With the United States reinforcing stringent sanctions against Iran during the presidency of Donald Trump, many expected the economy of the embattled country – one long tied with state-sponsored terrorism – to completely collapse. The Biden Administration ultimately rescinded certain aspects of this sanctions program earlier this year to ease economic pressure on various sectors of Iranian business in hopes of resurrecting negotiations over the country’s nuclear programs. However, the Middle Eastern country had somewhat surprisingly managed to stay afloat financially in the meantime, stirring speculation as to why the measures taken by the U.S. against Iran over the past half-decade ultimately failed to have a lasting impact.

               In 2015, the Obama administration struck a deal with Iran that many believe only served to legitimize and placate a nation widely accepted as a major hub for illicit financial activity tied to terrorism. The agreement, coined the Joint Comprehensive Plan of Action (JCPOA) or more simply the Iran Nuclear Deal,centered on reducing the ability of Iran to produce plutonium and uranium, two key components to the creation of nuclear weapons. In exchange for their commitment in this regard, the U.S. and its international counterparts in the deal (a group that included the UK, Russia, France, China and Germany) would reduce or completely withdraw crippling economic sanctions that had been placed on the Republic in years past, measures that had long stifled Iran’s overall growth and development. While the move was considered the signature foreign policy initiative of the Obama presidency, it had virtually no impact on halting Iran’s nuclear development programs, and simply relied on the word of a government that has demonstrated nothing but contempt for the United States for decades, while also creating a significant influx of cash for the country at the time.

               In 2018, the Trump administration pulled out of the lopsided deal citing its inherent flaws and the fact that Iran failed to make any tangible changes with respect to limiting their nuclear efforts, nor improving diplomacy with the U.S. since the agreement was signed. The decision also brought force the prohibition of international financial institutions (FI’s) from managing the accounts and funds of Iranian companies or risk hefty penalties that include multi-million dollar fines and sanctions in their own right. At the time, Joe Biden called the administration’s decision a “profound mistake”, though upon taking over the reigns as President, the current leader ultimately kept in place many of the sanctions initiated by the Trump administration heading into 2022. Economic sanctions have become the method of choice to respond to unique geopolitical challenges and are often highly effective in cutting off international trade options and limiting valuable resources available to individual entities as well as entire countries that are targeted. So why did the U.S. efforts against Iran fall short? A recent report from the Wall Street Journal has shed light on how exactly Tehran was able to work around said measures to continue business as usual.

               There are several international banking services that are currently providing services to Iran’s sanctioned energy and industrial sectors – major sources of business for the Republic – that have provided Iran with large streams of revenue in spite of the United States best efforts to limit these financial flows. The alleged parties that have continued provided banking services to these sanctioned sectors include Chinese, Middle Eastern and even several unnamed Western banks. Using back channels of proxy companies and foreign exchange intermediaries, Iran holds many accounts that collectively amount to billions upon billions of dollars worth of U.S.-banned trade. WSJ reporter Ian Talley details the practice, noting that:

“Iranian-controlled foreign exchange houses outside the country set up proxy companies and bank accounts for them. Through those companies and their bank accounts, sanctioned Iranian companies sell their oil and other goods to foreign purchasers, receiving dollars, euros and other foreign currencies. Iranian importers then use those funds to pay for goods the country needs to keep the economy afloat. An electronic clearinghouse run by Iran’s central bank settles those currency trades between Iranian exporters and importers.” (wsj)

               Though U.S. intelligence officials continue to gather concrete evidence to support claims that the unnamed banks in question are complicit with permitting Iranian transactions, it is safe to say that many FI’s are failing to perform proper due diligence with respect to clearing potentially suspicious activity, or worse are purposefully looking the other way given the influx of business. Nevertheless, western intelligence officials say there is evidence of tens of billions of dollars of similar transactions secretly conducted throughout the global financial system (WSJ). All told, the ease with which Iran has been able to work around the sanctions has cast doubt on the true effectiveness of sanctions initiatives as a whole (including those currently enacted against Russia over the military conflict with Ukraine). Either way, the current administration is seeking to identify firms and institutions that are providing means of circumventing sanctions and levy the appropriate penalties for their respective wrongdoing. This has not been easy however. With the sanctions-evasion infrastructure of targeted countries with significant financial means and a large global reach become all the more sophisticated, following through on sanctions appears likely to be an uphill battle for years to come. In fact, it could be argued that sanctions may be doing more damage to Western economies than they are to that of Iran and Russia.

Citations

1. Talley, Ian. “WSJ News Exclusive | How Iran Tapped International Banks to Keep Its Economy Afloat.” The Wall Street Journal, Dow Jones & Company, 22 June 2022.