The New Era of Doing Business with Iran: Iran’s International Commercial Transactions and Global Security

Vafai John

Abstract

On January 17, 2016, in a statement following his signing of the Joint Comprehensive Plan of Action (JCPOA) with Iran, President Obama addressed that country’s people, stating that “yours is a great civilization, with a vibrant culture that has so much to contribute to the world – in commerce, and in science and the arts.” While the former U.S. President’s evaluation of the Iranian people’s greatness is indisputable, there are questions concerning doing business with Iran which transcend conventional legal issues and commercial problems.

Given the juxtaposition of Iran’s duopolistic government structure and ideologically oriented decision-making processes, questions arise as to what extent multinational corporations, including U.S. companies, should reasonably expect to conduct commercial transactions with that country. Specific issues arise related to Iranian banks, international credit recognition, terms of payment, and the conceptual legality of interest in Iran. In addition, more practical issues arise related to the governing law of contract and proper dispute resolution mechanisms. Furthermore, U.S. regulatory constraints limit the efficacy of certain contracts between Iran and U.S. companies. This article attempts to illustrate the structural, legal and operational issues concerning doing business with Iran and, where possible, means for mitigating such issues.

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Iran’s Uprising—A Case of Patrimonial Corruption Part 2

Vafai John

Iran’s Uprising—A Case of Patrimonial Corruption Part 2

Iran’s corruption is more structural and ideologically oriented than the one resulting from nepotism or individual petty corruption. The grievances expressed by the ordinary Iranians on the streets of various towns, reflect the structural corruption that have resulted in a grave disparity in distribution of resources for the ordinary people. Because of the structural and patrimonial corruption, mismanagement, and preferential treatment of its citizens, Iran’s economic growth after the nuclear deal has benefited only the well-connected few. The demonstrations took place primarily in towns other than Tehran, and the demonstrators were not solely students demanding change on government’s policies concerning basic human rights and political freedoms. The demonstrators have been asking for an affordable price of groceries.

The decision-making in Iran requiring financial expenditures is not limited to issues related to policymaking within Iran. It could permeate, and at times influence, Iran’s major foreign policy issues— including the ones the country faces in the Middle East. For example, after the ISIS terrorists’ defeat in Syria, Iran is preparing to co-operate in Syria militarily and financially with the European community. That is, Iran will participate in post-war reconstruction of Syria. Russia’s representative to the European Union, Vladimer Chizhov, has reportedly urged that not only the EU but also “Iran should contribute to the postwar reconstruction of Syria.” Iran’s participation in reconstruction of Syria will provide another enormous income opportunity for the Islamic Republic’s extra-constitutional institutions and “charity-based” companies to engage in vastly profitable reconstruction activities of Syria. However, the benefits are not going to be seen or felt by those who demonstrated in various towns of Iran, lamenting on the steep rise in price of basic goods.

In addition to the economic deprivations derived from structural corruption, there exist individuals in Iran that because of their special influence, clerical command, and bureaucratic power, have been able to engage in various acts resulting in unjust enrichment for themselves and their cronies. One example of this category of individuals is Ayatollah Sadegh Amoli Larijani, the head of Iran’s judicial branch of the government. Ayatollah Larijani has amassed a considerable amount of wealth because of his position in Iran’s judiciary. Ayatollah Larijani, his brothers, Ali Larijani, (Speaker of the House) President Rohani, (plus ten other individuals) are the members of the powerful Supreme National Security Council of Islamic Republic of Iran. On 23 May 2012, Ayatollah Larijani was put into sanction list of the European Union. However, President Obama did not follow suit. Finally, in January 2018 President Trump, joined the European Union and sanctioned Ayatollah Larijani for allegedly human rights abuses and involvement in punishing demonstrators who, in various occasions, participated in anti-government rallies, protesting throughout the country.

