How Reza Zarrab circumvented the Iranian oil sanctions and what his story reveals about an international web of government corruption.
Chapter 2 – Financial Crimes/Setting the Stage
The Society for Worldwide Interbank Financial Transactions (SWIFT) was founded in Brussels in 1973. It fulfilled an internationally recognized need to standardize and secure financial transactions made by banking institutions. After 4 years of development it came on-line in 1977 and all transactions were essentially treated as private by the international banking industry until the collapse of the twin towers in New York on September 11, 2001. Persistent lobbying on behalf of the US government eventually saw the relaxing of privacy standards and the introduction of a Terrorist Financing Program in 2006. By 2010, despite EU protest, the US government and its intelligence agencies had gained nearly full access to the data transmitted by foreign countries and it used this information to enforce economic sanctions designated against perceived enemies.
The “golden loophole” refers to a legal back door allowing creative entrepreneurs like Zarrab and Zanjani to profit from assisting Iran in their efforts to evade US and UN sanctions. The sanctions, set in place by these institutions to forestall and prohibit Iran's efforts to produce nuclear weapons, meant that money derived from the export or sale of Iranian oil could not be legally transmitted or transacted using SWIFT's secure financial messaging services. Gold was exempt because it did not require SWIFT banking protocols to conduct a transaction. Cash was also an option. It could be physically moved across state borders and then be deposited into the offshore banking world. Once it hit Cypress, or one of dozens of other offshore tax havens, the money became untraceable. During the trial following Zarrab's arrest in the United States he outlined convoluted transfers that involved up to 10 transactions to get the oil money back into Iran.
Zarrab's father, HosseinZarrab, must have been very proud. It was a complicated scheme that incorporated Turkish banks, the huge UAE gold market based in Dubai, dozens of Limited Liability Corporations and two major laundromats controlled by Azerbaijani and Russian crime syndicates.
A December 2011 draft email intended to be sent on Zarrab’s behalf, later found in his email account, contained a business proposal addressed to the Central Bank of Iran.
It read, in part: “It is no secret that the trend is moving towards intensifying and increasing the sanctions, and since the wise leader of the Islamic Revolution of Iran has announced this to be the year of the Economic Jihad, the Zarrab family, which has had half a century of experience in foreign exchange, while establishing branches in Turkey, United Arab Emirates, Russia, and Azerbaijan, considers it to be our national and moral duty to declare our willingness to participate in any kind of cooperation in order to implement monetary and foreign exchange anti-sanction policies.”
From occrp.org
Authors: Paul Radu and Khadija Ismayilova
Published October 2, 2017
Zarrab's father served Mahmoud Ahmadinejad, the President of Iran, from 2005-2013. He is often described as a close and dear friend to the former leader. In 2013 he was extradited and tried in a US court for evading Iranian oil sanctions. He was found guilty and fined 9.1 million dollars. Cooperation with US authorities saw the fine reduced to 2.3 million dollars. Details of Hossein's plea remain sealed but it appears that his brush with US law makers only served to strengthen his son's commitment to undermine the sanctions that were crippling Iran.
During Zarrab's early money laundering years he played fast and loose with a system corrupted beyond most Americans' wildest dreams. He bought expensive cars, a personal jet for his wife's concert tours and multiple million dollar properties found in some of the most exclusive and desirable places in the world. The exploits of the popular couple were regularly featured in the Turkish tabloids, television and newspaper outlets. Together they mingled with Turkish politicians and spent money outrageously.
Under the protective umbrella of Adaletve Kalkınma Partisi (AKP), the political party backing Turkish President Recep Erdogan, Zarrab had essentially undertaken what could technically be described as state approved criminal evasion of US and UN sanctions. Erdogan gave Zarrab access to Turkish banks that extended credit and reasonable rates to the young man and Zarrab used the funds to buy Iranian oil with Turkish lira. The Iranians, who maintained ghost accounts in these same Turkish banks, received the proceeds through internal bank transfers that did not require use of the SWIFT banking system.
This was a useful first step in the exchange of oil for money, but any attempt by the Iranians, or the Turk's for that matter, to wire the money back to Iran would require use of the SWIFT banking system and thus automatically trigger the electronic monitoring system introduced by US and the UN statutes. Both parties would then be breaking international law and liable to criminal charges.
However, if these funds were used by the Iranians to buy Turkish gold from Zarrab then the transaction was entirely legal. This was the essence of the “golden loophole”. Gold could be transferred across borders and in between banking institutions without invoking the SWIFT system of computerized record keeping. Zarrab was essentially flying under the radar of SWIFT banking protocols.
Under his continued supervision the gold was then ferried to the huge gold market in Dubai by human mules boarding commercial airlines. At the airport in Ankara the mules simply filled out a form and declared their gold at customs. As long as the gold was deemed to be for personal use and less than 50 kilos they could carry it into Dubai. During the height of this operation Zarrab's team of 40+ mules transferred a metric ton of gold on a daily basis. To give a sense of the magnitude of Zarrab's gold dealing business it is instructive to give a brief overview of its immense, concentrated worth.
In today's spot market gold is valued at approximately $1,250 an ounce. A metric ton of gold contains 35,274 ounces and fetches around 40 million dollars. In 2012 gold was valued between $1,500 and $1,700 dollars per ounce. This price differential pushed Zarrab's daily gold transfers into the range of 60 million dollars per day. At this rate Zarrab could move a billion dollars across the border in about two weeks. This money obviously aided Iran but it also served to offset Turkey's runaway inflation, economic mismanagement and deeply embedded crony capitalism.
In Dubai the gold was either sold for US dollars or further transported across the Gulf of Oman into Iran. The southern Iranian coast is relatively remote and just over hundred miles from Dubai. Powerful speedboats could transport the gold and cash across the gulf in less than two hours. In this way US sanctions based upon exclusion from the internationally recognized SWIFT banking system were circumvented by physically moving instruments of value across borders. Gold was the preeminent form of trade because it was rich in value and untraceable. Large volumes held by state governments have seals and markings denoting point of origin and value but smaller volumes can be exchanged and traded for cash with little concern for discovery. The multiple transactions outlined by Zarrab in his testimony against his banking partner Mehmet Atilla served to mask the sale of Iran's oil by two methods; converting cash into gold eliminated the electronic paper trail created by the SWIFT financial system, thus depriving the US and UN of oversight, and the sheer volume of transfers between multiple Limited Liability Corporations served to mask its true provenance when the funds were finally resurfaced in the legitimate world economy. The funds, once disappeared into a parallel shadow banking system gave Zarrab a legal and economic cover that let him load up oil tankers and ship them anywhere in the world without the taint of Iranian provenance. It was a staggering oversight on the part of the creators of the sanctioning process. The immense profits accrued by Zarrab allowed him to bribe any agency or customs official that might stand in the way.
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Link for Chapter 3 — The December 17 Process