Iran's nuclear threat aided by fake firms, Rome bank: US
Tuesday, 28 August 2007
Vernon Silver
On Dec. 23, 2006, the United Nations Security Council slapped economic sanctions on Shahid Hemmat Industrial Group for its role in weapons proliferation as Iran's maker of liquid-fueled ballistic missiles.
Known as SHIG, the Iranian firm produces the Shahab III rocket, which has a range of at least 800 miles, according to the U.S. Treasury Department. That radius puts downtown Tel Aviv, Saudi Arabia's oil fields and India's financial center, Mumbai, within reach.
Three days after the Security Council ordered a freeze on SHIG's assets to help block Iran from developing nuclear weapons, the maker of the country's longest-range missile was ready to go shopping in Europe.
It turned for help to state-owned Bank Sepah, Iran's fifth- biggest lender. On Dec. 26, a Bank Sepah branch in Tehran issued a 28,845 euro ($39,255) letter of credit on behalf of Sabalan Co. -- a front company for SHIG that shares the address and phone number of the missile maker, according to a person with access to details of the transaction. The letter of credit was forwarded to Bank Sepah's branch in Rome, where Sabalan paid its supplier -- Behringer GmbH, the Kirchardt, Germany-based maker of drills and metal-cutting tools.
Christian Behringer, the German company's co-managing director, says the purchase consisted of parts for industrial sawing machines. He says his company had no idea that a missile producer, which UN sanctions bar from buying any type of equipment, was behind the deal. Nor did he know that Bank Sepah may have helped SHIG skirt the UN prohibition.
``We did all these checks when we had this transaction forwarded to our banks,'' says Behringer, whose family owns the company and isn't accused of wrongdoing. ``After checking all the sanctioned companies, et cetera, it didn't come up on the radar screen.''
That's exactly what Bank Sepah and its military clients have been aiming for -- and may show how Iran is secretly financing the development of nuclear weapons, U.S. Treasury Undersecretary Stuart Levey says.
The Tehran-based bank has handled dozens of transactions totaling millions of dollars for front companies of Iran's missile makers since at least 2000, he says.
Many of the deals have gone through the Rome branch en route to funding purchases that have helped Iran build an arsenal of rockets that may become weapons of mass destruction if the nation develops nuclear warheads.
``Bank Sepah served as the main financial institution for transactions that were involved in Iran's procurement,'' says Victor Comras, a former UN monitor for sanctions against al- Qaeda. ``They were knowingly involved in the actual financing of the transactions,'' says Comras, who also was a U.S. State Department sanctions specialist and now works as a lawyer in Falls Church, Virginia.
Bank Sepah Chairman Ahmad Derakhshandeh's office referred inquiries to the bank's international department. Farideh Zolfaqari, the department's head, denied the U.S. and UN accusations that the bank supported Iran's missile makers.
``These are not correct,'' she said. Zolfaqari said further details would have to come from the bank's public relations staff. They declined to comment.
Iran, which President George W. Bush labeled a member of a so-called ``axis of evil'' in January 2002, has positioned itself among the world's nuclear outlaws. It defied UN Security Council resolutions in December and March that called for the country to halt uranium enrichment, which can be a precursor to bomb making.
The UN Security Council and members including China, France and Russia are concerned that Iran's enrichment program may be part of an effort to develop nuclear weapons.
Iran has two facilities that may become capable of making ingredients for atomic bombs, says Leonard Spector, deputy director of the James Martin Center for Nonproliferation Studies of the Monterey Institute of International Studies in Monterey, California.
One is a small research plant under construction in Arak, about 150 miles southwest of Tehran, that would produce plutonium, Spector says. The other is a centrifuge facility in Natanz, 150 miles (240 kilometers) south of Tehran, where Iran says it's enriching uranium.
``The activity is so suspicious and going on for so long in secrecy that it has the classic signs of heading for nuclear weapons,'' says Spector, 62, who runs the Washington office of the James Martin Center, the largest U.S. nongovernmental group devoted exclusively to research and training on nonproliferation.
``The reason the missiles are significant is, what Iran has been building over the last three or four years is capable of reaching places we care about,'' Spector says, naming Israel and Turkey. ``Countries don't build missiles like this for conventional weapons.''
Iran says it's building a nuclear power plant to provide electricity for its 70 million people. On July 26, Iranian President Mahmoud Ahmadinejad said the U.S. and Western allies should accept the country's right to pursue nuclear research.
``Even if the number of resolutions against Iran reached 300, it cannot prevent materialization of the country's rights,'' he said in an interview on Iranian state television, the official Islamic Republic News Agency reported.
Levey says Iran's use of state-owned banks and front companies is part of the country's broader effort to disguise how it moves money around the global financial system. Iran may have adopted similar tactics to fund its nuclear program, he says.
