extensive financial services, such as arranging financing and processing dozens of multi-million dollar transactions, for the Shahid Hemmat Industries Group (SHIG) and the Shahid Bakeri Industries Group (SBIG), two Iranian missile firms designated by the UN Security Council in UNSCR 1737 and identified by President Bush in the Annex to E.O. 13382 for their direct roles in advancing Iran's ballistic missile programs. Bank Sepah also has provided financial services to SHIG's and SBIG's parent entity, Iran's Aerospace Industries Organization (AIO), which also was identified by President Bush in the Annex to E.O. 13382 for its role in overseeing all of Iran's missile industries.

➢ Bank Melli. Iran's largest state-owned bank, Bank Melli, has facilitated numerous purchases of sensitive materials for Iran's nuclear and missile programs on behalf of UN-designated entities. In doing so, Bank Melli has provided a range of financial services to known proliferators, including letters of credit and the maintenance of accounts. The United States, the European Union, and Australia have designated Bank Melli.

➢ Bank Mellat. Iran's state-owned Bank Mellat has provided banking services in support of Iran's nuclear entities, namely the Atomic Energy Organization of Iran (AEOI) and Novin Energy Company. Bank Mellat, which was designated pursuant to E.O. 13382 in October 2007, has serviced and maintained AEOI accounts, mainly through AEOI's financial conduit, Novin Energy. Bank Mellat has facilitated the movement of millions of dollars for Iran's nuclear program since at least 2003.

➢ Export Development Bank of Iran. On October 22, 2008, the Treasury Department designated the Export Development Bank of Iran (EDBI) under E.O. 13382 for providing or attempting to provide financial services to Iran's Ministry of Defense and Armed Forces Logistics (MODAFL), which had been designated by both the European Union and the United States for its involvement in Iranian proliferation activities. Some MODAFL scientists and officials have also been designated by the UN. The EDBI provides financial services to multiple MODAFL-subordinate entities that permit these entities to advance Iran's WMD programs. Furthermore, the EDBI has facilitated the ongoing procurement activities of various front companies associated with MODAFL-subordinate entities. In addition, since Bank Sepah's designation by the United States and the UN Security Council, the EDBI has served as one of the leading intermediaries handling Bank Sepah's financing, including WMD-related payments. The EDBI has also facilitated financing for other proliferation-related entities sanctioned under U.S. and UN authorities.

• International Focus on Proliferation Risks Associated with Iranian Financial Institutions. The role that Iranian financial institutions play in Iranian proliferation activities is underscored by UNSCR 1803, which was adopted in March 2008 and calls upon states to exercise vigilance over the activities of their financial institutions with all Iranian banks. The FATF issued guidance in October 2008 to assist countries in implementing this provision. That guidance recommends that jurisdictions encourage their financial institutions to take strong preventive measures for the mitigation of risks posed by Iranian banks, including refusing to process transactions involving Iranian banks when full information regarding the parties to the transaction is unavailable. The FATF guidance also recommends that jurisdictions encourage their financial institutions to reassess, and if necessary, terminate correspondent relationships with Iranian banks, and take steps to satisfy themselves that their correspondent relationships with non-Iranian financial institutions are not used to circumvent the risk-mitigation practices in place for Iranian banks.

Iran Uses Deceptive Financial Practices to Evade Sanctions

• Iranian Commercial Banks. It has been a standard practice for Iranian financial institutions to conceal their identity to evade detection when conducting transactions. For example, Bank Sepah has requested that its name be removed from transactions in order to make it more difficult for intermediary financial institutions to determine the true parties to a transaction. Following the designation of Bank Sepah under UNSCR 1747, Bank Melli took precautions not to identify Bank Sepah in transactions. Bank Melli also has employed similar deceptive practices to obscure its involvement from the international banking system when handling financial transactions on behalf of the IRGC. In addition, when Iranian assets were targeted in Europe, branches of Iranian state-owned banks in Europe took steps to disguise ownership of assets on their books in order to protect assets from future actions.

