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Iran’s ‘sanction-busting’ business model

Iran’s ‘sanction-busting’ business model

The international sanctions against Iran are aimed at compelling the regime to change its policy on nuclear weapons development. The sanctions themselves have, however, affected a much broader swathe of Iranian society and have had a profound effect on how the business community functions. In their long-running effort to mitigate the impact of sanctions, Iranian companies have developed a variety of techniques to evade sanctions, but in doing so have instituted practices that could lead commercial partners to unwittingly transact with sanctioned entities. Any analysis of the impact of international sanctions on Iran’s commercial class tells a story of an economy with profound challenges: soaring inflation, declining oil exports, restricted access to international financial markets and perhaps most important of all, the rapid depreciation of the Iranian currency. These hardships have forced Iranian businesses to employ all means at their disposal for mere survival. The methods they have developed in response to the sanctions are as diverse as they are imaginative. They include the use of offshore bank accounts; concealing the identity of business entities through sophisticated and opaque corporate structures; and producing falsified export documents.

The well-established cottage industry catering to those seeking to evade international regulatory restrictions has been described by our contacts in Tehran as the ‘sanction busting business’. Iran’s experience in circumventing sanctions has deep roots, dating back to shortly after the Islamic revolution of 1979, when sanctions were first introduced. Over the past three decades, Iranians have continuously managed to adapt their commercial activities to skirt the limitations presented by different sanction regimes. Businessmen learned how to employ roundabout methods for paying foreign suppliers when it became impossible to process transactions through the domestic banking sector. This has led to increased cooperation between state organisations – most notably the Islamic Revolutionary Guards Corps (IRGC) – and networks of international smugglers.

An unintended consequence of international sanctions has therefore been to provide for lucrative deals between organised criminal groups and individuals with close ties to the Iranian regime. Even non-state companies are getting in on the act, albeit as a means of survival rather than enrichment. By operating from jurisdictions that have historically housed large numbers of Iranian companies – such as the UAE and Turkey – and more recently countries such as Malaysia and Venezuela, Iranians have been able to access international financial markets, an impossibility at home. Many such businesses cater to the demands of the Iranian market by serving as front companies, re-routing their purchased cargoes to Iran.

Of particular concern to those seeking to apply the sanctions regime is that ostensibly banned products are making their way to Iran through these processes. Our experience suggests that setting up multi-layered front companies with hazy ownership structures has allowed Iranian businesses to flourish despite international restrictions. Specifically, this effective anonymity has allowed companies to order products and, in direct contravention of trade sanctions, to successfully pay for them via international financial institutions. It is not uncommon to discover, for example, that a company that is on paper registered in South America is in fact, through a complex holding structure, controlled by two Iranian financial institutions, both of which have been sanctioned by the US and the EU. Meanwhile, our contacts in Tehran tell us that almost any product, ranging from American-made mobile phones to European machinery and spare parts, can be found in the market, albeit at above-market prices. The ramifications of ‘sanction busting’ activity are being felt in the west as well.

In early 2012, as many as 84 British companies were found to have breached sanctions, many despite having no direct dealings with Iran. Indeed, it was only after inspections had been conducted by the UK’s revenue and c ustoms authorities did it become apparent that Iran was the final destination of various of those companies’ products. Such episodes make clear that companies operating in the Middle East run an increased risk of inadvertently falling foul of international regulatory and legal frameworks. As long as Iranian firms continue to adapt to the difficult environment in which they are operating, Western businesses will need to ensure that they too are taking the steps necessary to comply with global sanctions regimes. Business Intelligence, London

Published: 19th June 2013