``They used front companies to conduct these procurements of needed parts for their missile and nuclear programs,'' he says. ``Bank Sepah really was the bank of choice for Iran's missile firms, and those firms used Bank Sepah to finance and in many ways to obscure their activities over the course of many years.''
During the past two years, Levey has traveled throughout Europe and the Middle East meeting bankers and government officials to rally support for a crackdown on Bank Sepah. He says the bank stands out among Iran's lenders for the number of transactions it has handled for rocket makers.
In one 2005 deal, Iran's Aerospace Industries Organization, the parent of SHIG, directed Bank Sepah to pay more than $500,000 to a North Korean firm, according to a Treasury Department notice on Jan. 9. The firm was associated with another company in the communist nation, called Komid, which has provided Iran with missile technology, the Treasury said.
Iran's Shahab rocket is based on North Korea's No Dong missile, according to the Treasury.
``The financial relationship between Iran and North Korea, as represented by the business handled by Bank Sepah, is of great concern to the United States,'' Levey said at a Washington press conference on Jan. 9, explaining one reason the U.S. designated Bank Sepah as a supporter of the proliferation of weapons of mass destruction that day.
Matthew Levitt, director of the Stein Program on Terrorism, Intelligence and Policy at the Washington Institute for Near East Policy, says he's concerned that Iran's banks may be copying Sepah's methods or developing new ones for evading scrutiny.
``Iran may try to change some of these practices and be still sneakier,'' says Levitt, whose group promotes U.S. interests in the Middle East.
At least one Iranian bank has circumvented international regulations on money transfers by asking European financial institutions to take names linked to Iran off paperwork involving U.S. dollar transfers.
In a case involving state-owned Bank Melli Iran, Amsterdam- based ABN Amro Holding NV agreed to pay $80 million in civil penalties to U.S. bank regulators in December 2005.
The U.S. said that an overseas branch of ABN Amro, the biggest Dutch bank, had removed references to Bank Melli in its instructions to ABN's New York branch for transferring money and issuing letters of credit, according to the Dec. 19, 2005, penalty order issued by federal and state regulators.
``ABN Amro recognizes that serious mistakes were made and accepts the sanctions,'' the bank said in a statement that day.
Almost all U.S. dollar bank transfers anywhere in the world flow through banks in New York because that's traditionally where foreign lenders hold the dollar accounts from which they can easily shift money, says Hal Eren, a former lawyer for the Treasury Department's Office of Foreign Assets Control.
In some cases, banks are restricted by laws in their home countries from holding anything but local currency there, he says.
To ferret out suspicious transfers, U.S. banks use computer programs to detect transactions involving countries such as Iran that are under U.S. sanctions.
``We need to take a close look at the rest of the Iranian banking sector,'' says Levitt, who'd served as deputy assistant secretary for intelligence and analysis at the Treasury Department from 2005 through the start of this year. ``Why would we assume that it's being done by one bank and not the others?''
Spector says that in Sepah's case, the bank knew full well what sort of activity it was fostering in working with SHIG.
``They've done business over the years, and that company is notorious,'' he says. ``You can presume knowledge in this case -- based on the nature of the company and the duration of the business and that it's a state bank.''
Bank Sepah, founded in 1925 by the Iranian Army's pension fund, was the country's first bank, according to its literature. The word Sepah -- with the ``a'' pronounced like the one in ``act'' -- is a derivation of the Farsi word for army.
After the 1979 Islamic Revolution brought Ayatollah Ruhollah Khomeini to power, his government nationalized Bank Sepah and other lenders. The government charged the banks with helping rebuild Iran and its military after the eight-year war with Iraq ended in 1988.
Today, Sepah is a full-fledged retail and commercial bank that takes deposits, supplies home financing and runs a brokerage and a system of automated teller machines. It has about 18,000 employees and 1,691 domestic branches, plus an overseas office in each of four European cities: Frankfurt, London, Paris and Rome, according to the 2004-05 annual report.
Sepah has also remained close to its military roots. The bank has an Armed Forces Affairs Department, which has 94 employees and a unit that provides financial services for retired soldiers. On the bank's organizational chart, the Armed Forces Affairs Department shares equal rank with the departments that run Sepah's regional branches and its ATMs.
When the UN Security Council singled out Bank Sepah in March, it was already on the trail of Iranian rocket makers. It said Sepah was aiding companies -- including SHIG -- that the council had cited in its Dec. 23 resolution for their roles in Iran's missile program.
The UN's December sanctions prohibited countries from exporting into Iran metals such as titanium-stabilized duplex stainless steel that could be used in rockets, some types of tools for cutting metal and equipment ranging from entire missiles to propellants, software and navigation systems.