• Central Bank of Iran. The Central Bank of Iran (CBI), the sole Iranian entity that regulates all Iranian banks, has not only engaged in deceptive practices itself – such as asking for its name to be removed from transactions – but has also encouraged such practices among Iran's state-owned banks. For example, prior to EU and UN sanctions, the CBI attempted to help Banks Sepah and Melli protect their assets from being frozen. Later, the CBI instructed non-sanctioned Iranian state-owned banks to issue payment instructions on behalf of Sepah in order to circumvent sanctions. In the case of Bank Melli, the CBI provided substantive assistance to minimize the impact of sanctions. In fact, between January and March 2008, the CBI handled tens of millions of dollars in transactions to and from the accounts of U.S.- and UN-designated banks held at the CBI.

• Use of Front Companies and Misuse of Bank Accounts. Iran hides behind front companies and intermediaries to engage in ostensibly legitimate financial and commercial transactions that are actually related to its nuclear or missile programs. Iranian entities form front companies outside of Iran for the sole purpose of exporting dual-use items to Iran that can be used in these programs. These front companies enable the regime to obtain materials that the country of origin would typically prohibit from being exported to Iran. Iran also has a history of using accounts set up for one purpose to facilitate activities with designated entities.

• Use of Money Service Business Accounts. Iran also has exploited its relationship with certain foreign money service businesses, capitalizing on a business model where the absence of an ongoing account relationship may mean that less information is collected on certain transactions.

Effect of the Revocation of U-Turn License

OFAC has revoked the authorization of "U-turn" transfers for the direct or indirect benefit of Iran, through an amendment of the Iranian Transactions Regulations, 31 CFR part 560, to narrow the scope of existing § 560.516. This action affects the "U-turn" class of funds transfers, which are so named because, while they are conducted on behalf of Iranian account holders and banks or in connection with Iran-related transactions, they only pass through the U.S. financial system on their way from one offshore non-Iranian financial institution to another.

As a result of today's action, U.S. depository institutions are no longer allowed to process "U-turn" transfers to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran. The prohibition on U-turns applies not only to state-owned Iranian banks and the Central Bank of Iran, but also to privately-owned Iranian banks, Iranian companies, and the settlement of third-country trade transactions that involve Iran.

Allowable Transactions

Today's action will not affect funds transfers by U.S. depository institutions, through intermediary third-country banks, to or from Iran or for the direct or indirect benefit of the Government of Iran or a person in Iran arising from several types of underlying transactions including:

A non-commercial remittance to or from Iran (e.g., a family remittance not related to a family-owned enterprise);
The exportation to Iran or importation from Iran of information and informational materials;
A travel-related remittance;
Payment for the shipment of a donation of articles to relieve human suffering; or
An underlying transaction authorized by OFAC through a specific or general license. Allowable funds transfers would include, for example, payments arising from over-flights of Iranian airspace, legal services, intellectual property protection, and authorized sales of agricultural products, medicine, and medical devices to Iran pursuant to the Trade Sanctions Reform and Export Enhancement Act.

