Photo illustration by John Lyman

World News


The Mullahs’ Dark Money

As a renewed Iran nuclear deal hangs in the balance, it is worth assessing the role illicit finance has played in the Iranian regime’s survival. Any future Iran policy must crack down on these financial networks, or risk eliminating any bite a sanctions policy may have. This involves policing European and Gulf Arab compliance with sanctions policy.

Although U.S. President Joe Biden is hell-bent on resurrecting his Democratic predecessor’s deal with Iran, he has encountered multiple roadblocks. Russia’s invasion of Ukraine threatened to upend the deal completely. Once the U.S. placated Russia with its “waiver” for Russo-Iranian trade, Iran pressed harder, and demanded the Islamic Revolutionary Guards Corps (IRGC) be de-listed as a terrorist organisation. A breakthrough in the next month is possible, albeit diplomatically difficult. The White House likely would accept IRGC de-listing, but America’s Middle Eastern allies, namely Saudi Arabia, the UAE, and Israel, may publicly break with Washington over this. In turn, Iran now terms the IRGC de-listing a “red line.”

If talks break down, the Biden administration will be forced to reimpose the U.S. comprehensive sanctions framework against Iran. One would expect, given the scale and brutality of these sanctions, that Iranian negotiators would walk back from a self-evidently ambitious demand. Indeed, the Iranian economy was in recession from 2018 to 2020 overwhelmingly because of American sanctions. Iranian inflation dropped to 34.7% in March 2022 from nearly 50% in April 2021. Last summer’s blackouts and water shortages triggered another round of protests, following on from protests in 2019 and 2020. Clearly, the Iranian regime is under some pressure.

Russia’s experience in Ukraine provides a lesson for any future sanctions regime. The Russian state built a war chest of foreign currency reserves from 2014 onward. Putin’s siloviki co-opted the oligarchs by offering them control of lucrative parastatal organisations after the post-Crimea asset seizure. The Russian Economics Ministry cut budgets to ensure they could survive under more extensive sanctions and stockpiled currency reserves. Concurrently, Putin ensured the Security Services, particularly his pet FSB, were funded, loyal, and competent enough to suppress internal dissent. Putin’s objective is not Russian prosperity, but the survival of his regime. Russia has enough external access through China, India, Iran, and perhaps Europe to keep money flowing into the Russian economy and survive.

Supreme Leader Ali Khamenei has pursued a similar policy, prioritising the regime’s favoured IRGC – indeed, at this point Khamenei draws so much military and economic support from the Revolutionary Guards that Iran has morphed from a hybrid regime into a more traditional autocracy, despite its democratic trappings. To preserve this regime, Iran has created a global dark money network, integrated with its state-managed black markets.

Iran’s dark money system has two components – a financial aspect that allows Iranian companies to move cash internationally, and a transport aspect that allows Iran to export its sanctioned oil.

The financial aspect of sanctions evasion involves a shell company system. As a recent Wall Street Journal article describes it, Iranian companies create proxy organisations that set up additional proxies outside of Iran. They then create bank accounts in target currencies and transmit ledger information back to Iran. Thus, Iranian companies can move and use cash at will, as long as they distribute their financing widely enough. Evidence indicates that tens of billions of dollars worth of illicit cash can be found in Chinese, Hong Kong, Singaporean, Turkish, and Emirati located accounts. This allows the Iranian regime to import the products its economy requires to survive, paying in external bank accounts that it secretly controls.

The export aspect of sanctions relief involves Iran taking advantage of the Persian Gulf’s disorganised, poorly-monitored oil transport system. Saudi Arabia, Kuwait, Iraq, the UAE, and Iran are all major oil exporters. In total, Persian Gulf countries access half of global oil reserves. One-fifth of global oil passes through the Strait of Hormuz. Iran uses its penetration of Iraqi state institutions, and the sheer volume of oil moving in the maritime space, to transfer Iranian oil onto foreign-flagged ships, often turning off transponders, acting at night, and forging cargo manifests. Maritime transport is a high-volume business: merchant ships change hands frequently, and flags of convenience obfuscate effective corporate tracking. Thus, Iran can export oil despite sanctions pressure, while receiving payment in its above-discussed foreign accounts. In turn, this money goes back to the IRGC, which uses it to procure more missiles, fund Iran’s nuclear programme, and support Iranian proxies in Iraq, Syria, Lebanon, and Yemen.

Moreover, the European powers were reluctant to abide by secondary sanctions, those restrictions that are imposed on entities doing business with a target country. Europe established a non-dollar, non-SWIFT financial network to manage Iranian transactions – it has not used this network yet, but its very existence demonstrates European hesitance. When former President Donald Trump reimposed strict sanctions, the European powers allegedly encouraged Russia and China to purchase Iranian oil, indicating their tacit coordination with U.S. rivals on energy issues. In general, we should expect European banks to host Iranian shell bank accounts, and Europe to not scrutinise Middle Eastern oil too closely, lest its point of origin be discovered.

The Iran nuclear deal was a poor policy from the outset. Unlike Saudi Arabia or the UAE, Iran is too unruly, proud, and self-important to serve as an American regional policeman. Unlike Israel, Iran is too inherently paranoid and expansionist to support a stable Middle Eastern balance of power. The Obama-era “realignment” remains a political and strategic fantasy, no matter how desperately Biden and his team hope to revive it.

If its delusions come crashing down, the Biden administration must revert to a more rational policy, ironically that of its generally irrational predecessor, that of maximum pressure. So-called punitive sanctions are not punishment for their own sake, but rather the core of a policy that, over time, can erode Iranian power, or force Russia or China to step in and support the Iranian state at a drain on their own finances.

Imposing a coherent sanctions regime requires cracking down upon global Iranian illicit finance, European willingness to turn a blind eye to it, and the Gulf Arabs’ persistent unwillingness to secure their own exports and financial systems against Iranian penetration. This will be a difficult task. It will require diplomatic manoeuvre in Europe, some formal oversight system amenable to the Gulf Arabs, and a global economic monitoring system that integrates American and allied intelligence capabilities to track and eliminate dark money. But the war in Ukraine may provide an opportunity. If the Biden administration is willing to push Europe off Russian gas, support renewable energy research, and use Gulf Arab and American petrochemicals to address European demand, it can begin to induce European and Middle Eastern compliance. Russia is very nearly under an economic blockade. Iran should be as well.