The UN's March sanctions ordered a freeze on most of Bank Sepah's assets to stop it from financing and facilitating transactions for Iran's weapons program.
``Bank Sepah provides support for the Aerospace Industries Organization (AIO) and subordinates, including Shahid Hemmat Industrial Group (SHIG) and Shahid Bagheri Industrial Group (SBIG),'' the Security Council said in Resolution 1747, passed on March 24.
Iran's nuclear ambitions have been the subject of worldwide suspicion for years. Just months after the Sept. 11, 2001, terrorist attacks on New York and Washington, Bush verbally confronted Iran in his Jan. 29, 2002, State of the Union address. He used the term ``axis of evil'' in linking the country with Iraq and North Korea.
After the U.S. invaded Iraq in 2003, the administration turned in part to financial measures to take on North Korea and Iran.
In March 2004, Bush nominated Levey, a Justice Department official, to run a new Treasury division formed to unite efforts against international funding of terrorism. Levey, who has a law degree from Harvard University in Cambridge, Massachusetts, had been principal associate deputy attorney general.
Levey and his bosses learned the power of financial sanctions to affect political and military policy when the U.S. targeted North Korea's banking links to the outside world.
It accused a small bank in Macau, China, of having lax financial controls, particularly in the business it conducted for the communist regime. The U.S. designated Banco Delta Asia SARL as a ``primary money-laundering concern'' on Sept. 15, 2005. The move was a precursor to barring U.S. banks from handling Banco Delta's accounts six months later.
Levey said the bank was helping North Korean officials deposit counterfeit U.S. currency and agreeing to put the dollars into circulation. Stanley Au, chairman of Delta Asia Financial Group, the bank's parent, said there was no evidence his clients participated in the alleged activities.
Later in September, Macau froze $25 million in North Korean funds at Banco Delta. The move put pressure on North Korea that spilled into unrelated talks on dismantling its nuclear program, which involved China, Japan, Russia, South Korea and the U.S.
The talks centered on shutting down North Korea's Yongbyon reactor, an objective that became more urgent in October 2006, when North Korea tested a nuclear device.
The U.S. used the $25 million in blocked funds as a bargaining chip. Kim Jong Il's government demanded the return of money before it would comply with a Feb. 13 agreement to shut its plutonium-producing reactor.
In March, the U.S. said the money should be released; North Korea received the funds on June 25. The next month, it shut the reactor and let UN inspectors return.
Levey says he was surprised at how quickly the Banco Delta money-laundering case put him in the middle of nuclear talks.
``It was more powerful than we thought,'' he says. ``That informed us as we sat down and thought of Iran. Iran is more difficult, more integrated into the international financial system. It's also engaged in a lot of illicit activities.''
While U.S. banks had halted most Iranian business after the 1979 seizure of the U.S. embassy in Tehran, European companies and governments were less eager to give up ties to the world's fourth-largest oil producer.
Levey tried a new tactic: He talked to bankers about what he said were risks of dealing with Iran and gave them examples of deceptive practices. Among them were the use of front companies and the stripping of Iranian names off money transfers, which can undermine banks' controls for knowing the identities of customers, Levey says.
Henry Paulson, former chief executive officer of Goldman Sachs Group Inc., got involved with the campaign against Iran's techniques after he became Treasury secretary in July 2006.
``I was surprised to learn the extent to which Iran was exploiting global financial ties to pursue and finance its dangerous behavior,'' Paulson, 61, said in a June 14 speech at the Council on Foreign Relations in New York.
Paulson said reputable banks are at risk when they deal with Iran.
``Financial institutions that would exercise extreme caution to avoid even small-time crooks were unknowingly handling the money of Iran's proliferation front companies,'' he said. ``The people who run these financial institutions would be shocked and disturbed, to say the least, if they were aware of the facts.''
Sepah's Rome branch -- where the obligatory portrait of Islamic Revolution founder Khomeini hangs above the teller window for letters of credit -- was where many of the transactions by Iran's front companies were handled, Levey says.
The branch occupies a Mussolini-era building on the Via Barberini. The building also houses a Thai Airways International Pcl ticket agency, a local office of France's Le Monde newspaper, a branch of the Polish Tourist
Office and, on the ground floor, a men's clothing shop called Extra Large.
``A significant portion of those transactions did indeed go through the Rome branch,'' Levey says, adding that he's not sure why letters of credit for purchases of equipment and parts were handled in Rome. ``It's not like these missile firms are in Italy. These were Iranian customers that were using the Rome branch.''
Italy's central bank began an investigation of Bank Sepah at the end of 2006, starting with an inspection of the Rome office. The Bank of Italy demanded a detailed report on Sepah's activities, says Edoardo D'Andrea, a retired Bank of Italy inspector whom Sepah hired to assemble the response to the central bank's inquiry.
