Iranian Protestors

Iran’s Uprising: A Case of Patrimonial Corruption Part 1

The recent uprising in Iran has a powerful message: eliminate economic injustice. In this respect, it is more potent and enduring than the wave of demonstrations in 2009 seeking “where is my vote.” The 2009 revolt was primarily carried out by young university students, intellectuals, urban dwellers, and those who had the experience of life under democratic systems. In that year, young Iranians’ overwhelming vote, for a semblance of a representative government, was answered with guns. Iran’s problems could not be explained without referring to the paradoxical fabric of its society, and its government. Iran has one of the highest adult education in the world— 97 percent among young adults— well ahead of the regional average. Further, a considerable percentage of the student body, in Iranian universities, is female. And Iran has a unique pattern of distribution of wealth among its institutions. The disposition of economic resources is mainly controlled, and ultimately benefited, by the extra-constitutional entities.

The recent uprising in Iran has a powerful message: eliminate economic injustice. In this respect, it is more potent and enduring than the wave of demonstrations in 2009 seeking “where is my vote.” The 2009 revolt was primarily carried out by young university students, intellectuals, urban dwellers, and those who had the experience of life under democratic systems. In that year, young Iranians’ overwhelming vote, for a semblance of a representative government, was answered with guns.

Iran’s problems could not be explained without referring to the paradoxical fabric of its society, and its government. Iran has one of the highest adult education in the world— 97 percent among young adults— well ahead of the regional average. Further, a considerable percentage of the student body, in Iranian universities, is female. Telegram, an encrypted social media app is used by more than 40 million Iranians. It was a prime means of sharing information and videos during the antigovernment demonstrations. President Rohani solicited, and received, a substantial number of women’s vote who voted for him in the hope that the curbs on them will be modified. Yet after his re-election President Rohani’s new cabinet excluded women (and Sunnis). Further, he has left most obstacles on women in place including a ban on their presence in the stadiums.

This year’s demonstrations concerning “the price of eggs” reflects not only a deep and widespread economic outcry of the students and intellectuals, but also the ordinary people, tired of the financial autocracy of the few against the economic hardship of the mass. Official figures indicate a pronounced economic impact from the demonstrations. According to Mohammed Javad Azari, Iran’s Minister of Information and Communications Technology, within two weeks of unrest, bank transactions fell by 40 percent and the national postal services income fell by 18 percent. Further, while (according to the World Bank report) after the nuclear deal, the economy has registered a strong bounce back with an annual headline growth rate of 13.4 percent, unemployment among the ordinary people increased nearly 13 percent (up from 12.4 percent) in the spring 2017. The core dissatisfaction lies in economics and preferential system of distribution of wealth. The post-sanction economic diet with increased funding for the extra-constitutional entities and ideologically oriented groups in the Middle East, at the expense of the ordinary Iranians, has not worked.

Iran has a unique pattern of distribution of wealth among its institutions. The disposition of economic resources is mainly controlled, and ultimately benefited, by the extra-constitutional entities. The most powerful and politically formidable extra-constitutional institution in Iran is the Islamic Revolutionary Guard Corpse (IRGC) or “Pasdaran” (literally, the “Guardians of the Order”). Under the constitution of the Islamic Republic of Iran, “The Islamic Revolutionary Guards, shall remain active “in safeguarding the Revolution and of the fruits of its victory.”  The IRGC’s raison d’être is to guard and maintain the nation’s “Islamic foundation”. In his reelection campaign President Rohani pledged to poverty-ridden supporters “I promise to the people of Iran that in [my] administration the poverty will forever be eradicated.” His administration has been a disillusionment.

The 2018 budget, submitted to the Islamic Assembly, indicates that, contrary to President Rohani’s campaign promises, instead of concentrating the main proportion of the budget for productive activities, the IRGC’s share of the budget was increased to the extent that it exceeded the combined budget of the army, navy, and air force of the Islamic Republic of Iran.

Another ideological institution, engaged in commerce, is Khatam- al-Anbiya Foundation, (literally, “The Final Chain of the Prophets” — referring to prophet Mohammed). This foundation is the construction base of the IRGC. This conglomerate has reportedly over 800 registered corporations, each in charge of certain specialized commercial and investment projects, and is customarily awarded state contracts in various fields, including contracts on infrastructure, heavy-duty structures, and offshore construction. Its headquarters has reported an annual budget of $32 billion. In addition, the IRGC has a virtual monopoly of doing business in Kish and Queshm Islands, the government approved free trade zones. This foundation has also been active in Europe and the Middle East. In addition to its vast network of military activities in the Middle East region, through its affiliated conglomerates, the IRGC oversees economic activities such as managing major airports (e.g. Imam Khomeini airport, south of Tehran) and controlling the cargo movements, including international transactions in those airports (the involvement of foreign companies and passengers in the airports may pose a security risk, thus, making the IRGC’s management indispensable). Today, in addition to its formidable military power in the Middle East region, the IRGC is probably the most powerful economic entity in the Islamic Republic of Iran. The Revolutionary Guard Corps has alleged to have ties to over 100 companies with its annual revenue of billions of dollars in business and construction. Thus, the Islamic Revolutionary Guard Corpse appears to have dominated not only the millennium using the traditional emphasis on the country’s security, but also an economic lever.  Ahmadinejad, (president from 2005 to 2013), Ali Larijani (the head of the Iranian parliament since 2008) and others represent this branch of the “old guard.” As the former U.S. Treasury Secretary, Henry Paulson, famously stated “it is increasingly likely that if you are doing business with Iran, you are doing business with the IRGC.”

