The Iran Wars

by Jay Solomon

  By the end of 2011, as Tehran’s nuclear program expanded, Treasury was tracking more than $10 billion in Iranian oil sales going through Noor Islamic Bank each month, a sum that accounted for as much as 70 percent of its global oil sales. U.S. financial intelligence was perhaps Washington’s most precise form of information on Iran at this point, as large U.S.-dollar trades had to be registered at the Federal Reserve.

  The United States’ focus on Noor Islamic Bank set off a heated internal debate between the UAE’s two major royal families, according to U.S. and Emirati officials. The al-Nahyan family of Abu Dhabi—the political capital of the UAE—took one of the hardest lines against Tehran in the Persian Gulf and viewed Iran’s nuclear program as an existential threat. They also knew that some Iranian maps showed the territory of the UAE as being just another province of the Persian Empire. The al-Nahyans were prepared to go to almost any length to contain Iran’s weapons program and to push back Tehran’s territorial aspirations.

  The al-Maktoum family in Dubai, however, was in a bind. They were heavily reliant on the Iran trade. But their ability to resist pressure from the Abu Dhabi royals had been weakened when the al-Nahyan family bailed out Dubai to the tune of tens of billions of dollars as its real estate bubble burst and its credit rating sank in 2007 and 2008.

  U.S. Treasury officials flew to Dubai in late 2011 to say that the Obama administration was prepared to sanction Noor Islamic Bank, which would send out a warning sign about the UAE’s entire financial system. Heated exchanges occurred between U.S. and Emirati officials, who worried that the UAE’s entire economic recovery could be placed at risk. The Treasury was unmoved. “ ‘Don’t test us’ was our message,” said one Treasury official who took part in the meetings.

  In early January 2012, Noor Islamic Bank formally notified the Treasury that it had cut off all of its Iran trade to avoid facing U.S. sanctions. The fallout was dramatic. The value of the Iranian currency, the rial, plunged by more than 30 percent against the dollar in just a few days. Tehran was virtually unable to conduct any dollar-related transactions, which were required for oil sales. Billions of dollars of Iranian oil revenues were detected sitting in offshore bank accounts, unable to be repatriated. Banks throughout the world were spooked about any ties to Tehran.

  U.S. officials saw the collapse of the Iranian currency as a clear sign that Tehran’s financial system was cracking. The key, the Americans learned, was to find and then block the key nodes in Iran’s international financial network. These were banks or firms that were doing a disproportionately large amount of trading with Iran. Once those firms realized they could lose access to the U.S. financial system by doing business with Iran, they would cut it off.

  Stuart Levey stepped down from the Treasury Department in 2011 and took a lucrative job as legal counsel at Hongkong Shanghai Banking Corp. (HSBC) in London. His first order of business was to help the bank wrestle with its own ties to illicit business, in particular drug money. HSBC would eventually pay the U.S. government $9 billion in fines for helping Mexico’s Sinaloa drug cartel move money into American banks.

  But Levey’s successors at Treasury and TFI, first David Cohen and then Adam Szubin, continued relentlessly tracking Iran’s oil money, including the operation in the UAE. They knew Iran was growing more and more isolated financially. “As their financial options get narrower and narrower, you do see heavy reliance on key, third-country intermediaries,” Szubin told me about the UAE operation. “To the extent we could detect them and knock them out, the impact became bigger and bigger. We had some difficult conversations with foreign jurisdictions.”

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  THE FINANCIAL WAR ON Iran was playing out in the United States as well as overseas. Local governments were divesting their money from companies or organizations doing business in Iran. And public prosecutors and lawyers based in Washington and New York were joining with the Treasury and the State Department to attack Iran’s finances.

  Perhaps no American law enforcement official took a more aggressive line than Robert Morgenthau, who served as Manhattan’s district attorney for thirty-five years until his retirement in 2009 at age ninety. Morgenthau saw it as his duty to use the New York financial system and its outsized influence on the global economy to police the world’s banks and punish Washington’s adversaries. Iran became an obsession during his final years in office.

