Lawmaker Hints Tehran City's Deal with China is to Circumvent Sanctions

The US treasury has noticed that more money is getting to the regime in Tehran through the Malaysian financial system, Reuters reported Friday, quoting an unnamed source.

The Iranian regime has in recent years made the most of its friendly relations with Malaysia. Large amounts of US-sanctioned Iranian oil sold to China have been branded as Malaysian oil, passed along by middlemen and transferred ship to ship in international waters, according to tanker tracking companies, with little resistance by Malaysian authorities.

Ship-to-ship transfers are Iran’s favorite method of trying to hide its oil shipments, with cargos rebranded as oil from other countries and sold mostly to smaller refineries in China.

In their visit to Malaysia next week, Neil MacBride and Brian Nelson, the US Treasury's general counsel and under-secretary for terrorism and financial intelligence, are expected to convey to Malaysian authorities that helping Iran get around oil sanctions and access funds may result in sanctions for individuals or entities involved in such business.

Iranian officials pride themselves on their ability to circumvent sanctions –with shell companies, layers of intermediaries, and at high cost, involving hefty payments to intermediaries arranging shipments and laundering money.

Last year, the US treasury sanctioned Hossein Hatefi Ardakani for overseeing a “transnational procurement network” spanning the Middle East and East Asia. Ardekani was accused of procuring “servomotors, inertial navigation equipment, and other items” for Iran’s drone program through front companies in Malaysia, Hong Kong and others.

Their endeavor has been markedly helped in the last few years by the Biden administration’s reluctance to antagonize Iran’s rulers. However, that tendency seems to have waned more recently – after October 7th, in particular.

Last December, the US treasury imposed sanctions on four Malaysia-based companies it accused of helping Iran's production of drones. A number of new sanctions have also been introduced to sever the financial flows towards Iran, which US officials say fuels instability in the Middle East.

Critics of the Biden administration say abandoning Donald Trump’s “maximum pressure” policy has not only emboldened the Iranian regime to adopt a clearly more aggressive foreign (and nuclear) policy, but has enabled the Revolutionary Guards (IRGC) to implement those policies with more money in their coffers.

Biden officials have rejected the accusations many times, stating that the administration has sanctioned “over 600 individuals and entities”, including Iran. Hamas, Hezbollah, the Houthis, and Kataib Hezbollah.” Biden says his treasury department will “impose sanctions that further degrade Iran's military industries."

In response, the president's opponents and critics point out that sanctions are effective only when (and if) they are enforced rigorously –and across the board. Iran’s biggest trade partner and main buyer of oil is China. Many experts say it’s hard, if not impossible, for any US administration to sanction China. And without China, no sanction regime would impact the Iranian regime in a meaningful way.

US lawmakers Elizabeth Warren (D-Mass.) and Angus King (I-Maine) urged the Biden administration on Wednesday to disclose its strategy for addressing concerns regarding Iran's Bitcoin mining operations, citing potential national security risks.

In their letter addressed to Defense Secretary Lloyd Austin, Treasury Secretary Janet Yellen, and National Security Advisor Jake Sullivan, senators requested information about Iran's crypto mining operations since 2021, including details on how the Iranian government has benefited.

Warren and King emphasized that crypto mining, which involves verifying crypto transactions and generating new tokens, has become increasingly "lucrative" for Iran, despite numerous international sanctions imposed on the country due to its nuclear program.

The first study to estimate Iran's potential profits from evading sanctions via cryptocurrency was published in 2021. At the time, Reuters reported that Iran's bitcoin production would generate revenues close to $1 billion a year, which was echoed in the letter.

"One estimate indicates that Iranian Bitcoin mining could have produced as much as $1 billion in revenue in 2021," the letter said, pointing to Bitcoin mining reportedly generating more than $186 million for Iranian crypto platforms between 2015 and 2021, with Tehran being one of the top eight Bitcoin-producing countries at the time, the lawmakers said.

The senators stated that crypto miners in Iran are required to sell their products to the Iranian central bank, which, in turn, enables the Iranian government to evade sanctions.