The second branch of the extra-constitutional organizations in Iran is the chain of purportedly charitable religious foundations (Bonyad) with a vast business networks. These religious foundations control reportedly 20 percent of Iran’s gross domestic product (GDP). One of these foundations is Mostazafan Foundation (literally means, “The Foundation of the Economically Deprived People”). This foundation reportedly accounts for over 1.5 percent of Iran’s gross domestic product. As the United States maintains the secondary sanctions against Iran (that is, sanctions on foreign companies), to a considerable extent, the IRGC, or its designated subunit foundations, are engaged in various forms of business transactions with foreign countries.

The third branch of the extra-constitutional organizations in Iran is the “Setaad” (meaning base or center). This non-governmental entity is an umbrella for a chain of seemingly secular charity organizations. The entities under Setaad are engaged in vast economic activities in Iran. According to the annual report by the World Bank, Iran’s gross domestic product (GDP), in 2016 was $412.2 billion. Setaad had assets estimated to be $95 billion, or slightly less than one fourth of Iran’s annual budget in that year. It must be emphasized that the ideologically oriented charity organizations are exempt from payment of taxes or custom fees. Like other extra-constitutional and non-governmental organizations, and having seemingly been engaged in charity related activities, Setaad-related commercial activities are primarily exempt from payment of taxes or custom fees.

The mercantile elites of the Islamic Republic which have founded these organizations, mostly through informal business arrangements with the elite and clerical institutions, effectively dominate Iran’s economy. They are engaged in numerous lucrative (and mostly short-term) business ventures. The effect of this structural economic establishment is that only the informal networks and cartels of business associations have access to market demand. These ideologically-based corporate chains are largely unregulated, avaricious, and predatory to the extreme.

The extra-constitutional foundations in Iran have been engaged in financing and banking activities, and lending money to a demanding market with an exorbitant interest rateoften not affordable by the middle class, even though charging interest on money, under the criminal code of Iran, is a crime subject to corporal punishment. According to the report, by the International Monetary Fund (IMF), dated February 2017, unlicensed financial institutions (UFI), have routinely engaged in lending money to the demanding market.

The IMF’s report, further, indicates that the major reason for Iran’s international banking problems (even after the conclusion of the nuclear deal with the 5+1 countries) is “a legacy of government payment arrears, …and poor risk management practices.” The ideologically-oriented non-profit “charity” organizations in Iran have developed into a tremendous conglomerate entity. One example of such an organization is Mehr Bank. Established by a foundation called “Bonyad Taavoneh Sepah,” and controlled by the Islamic Revolutionary Guard Corps, ostensibly for charity purposes, Mehr was an umbrella firm which included Mehr Housing Development and Investment Company. These subsidiaries originally operated as somewhat separate entities, but later ballooned into a holding conglomerates that engaged in buying and selling ship, truck, and industrial equipment.

Within a short period of time, using the right connections, Mehr Finance and Credit Institution, was upgraded to Mehr Bank. At present, Mehr Bank has an expansive network of reportedly 700 branches throughout Iran. Iran’s financial institutions have provided loans to individuals and business entities without appropriate oversight. Even after the conclusion of the nuclear agreement with the 5+1 countries, Iranian financial institutions have not been able to fully engage in traditional international banking transactions. The reason for their shortcoming is endemic. These corporate entities have not grown within the framework of the genuine competitive process of the open market. Because of their association with ideological entities— such as the IRGC, “Setaad”, Bonyadeh Moztazafan and various foundations with the legal status of charity — and through a systematic financial modus operandi, these entities have organized a virtual and high-volume financing conglomerate operations within Iran. Further, according to the estimates by the International Monetary Fund(IMF), there are more than 7,000 “financial firms” in Iran, which in mid-2017, they controlled 25 percent of the country’s cash flow. These financial firms have been owned and controlled not by financial experts “but by people with close links to religious institutions, the judiciary, and the Revolutionary Guards.”