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	November 6, 2008 HP-1258 Fact Sheet: Treasury Strengthens Preventive Measures Against Iran On October 16, the Financial Action Task Force (FATF), which has members representing 32 jurisdictions and is the world's premier standard-setting body for anti-money laundering and counter-terrorist financing (AML/CFT), warned for the fourth time about the risks posed to the international financial system by continuing deficiencies in Iran's AML/CFT regime. The FATF called for all countries to strengthen preventive measures to protect their financial systems from this risk. Additionally, the UN Security Council called upon all states in March 2008 to exercise vigilance over the activities of financial institutions in their territories with all Iranian banks. Consistent with these multilateral calls for action, the Treasury Department is revoking the "U-turn" general license today to protect U.S. financial institutions individually, and the U.S. financial system as a whole, from the significant terrorist financing and proliferation risks posed by Iran. This regulatory action will close the last general entry point for Iran to the U.S. financial system. Iran's access to the international financial system enables the Iranian regime to facilitate its support for terrorism and proliferation. The Iranian regime disguises its involvement in these illicit activities through the use of a wide array of deceptive techniques, specifically designed to avoid suspicion and evade detection by responsible financial institutions and companies. Iran also is finding ways to adapt to existing sanctions, including by turning to non-designated Iranian banks to handle illicit transactions. The Treasury Department is taking a range of measures, including today's action, to counter these deceptive activities. The Treasury Department encourages all jurisdictions to adopt robust preventive measures consistent with the FATF warnings and relevant UN Security Council Resolutions (UNSCRs). Iran Misuses the International Financial System to Support Terrorism Iran is the world's most active state sponsor of terror. The support provided by the regime to terrorist groups includes financing that is routed through the international financial system, especially through Iranian state-owned banks. • Iran's Support to Terror. The Department of State designated Iran as a state sponsor of international terrorism in 1984, and Iran remains the most active of the listed state sponsors of terrorism, routinely providing substantial resources and guidance to multiple terrorist organizations. For example, Hamas, Hizballah, and the Palestinian Islamic Jihad (PIJ) maintain representative offices in Tehran to help coordinate Iranian financing and training of these groups. • Iran's IRGC and IRGC-Qods Force Support Terrorist Groups. Elements of Iran's Islamic Revolutionary Guard Corps (IRGC) have been directly involved in the planning and support of terrorist acts throughout the world, including in the Middle East, Europe and Central Asia, and Latin America. The IRGC-Qods Force, which has been designated under Executive Order 13224 for providing material support to the Taliban and other terrorist groups, is the Iranian regime's primary mechanism for cultivating and supporting terrorist and militant groups abroad. Qods Force-supported groups include: Lebanese Hizballah; Palestinian terrorists; certain Iraqi Shi'a militant groups; and Islamic militants in Afghanistan and elsewhere. The Qods Force is especially active in the Levant, providing Lebanese Hizballah with funding, weapons and training. It has a long history of supporting Hizballah's military, paramilitary and terrorist activities, and provides Hizballah with more than $100 to $200 million in funding each year. The Qods Force continues to provide the Taliban in Afghanistan with limited weapons, funding, logistics and training in support of anti-U.S. and anti-coalition activities. • Iran Uses its Banks to Finance Terrorism. In a number of cases, Iran has used its state-owned banks to channel funds to terrorist organizations. Between 2001 and 2006, Bank Saderat transferred $50 million from the Central Bank of Iran through Bank Saderat's subsidiary in London to its branch in Beirut for the benefit of Hizballah fronts that support acts of violence. Hizballah also used Bank Saderat to send funds to other terrorist organizations, including Hamas, which itself had substantial assets deposited in Bank Saderat as of early 2005. The Treasury Department designated Bank Saderat under E.O. 13224 for providing financial services to Hizballah, Hamas and PIJ. Australia has also designated Bank Saderat. Iran's Bank Melli, which has been designated by the United States under E.O. 13382 for proliferation-related activities, was used to transfer at least $100 million to the IRGC-Qods Force between 2002 and 2006. • Iran Lacks a Counter-Terrorist Financing Legal Regime. In addition to its regime-directed support to terrorist