  Morgenthau built on the work of his father, Henry Morgenthau Jr., who had served as secretary of the Treasury under President Franklin Delano Roosevelt. The elder Morgenthau established the Office of Foreign Assets Control, the Treasury unit that pioneered the use of sanctions to punish America’s adversaries and was a precursor to Stuart Levey’s work fifty years later. In his early years as Manhattan district attorney, Robert Morgenthau led investigations into New York banks that cycled Latin American drug money through the U.S. financial system and into funds controlled by the Mafia.

  The Morgenthaus, a German family that had emigrated from Bavaria in the 1800s, were passionately committed to protecting world Jewry and the state of Israel. Henry Morgenthau was the top figure inside the Roosevelt administration calling for an aggressive American effort to save Jews in Germany, Poland, Italy, and Hungary from Hitler’s war machine and to provide them with a safe haven in the United States. Morgenthau’s efforts resulted in the creation in 1944 of the War Refugee Board, the top American agency seeking to safeguard Europe’s Jews, though the family still bemoaned the fact that there were so many who could not be saved from the Holocaust. Henry Morgenthau also used his leadership of the Treasury to push President Roosevelt to reclaim billions of dollars in assets that had been looted by the Nazis from Europe’s Jews during World War II, with much of the money salted away in leading Swiss and Austrian banks.

  Robert Morgenthau, a World War II naval veteran, saw the threat posed by Iran and its nuclear program to the United States and the state of Israel as comparable in many ways to the Nazi threat. The native New Yorker believed that Tehran’s nuclear work was designed to create an atomic weapon that could hold Israel hostage and would allow Iran’s Middle East allies, including Syria, Hezbollah, and Hamas, to intensify conventional attacks on the Jewish state under the protection of an Iranian nuclear umbrella. In such a scenario, Morgenthau believed, the Pentagon and the United States would be able to offer only minimal support to its closest Mideast ally, as the likelihood of the United States engaging militarily would be slim. And here there was another analogy to World War II: the United States would be bystanders as Jews were targeted for extermination overseas.

  Morgenthau was aware that bankers in Zurich, Vienna, Paris, and London were reprising their role as the financial underwriters for the Jewish people’s enemies through their continued business with Iran. And he believed that New York’s banking system could be used as a tool to hit back.

  “If there is a buck to be made with the Iranians, I firmly believe they can always find a banker willing to take on the risk of doing business with them,” Morgenthau told me in an interview in 2012. The walls of his office in midtown Manhattan were covered with photos of Israeli leaders ranging from Yitzhak Rabin to Ariel Sharon. In other pictures, Morgenthau appeared alongside John and Robert Kennedy during JFK’s White House years. Photographs of U.S. naval destroyers were on display as well; when a Nazi torpedo hit his ship, the USS Lansdale, off the coast of Algiers in 1944, Morgenthau survived by treading water for four hours. “Our job is to stop the Iranians, and those who are abetting them,” Morgenthau told me. “It’s our duty.”

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  IN 2005, ONE OF Morgenthau’s top aides at the DA’s office was a former Israeli military officer named Eitan Arusy. The thirty-two-year-old once served as a spokesman for the Israeli Defense Forces. But while in the military he also developed an expertise in tracking the finances of the Jewish state’s enemies, including Hezbollah, Hamas, and their chief benefactor, Iran.

  At the time, Morgenthau was ramping up a staff of counterterrorism experts t
o meet the post-9/11 threat. To support this, he developed a close working relationship with Israeli intelligence and law enforcement. Morgenthau brought Arusy—known for having an encyclopedic knowledge of terrorist groups and the ways they moved money—to New York to fortify his bond with the Israelis and to educate the New Yorkers about terrorist financing.