Financial misconduct in Iran, on the individual level, takes different forms, from embezzlement, to kickbacks, cover-ups and economic and financial partnerships. Corrupt practices at the individual level—as opposed to government related international contracts— are practiced in systematic and organized fashion. For example, in the judiciary, there are customary, prearranged or pre-negotiated rates for each violation of law. Often the client (the plaintiff or the defendant) would offer a — pre-negotiated – sum to the judge (or the attending clerical requesting the judge) “to donate” the sum— a check or a negotiable instrument—to a saint Imam, a divine entity in a sacred city, or to a holy charity.

Another cause of endemic corruption in Iran and public dissatisfaction has been privatization. In the past few years, most of the privatized commercial entities have been transferred to ideological foundations. According to Eshagh Jahangiri, President Rohani’s senior vice president, “in order to implement Article 44 of the Constitution, [that emphasizes privatization,] and to shrink the size of the government, we have sold government’s assets worth a total of $80 billion”. However, the government has admitted that only “17 percent of this has been turned over to the true private sector. The rest of the public assets have been transferred to institutions that are not considered as belonging to the private sector.”  The new owners are primarily ideologically based “Islamic charity” organizations.

Despite its monopolistic power, the chain of ideologically based “charity organizations” does not have sufficient authentic global banking qualifications to engage in legitimate foreign trade and is not recognized by the major banking associations, credit organizations, or credit setting institutions. The Public Statement by the “Financial Action Task Force on Money Laundering (FATF),” a Paris-based global standard setting body for banking transactions and anti-money laundering, established in 1989, is a case in point. After testing the Islamic Republic’s international money transfers, the FATF warned Iran that “until Iran implements the measures required to address the deficiencies identified in the action plan, the FATF will remain concerned with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system.”

In practical international banking procedure, such an alarming notice substantially reduces Iran’s ability with respect to opening letters of credit within the international banking community, especially the major transnational banks in the United States and Europe. That is why even after the conclusion of the nuclear deal, since mid-July 2015, Iran’s banking transactions with major foreign countries remain jeopardized by the irregularities created by the operation of the extra-constitutional entities. According to the FATF, until the structural changes in the Iranian banking system are firmly established, “Iran will remain in the FATF public statement until the full Action Plan has been completed.”  At one point, the FATFunequivocally stated that “if Iran fails to take concrete steps to continue to improve its [credit standing], the FATF will consider calling on its members and urging all jurisdictions to strengthen counter measures against Iran.”

Because of the ideological nature of these financial institutions, as far as the international commercial banking operation is concerned, Iran has not been able to fully benefit from the opportunities available as the result of lifting sanctions and engaging in commercial activities even with European countries, which have adopted less stringent sanction regimes. One reason for the banking hurdle in Iran is that, in their commercial transactions with western companies, the IRGC-associated, or charity related, banks do not necessarily follow the customary banking rules such as opening or providing letters of credit for foreign companies.  As a result, it took a long time for Iran (nearly two and half years after the signing of the nuclear accord), to start entering into “financing agreements” with international banks.

Yet most of these agreements are with Asian banks, including €8 billion extended by South Korea’s Export Import Bank (Kexim) and a $10 billion line of credit by China. Of the Western banks, Australia’s Ober bank and Danish Dansk Bank have signed framework agreements with Iranian financial entities and the Central Bank of Iran (Bank Markazi) has entered into an agreement with Russia’s Export Insurance Agency (EXIAR). As Bijan Khajepour, a scholar in Iran’s economic development, has observed, “international companies exporting to Iran have faced major challenges in financial transactions, mainly due to the hesitation of global first-tier banks to engage the Iranian market.”

One reason for such hesitation has been that the ideologically-oriented banks in Iran have displayed resistance to comply with international banking norms and regulations, including regulations to comply with international standards, especially concerning regulations designed to combat money laundering and terrorism (even though Iran’s legislature has passed a sophisticated ant-money laundering law).

Professional and non-ideological corporations in Iran are compelled to endure unfair, ideologically inspired, regulatory system. Under the ordinary circumstances, for the government of Iran to grant a contract to a private company, the non-ideological traditional corporation must follow standard bidding procedures. Companies in question must factor in tax cost or payment of customs to the government. The ordinary participants of the bids, with no ideological base or connection, are in a vastly disadvantageous position as compared to the companies that are officially charity organizations and, as such, are given priority in business.

Further, the religious charity-based companies are substantially exempt from corporate tax payment. As a result, these companies can raise the price of their products with no apprehension of tax cost, governmental control, or constraints of a competitive market. This is a clear example of the patrimonial corruption where, as in case of Iran, the governmental structure, or the regulatory provisions, and institutional nepotism, provide for a selective group, a monopolistic market power, and a vast procurement ability. Iran’s economic misfortune is homemade.

Written by: Dr. John Vafai

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