organizations, Iran continues to lack a legal framework to counter the risk of terrorist financing and has not indicated a willingness to address this deficiency. The FATF's October statement on Iran notes that, while Iran has taken some steps towards implementing an anti-money laundering regime, there is a lack of even such a minimal "corresponding effort" by Iran in the area of counter-terrorist financing. Iran Misuses the International Financial System to Facilitate Proliferation • Iran Continues to Pursue Nuclear Capabilities and Develop Ballistic Missiles. In addition to its active support to terrorist and militant activities, Iran continues to defy the international community by pursuing nuclear capabilities and developing ballistic missiles in violation of five UNSCRs. Iran's failure to comply with these various resolutions has resulted in the UN Security Council's imposing sanctions against Iran. These have included specific provisions aimed at preventing Iran from abusing banks and the international financial system to pursue nuclear capabilities and develop ballistic missiles. • Iran Uses its Banks to Finance its Nuclear and Missile Programs. Multiple Iranian financial institutions have been implicated in facilitating Iran's nuclear and ballistic missile programs. ➢ Bank Sepah. Iran's state-owned Bank Sepah has been designated in the United States under E.O. 13382 and by the UN Security Council under UNSCR 1747. Bank Sepah has provided direct and extensive financial services, such as arranging financing and processing dozens of multi-million dollar transactions, for the Shahid Hemmat Industries Group (SHIG) and the Shahid Bakeri Industries Group (SBIG), two Iranian missile firms designated by the UN Security Council in UNSCR 1737 and identified by President Bush in the Annex to E.O. 13382 for their direct roles in advancing Iran's ballistic missile programs. Bank Sepah also has provided financial services to SHIG's and SBIG's parent entity, Iran's Aerospace Industries Organization (AIO), which also was identified by President Bush in the Annex to E.O. 13382 for its role in overseeing all of Iran's missile industries. ➢ Bank Melli. Iran's largest state-owned bank, Bank Melli, has facilitated numerous purchases of sensitive materials for Iran's nuclear and missile programs on behalf of UN-designated entities. In doing so, Bank Melli has provided a range of financial services to known proliferators, including letters of credit and the maintenance of accounts. The United States, the European Union, and Australia have designated Bank Melli. ➢ Bank Mellat. Iran's state-owned Bank Mellat has provided banking services in support of Iran's nuclear entities, namely the Atomic Energy Organization of Iran (AEOI) and Novin Energy Company. Bank Mellat, which was designated pursuant to E.O. 13382 in October 2007, has serviced and maintained AEOI accounts, mainly through AEOI's financial conduit, Novin Energy. Bank Mellat has facilitated the movement of millions of dollars for Iran's nuclear program since at least 2003. ➢ Export Development Bank of Iran. On October 22, 2008, the Treasury Department designated the Export Development Bank of Iran (EDBI) under E.O. 13382 for providing or attempting to provide financial services to Iran's Ministry of Defense and Armed Forces Logistics (MODAFL), which had been designated by both the European Union and the United States for its involvement in Iranian proliferation activities. Some MODAFL scientists and officials have also been designated by the UN. The EDBI provides financial services to multiple MODAFL-subordinate entities that permit these entities to advance Iran's WMD programs. Furthermore, the EDBI has facilitated the ongoing procurement activities of various front companies associated with MODAFL-subordinate entities. In addition, since Bank Sepah's designation by the United States and the UN Security Council, the EDBI has served as one of the leading intermediaries handling Bank Sepah's financing, including WMD-related payments. The EDBI has also facilitated financing for other proliferation-related entities sanctioned under U.S. and UN authorities. • International Focus on Proliferation Risks Associated with Iranian Financial Institutions. The role that Iranian financial institutions play in Iranian proliferation activities is underscored by UNSCR 1803, which was adopted in March 2008 and calls upon states to exercise vigilance over the activities of their financial institutions with all Iranian banks. The FATF issued guidance in October 2008 to assist countries in implementing this provision. That guidance recommends that jurisdictions encourage their financial institutions to take strong preventive measures for the mitigation of risks posed by Iranian banks, including refusing to process transactions involving Iranian banks when full information regarding the parties to the transaction is unavailable. The FATF guidance also recommends that jurisdictions encourage their financial institutions to reassess, and if