``I was there as a consultant to help with supervision,'' D'Andrea, 62, says. He declined to say what inspectors found or what Bank Sepah's response was, saying the process was confidential.
``By having confirmation from our allies, we're able to get multilateral buy ins on the threat that Bank Sepah poses,'' Levey says. ``The independent confirmation that came from allies on this point was probably crucial to the ultimate outcome to getting a designation from the United Nations.''
On March 22, France, Germany and the U.K. introduced a draft resolution to the Security Council to freeze Bank Sepah's assets and impose penalties on some military commanders not directly related to the atomic or missile efforts.
Spector says the evidence the U.S. supplied about Sepah must have been persuasive.
``This is a skeptical audience,'' he says of the UN, where the U.S. presented flawed intelligence on weapons of mass destruction before the 2003 invasion of Iraq. ``We haven't always been seen as accurate because of what we've portrayed to the Security Council in the past.''
The UN debate over sanctions against Bank Sepah coincided with a drama on the high seas.
On March 23, the day after the draft resolution was introduced, Iran captured 15 British marines and soldiers in the Persian Gulf. The next day, the Security Council passed Resolution 1747 ordering nations to restrict the operations of Bank Sepah.
Iranian Foreign Minister Manouchehr Mottaki said the UN sanctions on Bank Sepah were based on bad intelligence and designed to serve the countries that promoted it.
``Schemes of the co-sponsors of the resolution are for narrow national considerations and aimed at depriving the Iranian people of their inalienable rights rather than emanating from any so-called proliferation concerns,'' he said at the March 24 Security Council meeting.
On March 25, the U.K. froze all assets of Bank Sepah International Plc, the bank's London-based subsidiary. The Bank of Italy took similar action against the Rome branch the next day. The central bank also installed commissioners at the branch, ending D'Andrea's stint as a consultant.
``The Bank of Italy brings to the attention of intermediaries the reputational and operational risks involved in relations with subjects designated by the sanctions, among them being Bank Sepah,'' the central bank said in a March 30 release. A Bank of Italy spokesman declined further comment.
Five days later, on April 4, Iran ended the standoff with the U.K. It said it was releasing the British marines and soldiers. Two weeks later, on April 17, the U.K. Treasury loosened some restrictions on the London branch.
The U.K. issued a license to Bank Sepah International that let the bank make payments to depositors and staff. Levey says he has no issue with the license, which he says falls within the range of allowable exceptions to the UN sanctions against Bank Sepah.
Bank Sepah International says it wasn't involved in building Iran's missile systems.
``Bank Sepah International Plc has had no involvement with any of the transactions to which the U.S. government has referred in its public pronouncement,'' the London office said in an unsigned statement on its Web site. Liam Brennan, Bank Sepah International's compliance officer and spokesman in London, declined to comment.
``We've got no comment; everything is on the Web site,'' Brennan said.
Employees of Bank Sepah's Rome office referred questions to the banking commissioners installed to ensure compliance with UN sanctions. Luciano Di Paolo, one of the two commissioners, declined to discuss Bank Sepah's past actions or what Italian investigators have found.
``I can't answer questions,'' says Di Paolo, whose desk is covered with memos written on Bank Sepah letterhead and routine items including the bank's phone bills.
The crackdown on Bank Sepah along with U.S. efforts to convince European banks to cut ties to Iran may be helping push the country out of the international system of U.S. dollar transactions.
The day after the Treasury designated Bank Sepah as a supporter of weapons proliferation, Frankfurt-based Commerzbank AG said it would stop processing dollar transactions for Iran through its New York branch. In July, Iran asked Japanese refiners to switch to the yen to pay for all crude oil purchases.
Lenders are scaling back in Iran, too. Credit Suisse Group and UBS AG, both based in Zurich; Deutsche Bank AG, Germany's biggest bank; and Standard Chartered Plc of the U.K. say they've ended or curbed dealings in the country.
At Bank Sepah's Rome office, business has slowed. The bank closed out its outstanding letters of credit by July 31, according to an employee who answered phone inquiries on Aug. 1.
As Iran faces a financial squeeze by the Western financial world, it's pressing ahead with the nuclear program that may lead to warheads for SHIG's missiles, the Monterey Institute's Spector says. Iran's Arak research reactor is due to be completed in 2009.
Such reactors produce plutonium, which can be used as a substitute for enriched uranium in making a nuclear bomb.
Iran allowed UN inspectors to visit Arak in July and said it would open more nuclear plants to scrutiny. The Security Council is preparing for another round of sanctions to push Iran to halt construction.
The UN sanctions have imbued Iran and its nuclear potential with global urgency. Regulators now must stay one step ahead of Iran's banks in the critical job of ferreting out illicit funding of the country's weapons makers
....................
