Financial Times-How Iranians are avoiding sanctions

When Shahrom, a Tehran developer, wants to transfer thousands of dollars to his property investment business in Dubai, or to associates in the US, he does not go to the bank. Instead, like thousands of other Iranian business people, he turns to his trusted money changer.

“I usually transfer money into my own account in Dubai but my money exchange dealer tells me not to transfer more than $100,000 (£50,350, €63,125) at a time because it might look suspicious,” he says in his office in central Tehran, the walls adorned with photos of apartment towers his company has built. With sanctions in place against Iran, he and other dealers and businessmen who spoke to the Financial Times for this article asked that their surnames not be used.

“So I usually transfer money in batches of $40,000 or $50,000. But if I’m transferring money to or from the US, I send it through Turkey. I don’t want to make them suspicious either,” Shah­rom adds.

Hawala, a cheap and remarkably reliable system for money transfer, dates back to the eighth century but in recent decades has become the favoured method employed by migrant workers from south Asia and the Middle East to send earnings back home. The system has been used by business too – and since the US and the United Nations started curtailing Iran’s access to the international financial system following the regime’s refusal to stop enriching uranium, the use of hawala in Iran has rocketed, according to business people, money changers and analysts.

After almost three decades under various US sanctions, Iranians have proven adept at skirting the restrictions. Although the latest US crackdown on Iran’s financial sector and the sanctions imposed by the UN are hurting, Iranian businessmen have found a way to work around them.

Much of the traded goods that were being sent from countries in Europe and Asia – and even from the US – have been re-routed through Dubai, making it impossible to tell which are destined for the United Arab Emirates rather than for Iran. The use of hawala is a further way to circumvent western curbs. The apparent sharp increase in the use of informal money transfer systems is ringing alarm bells in Washington, which has been trying to scrutinise Iranian transactions.

Most of the time, hawala is used for legitimate transfers, but its anonymity and the lack of a full paper trail means it has attractions for more dubious dealings too. After the September 11 attacks on the US in 2001, Washington officials worried that al-Qaeda had used hawala as a conduit to provide finance for its mission. Although these suspicions were later discounted, hawala is unregulated and very difficult to police.

This is how it works. Mr A, an importer of Chinese shoes, goes to a money exchanger in Tehran and says he wants to send $10,000 to his supplier. The broker calls his counterpart in Beijing, who goes to the supplier’s bank and deposits the money. The Beijing counterpart carries a $10,000 debt against the broker in Tehran. When an Iranian in China wants to send $5,000 to his family in Iran, he goes through the hawala process in reverse. Over time, the debts of the brokers in Tehran and Beijing cancel each other out.

As the system is founded on honour, brokers – just like banks – know they will go out of business if they renege on a deal. And it is very fast – with average transfer times of 48 hours, it is much quicker than an international bank transfer or Western Union, thanks to the absence of bureaucracy. Hawala can often also be much cheaper than traditional methods.

Iranian hawala dealers charge a fee – typically 1-1.5 per cent of the total or sometimes a flat $50 – or use exchange rate spreads to generate their income. In a variation on this process, the money changer in Tehran uses a counterpart in Dubai, who deposits the money into an emirate bank account and then wires the money through the international banking system.

In that way, imported consumer goods enter Iran. “With the US trying to impose ever more vigorous financial sanctions on the other, how on earth else could the bazaar continue to operate without recourse to hawala?” asks Roger Ballard, a hawala expert at Manchester University. Saeed, who sells pots and pans imported from China in Tehran’s bustling bazaar, confirms this suggestion. “If we wanted to send money through the banking system it would cost a small fortune, so we give the money to dealers and they send the money through Dubai to China,” he says.

“These people are family, friends, people we trust. This is our secret way. If you talk about it, maybe they will try to put sanctions on this too,” Saeed says, before abruptly closing his mouth.

The liquidity for hawala transfers is provided by the huge flows of remittances sent from workers in first-world countries to their families in the Middle East and south Asia. Mr Ballard estimates that annual flows of such remittances total $100bn. “This is all about the globalisation of the world economy,” he says.

In dusty Ferdowsi Square in central Tehran, competition for business among the numerous money changers is rife. Almost all use the most informal version of hawala – sending counterparts in other countries to deposit money on their customers’ behalf and running debts for each other. In one exchange shop, where the facilities comprise a money counting machine and a teapot, Reza, behind the counter, explains the procedure.

“Just give me the name and account number of the person you want to send it to,” he says. “It will take less than 48 hours, maybe even less than 24 hours. London is the easiest place to send to because my guy there has lots of pounds,” he adds, laughing.

When asked if the money is guaranteed to arrive, Reza places his hand on his heart and says “100 per cent”. He then pulls out a stack of papers to prove his previous transactions – they show transfers of $30,000 to a Bank of China account in Beijing and $20,000 to a customer of Bank of America in New York.

