US Iran probe will reveal money laundering a way of life, says ex- Iranian banker

Author: | Published: 21 Aug 2012
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Bankers in the UK have warned the US probe into Iranian money laundering is set to get much worse.

Branding the $250 billion of transactions at the heart of the New York state Department of Financial Services’ (DFS) case against Standard Chartered as small fry, they claim US banks have been involved in a large proportion of transactions.

DFS superintendent Benjamin Lawsky this month made public allegations that Standard Chartered’s flagrantly deceptive actions with regards to Iran had left the US vulnerable to terrorists. The move led to a $340 million penalty for Standard Chartered, and the revelation that four European banks are also being investigated by US authorities for alleged violations involving oil trading and Iran.

Market participants expect US banks to also be implicated, however. One back office manager at a London-based bank said past experience at two Iranian banks had made clear to him that money laundering was a way of life.

"I have sent hundreds of millions of US dollars (USD) around the world to help the Iranians, and I can tell you, Standard Chartered was small fry," he said. "To wash the USD, you need an American middle bank. [One US bank] was in on 90% of all my transactions as I remember."

"I questioned my boss many times about these transactions," he continued. "He said not to worry as the governments were aware what Iran was up to."

"There are many banks involved in the Iranian pie," he continued. "US, German, French, UK and Swiss; they all have to clear their USD through a US Bank somehow. Otherwise, they wouldn't be in possession of USD." It was the only viable way to pay for USD-pegged Iranian oil, he explained.

He referred to it as 'doing the round houses’; that is sending USD from one UK bank to another US bank and then back to another UK bank, washed through the system via a system of MT202 (SWIFT telegraphic transfers between banks).

"How banks hid these transactions was a different thing," he said. But he believed many trading banks used their New York branches to do the work too.

It was, he said, therefore a joke that the US was fining UK banks. He believed US authorities were aware that for over 20 years UK banks had to clean their laundered money through a US conduit. "The US has had years to do something about this and they did nothing," he said.

What’s more, he warned that many loopholes remained to get around USD embargos on Iranian business. Obtaining back-to-back letters of credit was one such work around used, he said.

US/EU Iranian sanctions regime explained

Lawyers in the US hope the ongoing regulatory money laundering investigations will encourage a broader tightening of Iranian sanction regimes.

Vandenberg & Felieu’s New York-based managing partner Raymond Vandenberg said there was a perception in the US that some of the regulators had accepted sanctions only ostensibly. "The US has a fairly moralistic view of things, and has consequently imposed a full-blown enforcement of sanctions against Iran applicable to most individuals and businesses whatever the size or type," he said. "Whereas in Europe, and other parts of world geographically closer to Iran, there’s more of a temptation not to impose sanctions so fully because of the impact doing so will have on key business needs, for oil for example."

Taylor Wessing’s Shane Gleghorn said Switzerland’s approach in particular had left scope for some Iranian oil transactions to fall through a regulatory gap in Europe.

In July, the Swiss government announced a ban on supplying equipment to the Iranian petrochemical industry. But exempted transactions involving Iranian oil and petrochemical products for foreign policy reasons. Such deals are instead subject to a declaration requirement and thereby do not jeopardise Geneva's significant role in oil trading.

Gleghorn said there had been quite a bit of criticism of the Swiss approach by commentators in the US. "There are some commentators who suggest that there is, in some EU states, a practical difference between the US and EU approach because, from the US perspective, some of the states in the EU fail to enforce the sanctions regime with sufficient vigour," he said.

One Washington-based US law firm partner, who wished to remain anonymous owing to the sensitivity of the topic, said US sanctions against Iran were much broader than the UK sanctions regime although both sets of rules are fairly complex.

"The UK sanctions regime applies to UK entities, UK-based persons and all UK nationals," he said.

"But US sanctions, in addition to applying to US entities and all US nationals, also have an extraterritorial component," he said. "This enables certain sanctions to reach out to companies that have no US nexus but are engaging in activities with Iran, that are considered to be sanctionable under US law. That’s one big difference."

What’s more, recent US legislative changes will further expand the full scope of US sanctions to entities outside the US that are owned or controlled by US persons or US companies - a significant shift.

The US regime also prohibits US nationals and US companies from virtually all activities with Iran. In contrast, sanctions are much more targeted under UK law. "UK sanctions are more focused on designated persons and certain designated activities. Not all business dealings with Iran are prohibited, although there are broad restrictions in oil and gas sectors," he said.

Lessons learned
The US partner believed ongoing investigations into banks’ money laundering activities should help make clear how important it was for non-US financial institutions to fully understand the full reach of US restrictions and how they may have potential exposure to the US regime on non-USD related matters.

According to Gleghorn, the Standard Chartered case should highlight how inextricably linked business is to reputation management. "I am sure that the banks have had this in mind but it does seem imperative, and commercially-sensible, that any decision made with regards to sanctions regimes also pays consideration to the reputation of a firm," he said. But one UK-based law firm partner said such concerns were too often ignored by today’s bankers’ counsel. "The Standard Chartered case has revealed the endemic issues in the global banking system today," he said. "There is too much pressure on both external and internal bankers’ counsel to make commercially-focused decisions and far too little focus on ethics." He believed there was need for a total reboot of the global legal business. "The methodological analysis of the law is no longer such a prized thing," he said. "And that’s particularly notable with advisory work." Too many banks regarded their in-house legal teams as akin to operations, with general counsel reporting to the firm’s chief administrative offer and not to the board or chief executive. "In that environment, the lawyer becomes no more than a facilitator on hand to help transactions get done," he said. "It’s a problem that’s created a whole generation of lawyers who have risen through the ranks with the mindset that they must get business done at all costs." Bloomberg reported this week that federal regulators, including the US Treasury’s Office of Foreign Assets Control, the Federal Reserve, the Justice Department and the New York District Attorney’s office are all involved in a probe of Deutsche Bank and three other European banks. RBS has also revealed it is facing a US-led investigation into possible money laundering at the bank.