Bloomberg
On Dec. 23, 2006, the United Nations Security Council slapped economic sanctions on Shahid Hemmat Industrial Group for its role in weapons proliferation as Iran's maker of liquid-fueled ballistic missiles.
Known as SHIG, the Iranian firm produces the Shahab III rocket, which has a range of at least 800 miles, according to the U.S. Treasury Department. That radius puts downtown Tel Aviv, Saudi Arabia's oil fields and India's financial center, Mumbai, within reach.
Three days after the Security Council ordered a freeze on SHIG's assets to help block Iran from developing nuclear weapons, the maker of the country's longest-range missile was ready to go shopping in Europe.
It turned for help to state-owned Bank Sepah, Iran's fifth- biggest lender. On Dec. 26, a Bank Sepah branch in Tehran issued a 28,845 euro ($39,255) letter of credit on behalf of Sabalan Co. -- a front company for SHIG that shares the address and phone number of the missile maker, according to a person with access to details of the transaction. The letter of credit was forwarded to Bank Sepah's branch in Rome, where Sabalan paid its supplier -- Behringer GmbH, the Kirchardt, Germany-based maker of drills and metal-cutting tools.
Christian Behringer, the German company's co-managing director, says the purchase consisted of parts for industrial sawing machines. He says his company had no idea that a missile producer, which UN sanctions bar from buying any type of equipment, was behind the deal. Nor did he know that Bank Sepah may have helped SHIG skirt the UN prohibition.
``We did all these checks when we had this transaction forwarded to our banks,'' says Behringer, whose family owns the company and isn't accused of wrongdoing. ``After checking all the sanctioned companies, et cetera, it didn't come up on the radar screen.''
That's exactly what Bank Sepah and its military clients have been aiming for -- and may show how Iran is secretly financing the development of nuclear weapons, U.S. Treasury Undersecretary Stuart Levey says.
The Tehran-based bank has handled dozens of transactions totaling millions of dollars for front companies of Iran's missile makers since at least 2000, he says.
Many of the deals have gone through the Rome branch en route to funding purchases that have helped Iran build an arsenal of rockets that may become weapons of mass destruction if the nation develops nuclear warheads.
``Bank Sepah served as the main financial institution for transactions that were involved in Iran's procurement,'' says Victor Comras, a former UN monitor for sanctions against al- Qaeda. ``They were knowingly involved in the actual financing of the transactions,'' says Comras, who also was a U.S. State Department sanctions specialist and now works as a lawyer in Falls Church, Virginia.
Bank Sepah Chairman Ahmad Derakhshandeh's office referred inquiries to the bank's international department. Farideh Zolfaqari, the department's head, denied the U.S. and UN accusations that the bank supported Iran's missile makers.
``These are not correct,'' she said. Zolfaqari said further details would have to come from the bank's public relations staff. They declined to comment.
Iran, which President George W. Bush labeled a member of a so-called ``axis of evil'' in January 2002, has positioned itself among the world's nuclear outlaws. It defied UN Security Council resolutions in December and March that called for the country to halt uranium enrichment, which can be a precursor to bomb making.
The UN Security Council and members including China, France and Russia are concerned that Iran's enrichment program may be part of an effort to develop nuclear weapons.
Iran has two facilities that may become capable of making ingredients for atomic bombs, says Leonard Spector, deputy director of the James Martin Center for Nonproliferation Studies of the Monterey Institute of International Studies in Monterey, California.
One is a small research plant under construction in Arak, about 150 miles southwest of Tehran, that would produce plutonium, Spector says. The other is a centrifuge facility in Natanz, 150 miles (240 kilometers) south of Tehran, where Iran says it's enriching uranium.
``The activity is so suspicious and going on for so long in secrecy that it has the classic signs of heading for nuclear weapons,'' says Spector, 62, who runs the Washington office of the James Martin Center, the largest U.S. nongovernmental group devoted exclusively to research and training on nonproliferation.
``The reason the missiles are significant is, what Iran has been building over the last three or four years is capable of reaching places we care about,'' Spector says, naming Israel and Turkey. ``Countries don't build missiles like this for conventional weapons.''
Iran says it's building a nuclear power plant to provide electricity for its 70 million people. On July 26, Iranian President Mahmoud Ahmadinejad said the U.S. and Western allies should accept the country's right to pursue nuclear research.
``Even if the number of resolutions against Iran reached 300, it cannot prevent materialization of the country's rights,'' he said in an interview on Iranian state television, the official Islamic Republic News Agency reported.
Levey says Iran's use of state-owned banks and front companies is part of the country's broader effort to disguise how it moves money around the global financial system. Iran may have adopted similar tactics to fund its nuclear program, he says.