Next door at Soleymani Exchange, there is a 1 per cent charge for transfers of less than $10,000 and 0.5 per cent for amounts above that. “US dollars, Canadian dollars, no problem,” the man behind the counter says.

Asked about the legitimacy of such payments, he points to the certificate on the wall: “We’ve got permission from the central bank to do this. We guarantee that your money will be transferred securely.” On the US sanctions, all the hawala agents who spoke to the FT had the same answer: “No problem.” They point out the benefits – the speed of transfer and the absence of currency controls.

The set-up is only a little different across town in the shop of Naveed, the money exchanger who carries out transfers for Shahrom, the property developer. “We can transfer anywhere you want,” says Naveed, dressed in a three-piece suit and cufflinks behind the counter of his crowded premises. The door constantly opens and closes as women come in to transfer money to their children at university in the US and men seek to pay for goods imported through Dubai.

Naveed’s exchange office conducts between five and 100 international transfers a day, charging a 1.5 per cent fee. About half of his business goes through Dubai. “We can transfer from Iran to any bank in Europe,” Naveed says, producing documentation showing the €20,000 ($31,700, £15,960) he has just sent to BNP Paribas in Paris and €14,000 that went to Deutsche Bank.

“Because of the US sanctions, our business with Europe has gone up a lot. Before, the dollar was the currency we used most often but now about 70 per cent of our business is done in euros,” Naveed says. Still, Naveed offers to send dollars to US banks – through Dubai. “With US dollars there are some problems. But we are standing up to the US and we will continue to do so in the future too,” he says.

Both Naveed and Shahrom say the Dubai banks do not ask questions about the identity of the transferrers or the source of the cash. “They don’t know and they don’t want to know,” Shahrom says. “They just work with the system.”

As the US tries to increase pressure on Iran and force the government of President Mahmoud Ahmadi-Nejad to curtail its nuclear programme – which Tehran insists is only for civilian purposes – Washington is paying increasing attention to informal financial transfers such as these. “Only in the last couple of years have countries, including the US, started to take the issue of regulating hawala seriously,” says Victor Comras, a Washington-based expert on terrorism financing and money laundering. “The system operates on its own dynamic and there are a lot of part-time brokers because it’s so easy to get into. It’s a real ‘catch as catch can’ business.”

There are more than 40,000 hawala dealers registered with the US authorities, required to keep records and subject to the same kind of “know your customer” rules as banks. The authorities have also been tracking down and fining unregistered dealers. This is important for America’s international credibility, says Mr Comras, who served as a special terrorist financing monitor for the UN until 2004.

“At the same time as we are putting pressure on the international community to abide by the UN sanctions and as we use our leverage in the international banking system to get people to recognise the risks that they run if they do business with Iran”, he says, “we have to make sure that our own house is in order.”

Daniel Glaser, deputy assistant secretary for terrorist financing at the US Treasury, says the fact that the hawala business is booming is proof of the effectiveness of the sanctions. “In our view, this confirms the disruptive effect of the sanctions,” Mr Glaser argues. “They are making it more difficult for [the Iranians] to finance their regime and their nuclear programme.”

But he dismisses the suggestion that Washington’s targets might simply be able to move from a regulated, visible system to a murky one. “There is any number of ways for targets of sanctions to try to evade the sanctions,” Mr Glaser says. “If what our sanctions and the international sanctions have done is to push organisations like the Quds force [an Iranian unit that backs Islamic revolutionary movements abroad] out of the international financial system and into costlier, riskier and less efficient systems, then that is a good thing.”

American officials are understood to be concerned, however, that banks in Dubai are turning a blind eye to Iranian transactions. Under pressure from the US, banks in the UAE have been tightening restrictions on Iranian businesses, fearful that companies are being set up to circumvent sanctions, and have also curtailed credit to Iran. Iranian officials suggest that more than half of the banks in Dubai no longer give credit to Tehran-based businesses.

Dubai should do more, US officials say. “I don’t think they are doing as much as they should be doing,” says one, speaking on condition of anonymity and acknowledging: “It’s a big balancing act for [the Dubai authorities] – this is their next-door neighbour, so they don’t want to stick their neck out very far.”

If the US is serious about tracking down the sources of Iranian money that ends up on its shores, it should start by looking no further than New York, says Mr Ballard of Manchester University. “It’s all a complete hall of mirrors, because hawala is supposed to be a system without records,” he says. “The best source of data on this is going to be on Wall Street – if money is being sent to Bank of America, where are the records going to be?”

The trouble is, the simplicity of hawala helps ensure that while any paper trail may begin or end somewhere in the Gulf, it will rarely if ever specify that the origin of the funds is Iranian.