The position of Iran, in terms of the country’s structural corruption, can be explained by the annual research study, conducted by the German-based Transparency International, specializing in measurement of the degree of corruption prevailing in different countries of the world. Of 176 countries examined by the Transparency International in 2016, Iran’s position was 131 — at the same level as: Ukraine, Kazakhstan, and Nepal.

Iran’s corruption is more structural and ideologically oriented than the one resulting from nepotism or individual petty corruption. Corruption in Iran has dominated the economy to the point that in the spring of 2001, the Supreme Leader, Ayatollah Khamenei, issued a decree, famously known in Iran as “The Eight Point Executive Decree of the Supreme Leader.” This Executive Order contained eight articles addressing the public officials’ duties concerning combating public corruption. This decree ordered the officials “to adopt a policy with respect to destroying the financial and economic roots of corruption by the actions of the executive and judicial powers of the country.” This decree has not changed the pattern of the entitlements, of the pseudo-charity organizations, nor the scheme of the distribution of resources in Iran. In final analysis, Iran’s social upheaval, to borrow a term from Yale Law School Professor Susan Rose Ackerman, echoes the “patrimonial corruption” in that country.

The grievances expressed by the ordinary Iranians on the streets of various towns, reflect the structural corruption that have resulted in a grave disparity in distribution of resources for the ordinary people. A central element of the nuclear deal that was agreed by, now professor of Yale University, John Kerry, was to unfreeze $100 billion into revival of Iran’s economy. It has not worked. Most of that money has vanished into the ideological institutions and commercial structures as explained earlier. As Professor Arang Keshavarzian, of New York University, has indicated, in Iran “[c]compounding the handle on the Mafia is rooted in military and security power centers, the conspicuous consumption of honest scrupulous speculators, and the structures of international sanctions. The large commercial groups have generated a class of profiteers, often collaborating with partners in Dubai, Turkey and beyond”. That is why the demonstrations took place primarily in towns other than Tehran. The demonstrators were not solely students demanding change on government’s policies concerning basic human rights and political freedoms. The demonstrators have been asking for an affordable price of groceries. Approximately three years after Iran entered the nuclear deal with the 5+1 countries, its economy grew by 7 percent in 2016. However, because of the structural and patrimonial corruption, mismanagement, and preferential treatment of its citizens, Iran’s economic growth after the nuclear deal has benefited only the well-connected few. These are the reasons for the highly alert, broadly educated, but economically disadvantaged people, marching on the streets in various towns in Iran—that have been protesting the steep rise on the price of eggs.

Considering the above note, the fundamental question is “what is the reasonable projection of the future for the Islamic Republic of Iran”? To answer this question, we must review, albeit briefly, the ideological roots of the current Iranian government.

The Third Path

Iran from Empire to Ruin to Empire

Long before Iran’s Revolution of 1979, Ayatollah Rohollah Khomeini, the founding father of the Islamic Republic of Iran, had advocated a puritan Islamic structure of government for Iran. In his book, Kashfol-Asrar (The Revelation of the Unknown), published in 1942, Khomeini, advocated a “governing system for Iran, composed of a just ruler, and a legislative body formed by clergies that are just and experts on the principles emanated from God.” The law should originate from God (through Mohammed) and there is an order for all things in the world, no matter how minute they may be.

The core structure of the present Islamic Government in Iran is, to a large degree, reflection of such ideology, and is composed of the following powers:

First, the ideological control of the legislative process. Under the Iranian constitution, there is a 12-member powerful legislative ombudsman called the Council of Guardians (COG). The members of the COG are appointed by the Supreme Leader and the Supreme Council to the Judiciary. By the constitutional mandate, the Council of Guardians is established “for the purpose of safeguarding the principles of Islam and the Constitution.” The Council of Guardians has the absolute power of “judicial review”. That is, the COG has the power to declare the law of the land null and void, if such law is inconsistent with the Islamic rules or with the constitution. Further, the National Assembly (the legislative body) has no legal authority without the presence of the Council of Guardians.