  Arusy hit the ground running upon his arrival in the spring of 2005. He was surprised to learn that a foundation established by the shah in 1972 to promote Persian culture and heritage to Americans had survived the Iranian revolution and was still operating out of New York (although it had changed its name, first from the Pahlavi Foundation to the Mostazafan Foundation, and then to the Alavi Foundation in 1992). From the huge oil revenues Tehran had earned during the energy boom of the 1970s, Pahlavi had constructed a high-rise office tower on Fifth Avenue in midtown Manhattan to serve both as the foundation’s headquarters and as a source of rent revenue. It also purchased offices in Queens and built mosques in Virginia, California, and Nevada. All of this construction was initially financed by Bank Melli, one of Iran’s largest state banks. Tehran’s ambassadors to the United Nations, who had offices only blocks away from the foundation’s headquarters, had historically overseen the foundation’s operations, which largely consisted of providing grants to American universities, religious foundations, and nongovernmental organizations. And though the Carter administration had frozen billions of dollars of the Iranian state’s holdings and suspended lucrative arms deals following the revolution, U.S. financial regulators had somehow failed to detect the foundation during the sweep of Iranian assets that followed the severing of diplomatic relations between the United States and Iran in 1980.

  Now Arusy and New York law enforcement agencies closely scrutinized Alavi’s finances and the Iranian diplomats who oversaw the foundation. Because of the sanctions, no Iranian money at all was supposed to be in the U.S. financial system. They paid particular attention to Iran’s ambassadors to the United Nations, including Javad Zarif, who had cooperated with the United States on Afghanistan, and his successor, Mohammad Khazaee, who moved to New York in 2007. Morgenthau’s office learned that the diplomats regularly attended the foundation’s meetings and that Khazaee was keeping a close watch on Alavi’s donations and its overall finances, according to transcripts obtained by Arusy and U.S. law enforcement officials. “I have to be kept informed, and I have to be able to state my opinion in order for you to make a decision,” Khazaee told Alavi’s board during an October 2007 meeting at his residence on the Upper East Side. “We [in Iran] have to be kept informed regarding the general on-goings and allocations because we will be held responsible.” The upshot was that the leadership of the Iranian regime was running the foundation.

  Digging into the foundation’s finances, Arusy discovered that in the 1980s Iran had constructed a complex financial system both to continue to fund the Alavi Foundation with donations directly from Tehran and to mask the involvement of Iranian banks that were banned from the U.S. market. Tehran had established a front company, Assa Corp., in one of Europe’s most renowned tax havens, the Channel Islands, to finance Alavi. Banking records revealed that Bank Melli was the primary stakeholder in the Assa Corp. and thus controlled the Alavi Foundation—a clear violation of U.S. sanctions law. (Melli itself had been blacklisted since 2007 for its role in financing Iran’s nuclear and missile programs.) And because Iran also was banned from doing any charitable work in the United States, the foundation’s charitable activities were violations as well.

  Arusy uncovered additional information by developing confidential sources knowledgeable about Alavi’s operations, and he eventually gained access to some of the foundation’s emails. This information served as the cornerstone of a broader campaign Morgenthau planned to launch against European banks. Financial records obtained by Morgenthau’s office showed that two major European financial institutions, Lloyds Banking Group PLC of London and Switzerland’s Credit Suisse Group AG, illegally served as the primary conduit for Bank Melli to move money in and out of New York for the Alavi Foundation. Lloyds and Credit Suisse systematically hid these transactions by removing the Iranian originating codes on the wire transfers made through SWIFT, the international electronic payment system. The banks’ strategy, which is called “stripping” and is illegal inside the United States, made it virtually impossible for American financial regulators at the Treasury or in New York to detect that Iran was the original source of the money going into New York or the destination for funds leaving it. All this meant that the European banks were complicit in a massive scheme to evade sanctions.

  Lloyds and Credit Suisse had established special units in their European offices to oversee the transactions coming in from Tehran, but without any mention of the Iranian ties. The processing steps were laid out in an internal document of Lloyds’s, called the “Payment Services Aid Memoir,” that advised its staff on how to remove any Iranian reference codes when wiring funds through the U.S. financial system. The practice made it appear that all transactions were originating from Lloyds’s offices in the United Kingdom. “A member of Lloyds…would physically mark up the printed payment instruction to show what information should be changed, including crossing out any reference to Iranian banks or other sanctioned entities,” Morgenthau’s office wrote in a court filing describing the British bank’s strategy.