``They used front companies to conduct these procurements of needed parts for their missile and nuclear programs,'' he says. ``Bank Sepah really was the bank of choice for Iran's missile firms, and those firms used Bank Sepah to finance and in many ways to obscure their activities over the course of many years.''
During the past two years, Levey has traveled throughout Europe and the Middle East meeting bankers and government officials to rally support for a crackdown on Bank Sepah. He says the bank stands out among Iran's lenders for the number of transactions it has handled for rocket makers.
In one 2005 deal, Iran's Aerospace Industries Organization, the parent of SHIG, directed Bank Sepah to pay more than $500,000 to a North Korean firm, according to a Treasury Department notice on Jan. 9. The firm was associated with another company in the communist nation, called Komid, which has provided Iran with missile technology, the Treasury said.
Iran's Shahab rocket is based on North Korea's No Dong missile, according to the Treasury.
``The financial relationship between Iran and North Korea, as represented by the business handled by Bank Sepah, is of great concern to the United States,'' Levey said at a Washington press conference on Jan. 9, explaining one reason the U.S. designated Bank Sepah as a supporter of the proliferation of weapons of mass destruction that day.
Matthew Levitt, director of the Stein Program on Terrorism, Intelligence and Policy at the Washington Institute for Near East Policy, says he's concerned that Iran's banks may be copying Sepah's methods or developing new ones for evading scrutiny.
``Iran may try to change some of these practices and be still sneakier,'' says Levitt, whose group promotes U.S. interests in the Middle East.
At least one Iranian bank has circumvented international regulations on money transfers by asking European financial institutions to take names linked to Iran off paperwork involving U.S. dollar transfers.
In a case involving state-owned Bank Melli Iran, Amsterdam- based ABN Amro Holding NV agreed to pay $80 million in civil penalties to U.S. bank regulators in December 2005.
The U.S. said that an overseas branch of ABN Amro, the biggest Dutch bank, had removed references to Bank Melli in its instructions to ABN's New York branch for transferring money and issuing letters of credit, according to the Dec. 19, 2005, penalty order issued by federal and state regulators.
``ABN Amro recognizes that serious mistakes were made and accepts the sanctions,'' the bank said in a statement that day.
Almost all U.S. dollar bank transfers anywhere in the world flow through banks in New York because that's traditionally where foreign lenders hold the dollar accounts from which they can easily shift money, says Hal Eren, a former lawyer for the Treasury Department's Office of Foreign Assets Control.
In some cases, banks are restricted by laws in their home countries from holding anything but local currency there, he says.
To ferret out suspicious transfers, U.S. banks use computer programs to detect transactions involving countries such as Iran that are under U.S. sanctions.
``We need to take a close look at the rest of the Iranian banking sector,'' says Levitt, who'd served as deputy assistant secretary for intelligence and analysis at the Treasury Department from 2005 through the start of this year. ``Why would we assume that it's being done by one bank and not the others?''
Spector says that in Sepah's case, the bank knew full well what sort of activity it was fostering in working with SHIG.
``They've done business over the years, and that company is notorious,'' he says. ``You can presume knowledge in this case -- based on the nature of the company and the duration of the business and that it's a state bank.''
Bank Sepah, founded in 1925 by the Iranian Army's pension fund, was the country's first bank, according to its literature. The word Sepah -- with the ``a'' pronounced like the one in ``act'' -- is a derivation of the Farsi word for army.
After the 1979 Islamic Revolution brought Ayatollah Ruhollah Khomeini to power, his government nationalized Bank Sepah and other lenders. The government charged the banks with helping rebuild Iran and its military after the eight-year war with Iraq ended in 1988.
Today, Sepah is a full-fledged retail and commercial bank that takes deposits, supplies home financing and runs a brokerage and a system of automated teller machines. It has about 18,000 employees and 1,691 domestic branches, plus an overseas office in each of four European cities: Frankfurt, London, Paris and Rome, according to the 2004-05 annual report.
Sepah has also remained close to its military roots. The bank has an Armed Forces Affairs Department, which has 94 employees and a unit that provides financial services for retired soldiers. On the bank's organizational chart, the Armed Forces Affairs Department shares equal rank with the departments that run Sepah's regional branches and its ATMs.
When the UN Security Council singled out Bank Sepah in March, it was already on the trail of Iranian rocket makers. It said Sepah was aiding companies -- including SHIG -- that the council had cited in its Dec. 23 resolution for their roles in Iran's missile program.
The UN's December sanctions prohibited countries from exporting into Iran metals such as titanium-stabilized duplex stainless steel that could be used in rockets, some types of tools for cutting metal and equipment ranging from entire missiles to propellants, software and navigation systems.
The UN's March sanctions ordered a freeze on most of Bank Sepah's assets to stop it from financing and facilitating transactions for Iran's weapons program.
