Financial institutions should be on the lookout for illicit money transfers.
The U.S. Treasury Department on Thursday warned financial institutions to be on the lookout for money transfers sent by foreign exchange houses and trading companies that are actually an attempt to mask transactions on behalf of sanctioned Iranian entities.
The United States and allies have targeted Iran’s banking system and energy sector under a sanctions regime aimed at curbing the Persian Gulf power’s alleged pursuit of a nuclear-weapon capability. Tehran is widely understood to have responded by developing methods to avoid the full brunt of the punitive measures.
A 2010 U.S. law goes after foreign companies that do business with designated Iranian financial institutions. As the U.S. dollar is the favored currency for many international transactions, limiting Iran’s ability to utilize it has a powerful impact on opportunities for foreign trade.
The advisory notice by the Treasury Department’s Foreign Assets Control Office warns that increasingly restrictive U.S. measures targeting Iran’s banking system have led the nation to rely “more heavily on third-country exchange houses and trading companies to move funds.” Foreign currency exchange companies and trading firms are increasingly being used by Iranian entities to act “as money transmitters to process funds transfers through the United States in support of business with Iran that is not exempt or otherwise authorized by OFAC,” the notice states.
The department called on U.S. financial firms to keep closer watch on money transfers submitted from foreign trading companies and exchange firms. Treasury did not single out any specific countries as being the sources of these dubious transactions.
Cities and nations with large foreign trade sectors such as Dubai, Hong Kong, Singapore, and Malaysia are good guesses to be the sources of the transactions, according to a Washington-based expert on sanctions targeting Iran.
“My assumption is that the [United Arab Emirates] is probably a major locus for this activity because of the strong commercial relationships between Dubai and Iran and the presence of very sophisticated trading companies and foreign exchange houses,” said Mark Dubowitz, executive director of the Foundation for Defense of Democracies.
The foreign exchange houses involved are not small ‘mom-and-pop’ operations but highly profitable currency firms that handle commercial transactions worth hundreds of millions of dollars, he said in an interview. “They are interested in the business of major Iranian energy companies or telecommunication companies or construction engineering companies.”
As Dubowitz explained the Iranian scheme to avoid financial sanctions imposed by Washington: a U.S. bank receives a wire transfer from an exchange house that seems on the surface to be a normal transaction between ‘Company A,’ whose address has been removed, and a nonsanctioned entity. “The U.S. bank thinks it’s a normal payment sent from [for example] Dubai on behalf of a UAE company” when the real originator is an Iranian firm, he said.
Tactics used by exchange houses in this scheme to route payments to or through U.S. financial firms include not noting Iranian business addresses where they would otherwise apply and not naming Iranian individuals or businesses as the originator or beneficiary of the money, Treasury said.
“They [Treasury] are trying to warn U.S. financial institutions that these transactions may be a pretense by the Iranian regime to hide the origins of these transactions in order to circumvent U.S. financial sanctions,” Dubowitz said.
In addition to the explicit cautionary message to U.S. firms, Treasury is also giving an implicit warning to the third-party countries that are the sources of these transactions, according to Dubowitz.
Treasury officials have been traveling around the world to inform foreign governments on the risk to their own formal financial institutions under recently passed U.S. laws if they do not crack down on transactions with sanctioned Iranian enterprises. With Thursday’s advisory, Treasury is probably signaling to these governments that their exchange houses and trading companies could also be subject to U.S. sanctions if they do not watch out for these practices, Dubowitz said.