Second, control of the Judiciary. Under the Iranian Constitution (Article 162), the Chief Justice of the Supreme Court shall be an Islamic clergyman appointed by the Leader (no confirmation is required).

Third, the president must be elected from among statesmen of political and religious distinction. He must be “a pious believer in and faithful to the principles of the Islamic Republic of Iran and in the official religion of the country.”

According to the Constitution, the executive, the legislative, and the judicial powers, shall be “functioning under the absolute supervision and the leadership of the mandate of the affairs”. These three elements are the core forces that are locked into a structure where the benefits of material growth accrue, albeit disproportionately, to the core. The guardian of the interest of the core is the Islamic Revolutionary Corps (IRGC). This body has a constitutional mandate to preserve the ideological structure of the government. Under Article 150 of the Islamic Constitution of Iran, “the Islamic Revolutionary Corps …. shall remain active so that it would continue its role as the guardian of the Revolution and of the fruits of its victory.”

The IRGC is vested with the role of maintaining the country’s ideological mandate as well as its own economic interests. This juxtaposition—the co-existence of the extra-constitutional entities with the traditional governmental bureaucracies — has made Iran one of the most labyrinthine countries in the world.

In his remarkable essay, “The Second Image Reversed: the International Sources of Domestic Politics” (International Organization 32, no. 4 [autumn 1978]: 881-912) Peter Gourevitch, made a pointed observation applicable to Iran’s distribution of power and economic wealth after the Islamic Revolution. According to Gourevitch, countries with disproportionate distribution of political power, capital, organization, technology, and military preponderance “are locked into a structure where the benefits of growth accrue disproportionately to the core.” Such countries develop dual economies: an expanding modern sector tied to the needs of the core, and “a stagnant, miserable sector, irrelevant to the needs of international capitalism, hence abandoned and ignored.”

The above-mentioned observation is the situation uniquely applicable to present-day Iran. There is no evidence that lifting sanctions has visibly lifted Iran’s economy. The budget appropriations, in the aftermath of the Iranian unrest, are an example of the political competition between the government’s financial policy and the demands of the Islamic “charity organizations.”

Based upon the currently prevailing structure of the governing body in Iran, the policy formation in the Islamic Republic reflects the interests of two distinct bodies – official bureaucracy and Islamic extra-constitutional entities.

The public anger, was not just a reaction to the price hikes of the basic household materials, but to the government’s preferential policy on financial expenditures as well. For example, according to a parliamentary budget commission member’s statement on 24 January 2018, four billion dollars was allocated as “redirection from the Iranian National Development Fund” (originally set aside to develop infrastructure), to “boost military spending.” Further, while the street demonstrations were continuing, a substantial budget allocation was made to build a gold-plated “Koran ship,” launched in January 2018.

Yet, concerning the forthcoming years, the fundamental question remains to be answered: “what is the projection for the future of Iran”? There are several factors that will have a significant impact on the moderation, if not melting away, of the current theocratic system of governance in Iran.

Developments within Iran promise that Iran will become less governable under the Islamic State’s model:  Two social developments are non-stoppable:

First, the high – and climbing – literacy rates, especially in large cities and the urban areas (currently as high as 97 percent), will pose a growing challenge to control by the regime.  As more and more Iranians become literate, and aware of the wider world, the harder it will be for the Islamic government to maintain a veil of ignorance and isolation over the country.

Second, the increasing use and dependence of the population to the internet and global information.  According to the United Nations’ “State of the Broadband” report, in 2016, the percentage of Iranian households using internet, was at 52.18 percent.  And according to “Internet World States” (Internet Usage, Broadband and Telecommunications Reports), in June 30, 2017, over 70 percent of the population in Iran have used the Internet at least once, with the digital gender gap in young ages being very low.