As experts have often said, the Iranian government has a self-inflicted “muddled relationship with crypto-currencies”, which have served to obscure various forms of trade, aiding in evading sanctions, while simultaneously presenting avenues for illicit activities.

In 2022, the state’s Intelligence Ministry claimed they blocked over 9,000 accounts belonging to 454 individuals used for illegal or undeclared exchanges of currency and digital currency. Based on the exchange rate during that period, the relevant trades amounted to 600,000 billion rials or approximately $2 billion.

Reports in Iranian media suggest that large-scale crypto mining has been taking place by influential or well-connected networks, as well as some Chinese companies that are using cheap and subsidized electricity in mining farms they set up in Iran. This could have been permitted only by Iran's intelligence services and the Revolutionary Guard.

The senators' warning about Iran's use of crypto mining coincides with the Treasury Department's request to Congress in April, urging lawmakers to pass new legislation authorizing the department to intervene in terrorist financing and sanctions evasion methods that utilize cryptocurrency. As part of that Senate hearing session, it was also revealed that the Islamic Revolutionary Guards (IRGC) has been using cryptocurrency to fund Hamas and the Islamic Jihad of Palestine.

The letter from Warren and King also mentions the benefit that Iran's proxies are gaining from this low-profile trade.

"The Iranian military has used crypto to fund known terrorist groups like Hezbollah, the organization believed to be partially responsible for the January 2024 drone strike in Jordan that killed three US service members," officials said. "Unless we take action, Iran will continue to use crypto to fund attacks against Israel."

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In their letter, Warren and King asked the officials to "describe the steps the administration is taking to address threats to US national security posed by Iran’s reliance on crypto mining and cryptocurrency more generally to earn revenue and bypass sanctions."

Furthermore, the senators inquire about the Binance fiasco. In 2022, it was reported that the cryptocurrency giant Binance had processed Iranian transactions worth $8 billion since 2018 – despite US sanctions intended to isolate the country from the global financial system.

The founder and former CEO of cryptocurrency exchange Binance was sentenced to four months in prison this week for violating US money laundering law and failing to comply with sanctions against Iran.

The US Department of Justice announced on Wednesday that between December 2018 and December 2019, Muzzamil Zaidi, 40, and Asim Mujtaba Naqvi, 40, collected payments of khums—a religious tax on wealth—and donations purportedly from individuals in the US to help victims of the ongoing civil war in Yemen.

In 2018, Zaidi was granted permission to collect this tax on behalf of several Imams, according to court documents from the Justice Department.

To avoid law enforcement scrutiny, the pair enlisted friends, family, and other associates to transport cash out of the US in amounts less than $10,000.

One dollar transfer to Iran involved a group of 25 travelers going on a religious pilgrimage in Iraq and the subsequent transport of US dollars hand-carried by those travelers to Iran. They were arrested in Houston on Aug. 18, 2020. Zaidi's sentencing is scheduled for Aug. 13, and Naqvi's for Oct. 1.

Due to US economic sanctions imposed on Iran since 1995, money transfers are illegal. The State Department has designated Iran a state sponsor of terrorism every year since 1984. Additionally, on June 24, 2019, former US President Donald Trump imposed additional sanctions on the Supreme Leader of Iran, prohibiting the provision of funds to or for his benefit.

The investigation revealed that Binance allowed more than 1.5 million virtual currency trades worth around $900 million, violating US sanctions. These included transactions involving Iran and designated terror groups such as Iran-backed Hamas, al-Qaeda and Islamic State.

Prosecutors said Binance employed a "Wild West" model that welcomed criminals, and did not report more than 100,000 suspicious transactions.

Families of victims of the Hamas terror attacks of October 7 and the families of hostages taken to Gaza, are suing Binance, along with Iran and Syria, for Binance's role in funding the terror group, among others between 2017 and 2023.

Once considered a leading figure in the cryptocurrency world, Changpeng Zhao's sentencing marks him as the second major cryptocurrency executive to face prison time after Sam Bankman-Fried for his role in the FTX scandal.