necessary, terminate correspondent relationships with Iranian banks, and take steps to satisfy themselves that their correspondent relationships with non-Iranian financial institutions are not used to circumvent the risk-mitigation practices in place for Iranian banks. Iran Uses Deceptive Financial Practices to Evade Sanctions • Iranian Commercial Banks. It has been a standard practice for Iranian financial institutions to conceal their identity to evade detection when conducting transactions. For example, Bank Sepah has requested that its name be removed from transactions in order to make it more difficult for intermediary financial institutions to determine the true parties to a transaction. Following the designation of Bank Sepah under UNSCR 1747, Bank Melli took precautions not to identify Bank Sepah in transactions. Bank Melli also has employed similar deceptive practices to obscure its involvement from the international banking system when handling financial transactions on behalf of the IRGC. In addition, when Iranian assets were targeted in Europe, branches of Iranian state-owned banks in Europe took steps to disguise ownership of assets on their books in order to protect assets from future actions. • Central Bank of Iran. The Central Bank of Iran (CBI), the sole Iranian entity that regulates all Iranian banks, has not only engaged in deceptive practices itself – such as asking for its name to be removed from transactions – but has also encouraged such practices among Iran's state-owned banks. For example, prior to EU and UN sanctions, the CBI attempted to help Banks Sepah and Melli protect their assets from being frozen. Later, the CBI instructed non-sanctioned Iranian state-owned banks to issue payment instructions on behalf of Sepah in order to circumvent sanctions. In the case of Bank Melli, the CBI provided substantive assistance to minimize the impact of sanctions. In fact, between January and March 2008, the CBI handled tens of millions of dollars in transactions to and from the accounts of U.S.- and UN-designated banks held at the CBI. • Use of Front Companies and Misuse of Bank Accounts. Iran hides behind front companies and intermediaries to engage in ostensibly legitimate financial and commercial transactions that are actually related to its nuclear or missile programs. Iranian entities form front companies outside of Iran for the sole purpose of exporting dual-use items to Iran that can be used in these programs. These front companies enable the regime to obtain materials that the country of origin would typically prohibit from being exported to Iran. Iran also has a history of using accounts set up for one purpose to facilitate activities with designated entities. • Use of Money Service Business Accounts. Iran also has exploited its relationship with certain foreign money service businesses, capitalizing on a business model where the absence of an ongoing account relationship may mean that less information is collected on certain transactions. Effect of the Revocation of U-Turn License OFAC has revoked the authorization of "U-turn" transfers for the direct or indirect benefit of Iran, through an amendment of the Iranian Transactions Regulations, 31 CFR part 560, to narrow the scope of existing § 560.516. This action affects the "U-turn" class of funds transfers, which are so named because, while they are conducted on behalf of Iranian account holders and banks or in connection with Iran-related transactions, they only pass through the U.S. financial system on their way from one offshore non-Iranian financial institution to another. As a result of today's action, U.S. depository institutions are no longer allowed to process "U-turn" transfers to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran. The prohibition on U-turns applies not only to state-owned Iranian banks and the Central Bank of Iran, but also to privately-owned Iranian banks, Iranian companies, and the settlement of third-country trade transactions that involve Iran. Allowable Transactions Today's action will not affect funds transfers by U.S. depository institutions, through intermediary third-country banks, to or from Iran or for the direct or indirect benefit of the Government of Iran or a person in Iran arising from several types of underlying transactions including: A non-commercial remittance to or from Iran (e.g., a family remittance not related to a family-owned enterprise); The exportation to Iran or importation from Iran of information and informational materials; A travel-related remittance; Payment for the shipment of a donation of articles to relieve human suffering; or An underlying transaction authorized by OFAC through a specific or general license. Allowable funds transfers would include, for example, payments arising from over-flights of Iranian airspace, legal services, intellectual property protection, and authorized sales of agricultural products, medicine, and medical devices to Iran pursuant to the Trade Sanctions Reform and Export Enhancement Act. -30-