``Bank Sepah provides support for the Aerospace Industries Organization (AIO) and subordinates, including Shahid Hemmat Industrial Group (SHIG) and Shahid Bagheri Industrial Group (SBIG),'' the Security Council said in Resolution 1747, passed on March 24.
Iran's nuclear ambitions have been the subject of worldwide suspicion for years. Just months after the Sept. 11, 2001, terrorist attacks on New York and Washington, Bush verbally confronted Iran in his Jan. 29, 2002, State of the Union address. He used the term ``axis of evil'' in linking the country with Iraq and North Korea.
After the U.S. invaded Iraq in 2003, the administration turned in part to financial measures to take on North Korea and Iran.
In March 2004, Bush nominated Levey, a Justice Department official, to run a new Treasury division formed to unite efforts against international funding of terrorism. Levey, who has a law degree from Harvard University in Cambridge, Massachusetts, had been principal associate deputy attorney general.
Levey and his bosses learned the power of financial sanctions to affect political and military policy when the U.S. targeted North Korea's banking links to the outside world.
It accused a small bank in Macau, China, of having lax financial controls, particularly in the business it conducted for the communist regime. The U.S. designated Banco Delta Asia SARL as a ``primary money-laundering concern'' on Sept. 15, 2005. The move was a precursor to barring U.S. banks from handling Banco Delta's accounts six months later.
Levey said the bank was helping North Korean officials deposit counterfeit U.S. currency and agreeing to put the dollars into circulation. Stanley Au, chairman of Delta Asia Financial Group, the bank's parent, said there was no evidence his clients participated in the alleged activities.
Later in September, Macau froze $25 million in North Korean funds at Banco Delta. The move put pressure on North Korea that spilled into unrelated talks on dismantling its nuclear program, which involved China, Japan, Russia, South Korea and the U.S.
The talks centered on shutting down North Korea's Yongbyon reactor, an objective that became more urgent in October 2006, when North Korea tested a nuclear device.
The U.S. used the $25 million in blocked funds as a bargaining chip. Kim Jong Il's government demanded the return of money before it would comply with a Feb. 13 agreement to shut its plutonium-producing reactor.
In March, the U.S. said the money should be released; North Korea received the funds on June 25. The next month, it shut the reactor and let UN inspectors return.
Levey says he was surprised at how quickly the Banco Delta money-laundering case put him in the middle of nuclear talks.
``It was more powerful than we thought,'' he says. ``That informed us as we sat down and thought of Iran. Iran is more difficult, more integrated into the international financial system. It's also engaged in a lot of illicit activities.''
While U.S. banks had halted most Iranian business after the 1979 seizure of the U.S. embassy in Tehran, European companies and governments were less eager to give up ties to the world's fourth-largest oil producer.
Levey tried a new tactic: He talked to bankers about what he said were risks of dealing with Iran and gave them examples of deceptive practices. Among them were the use of front companies and the stripping of Iranian names off money transfers, which can undermine banks' controls for knowing the identities of customers, Levey says.
Henry Paulson, former chief executive officer of Goldman Sachs Group Inc., got involved with the campaign against Iran's techniques after he became Treasury secretary in July 2006.
``I was surprised to learn the extent to which Iran was exploiting global financial ties to pursue and finance its dangerous behavior,'' Paulson, 61, said in a June 14 speech at the Council on Foreign Relations in New York.
Paulson said reputable banks are at risk when they deal with Iran.
``Financial institutions that would exercise extreme caution to avoid even small-time crooks were unknowingly handling the money of Iran's proliferation front companies,'' he said. ``The people who run these financial institutions would be shocked and disturbed, to say the least, if they were aware of the facts.''
Sepah's Rome branch -- where the obligatory portrait of Islamic Revolution founder Khomeini hangs above the teller window for letters of credit -- was where many of the transactions by Iran's front companies were handled, Levey says.
The branch occupies a Mussolini-era building on the Via Barberini. The building also houses a Thai Airways International Pcl ticket agency, a local office of France's Le Monde newspaper, a branch of the Polish Tourist
Office and, on the ground floor, a men's clothing shop called Extra Large.
``A significant portion of those transactions did indeed go through the Rome branch,'' Levey says, adding that he's not sure why letters of credit for purchases of equipment and parts were handled in Rome. ``It's not like these missile firms are in Italy. These were Iranian customers that were using the Rome branch.''
Italy's central bank began an investigation of Bank Sepah at the end of 2006, starting with an inspection of the Rome office. The Bank of Italy demanded a detailed report on Sepah's activities, says Edoardo D'Andrea, a retired Bank of Italy inspector whom Sepah hired to assemble the response to the central bank's inquiry.