Presiding US District Judge Richard Jones in Seattle delivered a sentence that fell significantly below the three years requested by federal prosecutors, and well under the maximum of 1-1/2 years recommended by federal guidelines.

Binance was also found to have facilitated transactions involving the sale of child sexual abuse materials and processed substantial sums from ransomware attacks.

In addition to the prison term, Binance has agreed to a $4.32 billion penalty to settle the charges, while Zhao himself has paid a $50 million criminal fine and another $50 million to the US Commodity Futures Trading Commission.

Zhao stepped down as Binance's chief in November, when he and the exchange he founded in 2017 admitted to evading money-laundering requirements under the Bank Secrecy Act. He is expected to serve his sentence at a detention center near Seattle-Tacoma International Airport.

It took the Islamic Republic of Iran until the early hours of April 13 to respond to Israel’s April 1 air strike that eliminated 7 of its top brass in Damascus. Although the Iranian regime’s supposed “retaliatory” response that thrust over 300 drones and missiles from its soil directly unto Israel was in effect suspenseful affair with underwhelming physical impact, it has been foreboding of immense foreseen and unforeseen consequences. The rapid succession of EU-NATO leadership condemnations in the wake of the Iranian retaliation was the acknowledgement the potential destruction the Iranian strike could have wrought; had it not been successfully offset by a de facto entente of British, American, French, Israeli, Jordanian, and Saudi Arabian air defenses and air forces.

It was upon the comprehension of this reality that came the EU’s April 17, 2024 new sanctions against the drone manufacturing sector of the Iranian regime’s military-industrial complex. Promptly thereafter, Canada, UK, and US followed upon the EU sanctions with coordinated and correspondingly targeted identical suite of sanctions.

However, the question is, first, how these new sanctions figure in the greater scheme of sanctions that have already been set in place by EU, US, and their G7 allies against Iran. And second, whether there exist measures that can tangibly enforce them.

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The Many Different Types of Sanction Regimes

Over the past thirty years, major world powers, particularly US and EU, have increasingly resorted to sanctions as a major “non-military” leverage against “adversaries” or states that are held in violation of international conventions and treaties. The US sanctions are the broadest and oldest anti-Iran sanctions ever devised dating back to the 1979 US embassy hostage crisis. After the US, EU countries have the second largest sanction regime. The EU’s sanction regimes against Iran have never been as consistent as the US ones due the many ups and down in EU-Iran relations. The third regime of sanctions are those of UK and Canada sanctions, along with those of Australia, Japan, and South Korea.

EU-US Standoff and Collaboration over Iran Sanctions

The US boasts the broadest sanction regime in the world that encompasses over 26 countries and ten thematic sanction regimes, from counter narcotic and nuclear non-proliferation to cyber crimes and Global Magnitsky sanctions. Hence, as the EU has often sought to cajole a regime like that of Iran’s, it should come as no surprise that the EU-US have often clashed as to the path forward and disagreed over sanctions over many other aspects of their diplomacy vis-à-vis Iran.

A bone of contention over sanctions between EU and US arose in 2018 when President Trump abruptly left JCPOA, aka, Iran Nuclear Deal, and brought forth the “Maximum Pressure” sanctions upon Iran by 2019. To EU’s chagrin, the entirety of US sanction regime included secondary sanctions that forced many EU enterprises to “wind down” their ties with Iran. EU’s historically “complicated” relations with Iran made it to part ways with the US on this occasion, which caused much tension in the EU-US relations during the Trump presidency. In fact, the EU chief mandarins sought to introduce swift measures to shield EU enterprises from the wrath of US secondary sanctions.

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Nonetheless, the Iranian regime’s mass repression of popular protests in 2018 and 2019 culminated to the statewide crackdown of 2022 Woman, Life, Freedom uprising, and forced the EU to adopt up to ten packages of human rights-based sanctions against various Iranian regime individuals and entities between 2018 and 2023. It was at this juncture that the EU’s resistance in joining the US comprehensive sanctions against Iran began to erode.