  Early in 2009, Morgenthau’s office moved against the Alavi Foundation, charging it with being a front for the Iranian government. FBI agents raided and seized its offices in Manhattan and Queens and froze religious and cultural centers across the United States funded by the foundation. These included the Imam Ali Mosque in Queens, the Islamic Education Center of Houston, and the Islamic Education Center in Rockville, Maryland. In response to a complaint by a number of Islamic religious leaders that Morgenthau’s action against the Alavi Foundation was part of the U.S. government’s efforts to persecute Muslims following 9/11, the district attorney said he was simply safeguarding the U.S. financial system and preventing Iran from illegally earning revenues from U.S. businesses, although Morgenthau’s office also feared the Iranian government was using Alavi’s network to conduct intelligence operations and spread propaganda on behalf of the Tehran regime.

  As part of the crackdown, FBI agents tailed the head of the Alavi Foundation, Farshid Jahedi, as he walked the streets of New York in December 2008. Jahedi was among a coterie of Iranian government officials who maintained U.S. citizenship, thus presenting a test to U.S. intelligence services. One afternoon Jahedi tried to get rid of evidence by dumping the contents of his briefcase into a trash can, according to the FBI. As agents rummaged through the detritus, they found additional records directly tying the Alavi Foundation to Bank Melli and the U.K.-based front companies in the Channel Islands. The FBI later charged Jahedi with obstructing justice, for which he pleaded guilty and went to jail.

  Lloyds and Credit Suisse agreed to pay fines of $350 million and $536 million, respectively, for helping Iran (as well as Sudan) evade U.S. sanctions. But Morgenthau’s office learned that these banks were just part of a much broader effort by Europe’s banks to help Tehran commit financial fraud in New York. From 2009 to 2012, five other large European banks also admitted to sanctions-busting in plea agreements made with the Manhattan district attorney’s office and other American financial regulators. These included the Netherlands’ ING Bank, HSBC Holdings PLC of London, France’s BNP Paribas, and the United Kingdom’s Standard Chartered PLC and Barclays PLC. In all, these banks paid more than $4.4 billion in fines. “I don’t think anyone realized that the Iranians could be this active in New York, essentially right in front of our eyes,” Arusy told me.

  The case underscored the fact that many European companies and governments, which were tacitly allowing this trade, were far more concerned about maintaining their business ties to Iran than with confronting the threat posed by Iran’s nuclear program. Like Stuart Levey before him, Morgenthau believed that countries w
ould comply in pressuring Iran only if their own finances were placed at risk. The fines in New York spurred a rapid push by Europe’s biggest banks in the early 2010s to sever all their financial ties with Iran.

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  ROBERT MORGENTHAU WASN’T THE only U.S. lawyer seeking to punish Iran. Even some attorneys in the private sector were joining his crusade. And while corporate and family lawyers aren’t always the U.S. government’s natural allies—their pursuit of profits and compensation can actually place them in direct conflict with the government—Tehran’s long history of supporting international terrorism, particularly against Americans, provided a convergence of interest between the U.S. government and private sector attorneys, particularly under the George W. Bush administration. It was like a one-two punch: the Treasury Department targeted bankers with sanctions for doing business with Iran, and American lawyers then enforced those sanctions in court. The message was clear: Cross the Treasury and you’ll pay.

  Lawyer Steven Perles was at the forefront of the campaign. A onetime congressional aide to Alaska senator Ted Stevens, who was the acting Senate minority leader in 1979, Perles had staffed a special Senate committee set up in that year to monitor the Iran hostage crisis. Perles, a transplanted Alaskan, was impacted by his experience facing Tehran’s revolutionaries and morphed into a modern-day Simon Wiesenthal, dedicated to hunting down the assets of Iran and its allies. Perles worked on international trade issues while on Capitol Hill before shifting into private practice in the 1980s. Thrust into prominence by his investigative work, he regularly lectured at prominent law schools, from Harvard University to the Sophia International University School of Business in Tokyo. He was also active in Jewish affairs, receiving awards from the American Jewish Congress and the Rabbinical Alliance of America. But Perles’s true calling emerged in the 1990s as Hezbollah and Hamas, with Iran’s purported blessing, launched a campaign of suicide bombings against the state of Israel.