Internet commerce is one of the few flourishing non-oil industries in Iran, and the Iranian economy is increasingly dependent upon a reliable internet for business.  Official figures suggest that during the December 20017 and January 2018 unrest, because of internet interruption, bank transactions fell by 40 percent and national postal service income fell 18 percent. At present nearly, 60 percent of Iran population use mobile internet.

In the future, Iranians’ use of internet, access to, and communications with, the outside world will continue to grow. In short, the widespread use of Internet in Iran is an effective means to become aware of the developments of the outside world and when needed, communicate with the interested parties.

Developments Outside Iran are more variable and thus ambiguous as to the domestic impact of other states’ policies.

Although there is an insatiable desire and a determination on part of the young college age Iranians to continue their education in an American or western university, the new U.S. visa policies towards Iran are limiting that outlet.

Traditionally, Iranian students returning from abroad have been the most active elements in the population seeking domestic reform and change.  This was as true under the Shah’s Iran as it is today under the Islamic government.

Young Iranians are aware of the oppression and economic stagnation in Iran.  That is why so many Iranians want to go abroad.

Were the U.S. administration reverse its current immigration policy concerning Iran and allow Iran’s younger generation engage in higher education in America, the returning students could provide a substantial force to resist and effectively combat the extra-constitutional organizations, the political-religious clergy and spurious charity organizations now ruling Iran.

Iran’s young educated urban population is the most progressive element in that country. In many respects, the demands from young educated Iranians are uniquely parallel to the kind of policy changes that the U.S Government wishes the government of Iran to pursue.

In the long run, it is the free world’s “soft power” that most frightens Iran’s Islamist Republic.  This fear was reflected in early 2018 concerning a decree – issued from the office of the Supreme Leader – prohibiting the teaching of foreign language in the elementary schools of Iran.  But that genie is already out of the bottle.  The decree will prove to be imprudent since millions of Iranians are already proficient in English.  Further, it exposes for all, in outside world, the insecurity of the establishment towards its own increasingly educated populace.

The immigration policy currently adopted by the Trump administration concerning Iran, effectively, and in a perverse manner, contributes to the ideological goals and political philosophy of the prevailing orthodoxy in Iran. The young and educated people of Iran have started a “clash of civilizations” with the seemingly unbending monolithic theocracy of the Islamic Republic. In the long run the time is on the side of the new generation, so should be the United States.

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

Vafai John

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.

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The Third Path

Iran from Empire to Ruin to Empire

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.

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Dr. John Vafai

Dr. John Changiz Vafai, JD, LLM, JSD, MPA

John Vafai is an expert in international petroleum law. Vafai is recognized as a leading practitioner in the areas of international business law, business immigration, foreign direct investment and licensing, and natural resources and energy law. He has advised national governments and multi-national companies at the highest levels, previously serving as Deputy Minister of Social and Economic Development of Iran, Counsel to the Governor of Nizhny Novgorod Province, Russia, and the Directory of Legal Affairs and OPEC Negotiations for the National Iranian Oil Company.

He previously served as a Public Policy Scholar at the Woodrow Wilson International Center for Scholars in Washington, D.C., a visiting legal scholar at Columbia University School of Law, editor of the Harvard Environmental Law Review, and the winner of Yale University’s Ford Foundation James Raymond Goodrich Price for legal scholarship. Vafai earned his Doctorate in Juridicial Science (J.S.D) and Master of Laws (LL.M) from Yale University, his Masters in Public Administration (M.P.A) from Harvard University, and his Juris Doctorate (JD) from the University of Tehran, School of Law.

Dr. Vafai’s research fellowship includes law, public policy, and international legal transactions. His public policy focus includes Iran and the U.S. Foreign Sovereign Immunity Act (FSIA), the Terrorism Risk Insurance Act (TRIA), and the Joint Comprehensive Plan of Action (JCPOA).

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Banking Without Interest

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Luxury Services & Useful Fields

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World Trade Organization