As the Tehran regime became a major supplier of drones and missiles to Russia in the Russia-Ukraine war, the EU became host to millions of Ukrainian refugees. Alarmed by Tehran’s increasingly supporting role for Russia’s war effort, the EU introduced the first set of sanctions against the Iranian missile and drone manufacturing in 2023.

It should be highlighted that although the Biden administration maintained the Trump-era sanctions on Iran’s oil exports as it was negotiating a revival of the JCPOA, enforcement became a secondary concern since January 2021. This allowed Iran to more than double its oil exports to China by 2023 and weaken the sanctions regime.

With the escalation of the conflict in the Middle East post-October-7, the Iranian government continued to supply both its proxies in the region and Russia further afield with projectiles of various kinds becoming a brazen global arms supplier undeterred by any measure of sanctions. The EU looked on warily and Josep Borrell, EU foreign policy chief, struggled to avoid slapping sanctions upon it but to no avail. The last episode that consolidated EU-US collaboration on coordinated sanctions against the Iranian drone and ballistic manufacturing was the Iran-Israel conflict of 7-13 April 2024.

Sanctions: Enforcement and Effectiveness

Whether or not the US and EU would exert the will to enforce the sanctions remains the sticking question. In the last package of sanctions, including the Mahsa Act, passed by the Congress and signed by President Biden, there indeed exist many a set of measures to stop the Iranian petroleum exports, which constitute a major source of revenue for the Tehran and its military-industrial complex.

However, many experts have cast doubt unto whether Biden administration would be willing enforce them in this election year. Evidently, administration fears such a rigid enforcement may cause the price of oil to skyrocket globally and may thus refrain from the enforcement of such sanctions. Whereas Biden administration is loath to enforce the oil sanctions on Iran, the US Treasury is seeking new authorizations to counter the Iranian regime’s abuse of bitcoin and the dark web to circumvent sanctions.

Such contradictions have been Biden’s foreign have not gone unnoticed and the mullahs in Tehran have certainly tried to take advantage of it. Over the past several years, both Iran and Russia have shown much dexterity in circumventing sanctions, from dark web and bitcoin to shadow commercial fleets and overland routes. Prescient studies reveal that Iran’s shadow fleet of tankers ship oil to Malaysia which gets rebranded as Malaysian oil and then exported in China. Absence of appropriate sanction enforcement measures have similarly enabled Iran to smuggle arms to the Hezbollah of Lebanon using EU ports.

Enforcing so many sanctions targeting so many countries is no small feat. It requires much investment in digital and physical infrastructure as well as human resources. Neither the US nor the EU appear to be fully equipped with the requisite tools and human resources to enforce their ever-expanding sanction regimes; especially, vis-à-vis Iran. Since February 2024, the Biden administration is yet to appoint a permanent official to oversee the enforcement of the ballooning sanctions against Iran at the US Treasury. As to the EU, the problem of sanction enforcement has been even more complicated. Still, not until after several consultation rounds between the EU Council and the EU Parliament did the latter finally manage to pass rules that crack down on member state’s failure to enforce EU sanctions on March 12 of this year, whilst the broadest set of EU wide sanction against Russia dates back to February 2022!

Today, sanctions have become a permanent fixture in the global foreign policy and international trade establishment. A growing literature is focusing on sanctions and their effectiveness. Amongst the many works that have been published on the topic, there exist ostensibly academic volumes such as How Sanctions Work: Iran and the Impact of Economic Warfare(Bajoghli, Nasr, et al, Stanford University Press, 2024). Such “studies” illustriously correspond in authorship and stance to those of “Iran Influence Network”, and it is thus no wonder that authors of such works are increasingly forced to tread a fine line between lobbying and consultancy. Other stakeholders concerned with the growing sanction regimes are globally active enterprises who have built comprehensive databases that catalogue “risky individuals and entities” to help them in compliance with the global sanction regimes. Such works may be a good starting point to verify governments’ commitment to sanction enforcement.

In the end, if the EU and US fail to substantially implement the many sanction regimes that they have created over the past several years, they may lose much in prestige in credibility in the eyes of the world community where Russia and China have been jockeying to replace them as global powers. The last curtain in this segment is yet to draw.