FinCEN has issued an advisory for Iran that specifically is targeted for digital currency exchanges, banks and foreign banks so that the latter can understand their obligations under the correspondent banking system. The advisory is interesting because it is one of first instances of an attempt to provide guidance to foreign banks in respect of the reach of US financial crime law arising from the correspondent banking system. Often foreign banks, and in particular, digital currency exchanges, are not aware of the correspondent banking system and how US AML / CTF / sanctions law is applicable to them.
The practice in Iran is to move money out to Dubai and from there, banks and money services businesses sanctions-strip the money and move it to the US, Germany, UK or Canada. Sanctions-stripping is a way of providing originating information for banks that strips the origin of the money from being associated with Iran, an Iranian foreign national, or a person who holds an Iranian passport.
The FinCEN Advisory directs US correspondents to go back to foreign banks they provide services to (including Canadian banks) and seek additional information to ascertain that they are not being used for sanctions avoidance from Iran. In other words, to determine if sanctions-stripping of data occurred.
Here is a common example in Canada – an Iranian foreign national, almost always an undisclosed politically exposed person (“PEP“) immigrating to Canada opens a bank account in Dubai and wires money to that bank. The bank then wires it to a bank located in Quebec as part of a paid investor immigration program and strips out the originating information that the funds originated from Iran or an Iranian foreign national. The Dubai bank and the bank in Quebec know the funds involve an Iranian foreign national (the latter because they administer investor immigration funds) but that information is stripped. The money moves through a US correspondent bank in New York as originating from Dubai. The US correspondent bank is unaware that it handled Iranian funds from a PEP that may be subject to US sanctions. The US correspondent bank is then exposed to potential criminal liability in the US for unknowingly dealing in funds from Iran. Often, a money services business in Dubai acts as the facilitator whereby they are the party wiring funds to Canada secretly for an Iranian foreign national.
According to the Advisory, officials tied to the Central Bank of Iran, in particular, are being deployed to move money internationally to finance terrorism through Dubai and other cities in the United Arab Emirates. The Advisory provides examples including of an Iranian airline that moved money to Canada through Germany to finance terrorism. All Iranian foreign nationals use third parties and third party countries to move money – they have to because it is near impossible to export money in any form from Iran directly to another foreign financial institution except to Dubai and a handful of other countries whose banks deal with Iranian funds.
Enter Bitcoin – Bitcoin and other digital currencies allow for the movement of funds from Iran to anywhere in the world because they are decentralized and are outside of the formal financial system. The Advisory estimates that at least $3.8 million is exiting Iran through Bitcoin annually using digital currency exchanges.
And that brings us to so-called sovereign initial coin offerings (“SOV“); they are ICOs issued by a government. A SOV is a new digital currency issued off an existing or a new Blockchain by a government agency. Venezuela is an example of a country that issued a SOV called the Petro coin for sanctions avoidance on the NEM Blockchain, that can be bought with NEM coins. Here, you can read how millions of dollars of stolen NEM coin were allegedly traced and traded at a Vancouver digital currency exchange. That means that the Petro coin from Venezuela apparently issued for US sanctions avoidance, can be bought with NEM at a Vancouver digital currency exchange without visibility because that exchange trades NEM. If you can buy the Petro coin in Vancouver with NEM for sanctions avoidance, you will likely be able to buy an Iranian SOV.
The Advisory suggests that banks and foreign digital currency exchanges monitor IP addresses and engage in Blockchain tracing to ascertain the origin of digital currency trades from Iran, although the latter is harder to do than the Advisory suggests. No Blockchain identifies the origination of a transaction – only IP tracing can do that and with Iran’s heavy use of VPNs countrywide, such tracing is difficult.
You can, however, trace to Iranian wallets and that is where the focus should be on, in addition to utilizing competent AML, CTF and sanctions compliance methods. And in addition, banks and digital currency exchanges should know the typologies in respect of Iran — for example, the trades of digital currencies involving Iran in Canada typically take place involving former Iranians in Canada with a Canadian passport. The movement of money to and from Iran is closely transacted among persons of Iranian origin and specifically those with a Canadian passport (meaning those with undisclosed dual passports – one they use to travel from Dubai to Canada which they then switch out and hide and the second one they use to travel from Tehran to Dubai, and vice versa).
Iranian foreign nationals can only move money to Canada if they use banks, which means a US correspondent bank is being used unwittingly and unknowingly, or if they use digital currencies. They can use cash but it is bulky and they use credit card credits (e.g., pre-paying a Visa card so that the money can be spent in another country by another person. Leaving a large credit balance on an American Express or Visa credit card is a red flag for money laundering and sanctions avoidance).