``I was there as a consultant to help with supervision,'' D'Andrea, 62, says. He declined to say what inspectors found or what Bank Sepah's response was, saying the process was confidential.
``By having confirmation from our allies, we're able to get multilateral buy ins on the threat that Bank Sepah poses,'' Levey says. ``The independent confirmation that came from allies on this point was probably crucial to the ultimate outcome to getting a designation from the United Nations.''
On March 22, France, Germany and the U.K. introduced a draft resolution to the Security Council to freeze Bank Sepah's assets and impose penalties on some military commanders not directly related to the atomic or missile efforts.
Spector says the evidence the U.S. supplied about Sepah must have been persuasive.
``This is a skeptical audience,'' he says of the UN, where the U.S. presented flawed intelligence on weapons of mass destruction before the 2003 invasion of Iraq. ``We haven't always been seen as accurate because of what we've portrayed to the Security Council in the past.''
The UN debate over sanctions against Bank Sepah coincided with a drama on the high seas.
On March 23, the day after the draft resolution was introduced, Iran captured 15 British marines and soldiers in the Persian Gulf. The next day, the Security Council passed Resolution 1747 ordering nations to restrict the operations of Bank Sepah.
Iranian Foreign Minister Manouchehr Mottaki said the UN sanctions on Bank Sepah were based on bad intelligence and designed to serve the countries that promoted it.
``Schemes of the co-sponsors of the resolution are for narrow national considerations and aimed at depriving the Iranian people of their inalienable rights rather than emanating from any so-called proliferation concerns,'' he said at the March 24 Security Council meeting.
On March 25, the U.K. froze all assets of Bank Sepah International Plc, the bank's London-based subsidiary. The Bank of Italy took similar action against the Rome branch the next day. The central bank also installed commissioners at the branch, ending D'Andrea's stint as a consultant.
``The Bank of Italy brings to the attention of intermediaries the reputational and operational risks involved in relations with subjects designated by the sanctions, among them being Bank Sepah,'' the central bank said in a March 30 release. A Bank of Italy spokesman declined further comment.
Five days later, on April 4, Iran ended the standoff with the U.K. It said it was releasing the British marines and soldiers. Two weeks later, on April 17, the U.K. Treasury loosened some restrictions on the London branch.
The U.K. issued a license to Bank Sepah International that let the bank make payments to depositors and staff. Levey says he has no issue with the license, which he says falls within the range of allowable exceptions to the UN sanctions against Bank Sepah.
Bank Sepah International says it wasn't involved in building Iran's missile systems.
``Bank Sepah International Plc has had no involvement with any of the transactions to which the U.S. government has referred in its public pronouncement,'' the London office said in an unsigned statement on its Web site. Liam Brennan, Bank Sepah International's compliance officer and spokesman in London, declined to comment.
``We've got no comment; everything is on the Web site,'' Brennan said.
Employees of Bank Sepah's Rome office referred questions to the banking commissioners installed to ensure compliance with UN sanctions. Luciano Di Paolo, one of the two commissioners, declined to discuss Bank Sepah's past actions or what Italian investigators have found.
``I can't answer questions,'' says Di Paolo, whose desk is covered with memos written on Bank Sepah letterhead and routine items including the bank's phone bills.
The crackdown on Bank Sepah along with U.S. efforts to convince European banks to cut ties to Iran may be helping push the country out of the international system of U.S. dollar transactions.
The day after the Treasury designated Bank Sepah as a supporter of weapons proliferation, Frankfurt-based Commerzbank AG said it would stop processing dollar transactions for Iran through its New York branch. In July, Iran asked Japanese refiners to switch to the yen to pay for all crude oil purchases.
Lenders are scaling back in Iran, too. Credit Suisse Group and UBS AG, both based in Zurich; Deutsche Bank AG, Germany's biggest bank; and Standard Chartered Plc of the U.K. say they've ended or curbed dealings in the country.
At Bank Sepah's Rome office, business has slowed. The bank closed out its outstanding letters of credit by July 31, according to an employee who answered phone inquiries on Aug. 1.
As Iran faces a financial squeeze by the Western financial world, it's pressing ahead with the nuclear program that may lead to warheads for SHIG's missiles, the Monterey Institute's Spector says. Iran's Arak research reactor is due to be completed in 2009.
Such reactors produce plutonium, which can be used as a substitute for enriched uranium in making a nuclear bomb.
Iran allowed UN inspectors to visit Arak in July and said it would open more nuclear plants to scrutiny. The Security Council is preparing for another round of sanctions to push Iran to halt construction.
The UN sanctions have imbued Iran and its nuclear potential with global urgency. Regulators now must stay one step ahead of Iran's banks in the critical job of ferreting out illicit funding of the country's weapons makers
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Bloomberg