Imagining a Post-Sanctions Iran

Financial sanctions against Iran are contributing to the growth of regional criminal networks, which use fraud, bribery, and corruption to facilitate commerce. From airplane parts and medical equipment, to specialized materials for weapons programs, an intricate underground economy of financial and logistic intermediaries play a critical role in helping Iran circumvent Western sanctions. Do not expect this to change in a post-sanctions world.

Last November's interim agreement between Iran and the P5+1, aimed at resolving ambiguity surrounding Iran's nuclear program, is a sure cause for optimism, despite little progress since. A consequence of the interim agreement, in addition to the easement of select oil sanctions and the release of $4.2 billion in blocked assets, was an uptick in foreign investor interest in reengagement with Iran. In the months following, firms jockeying to take advantage of profitable new markets underscored the growing optimism for a return to normalized relations. While such a scenario may be distant, however, it is prudent to consider the potential repercussions of more than a three-decade legacy of economic and financial isolation. What will happen to the underground economy supporting Iran's access to global markets?

Earlier this year, a prominent Iranian-Turkish businessman was implicated in a fraudulent scheme of bribery and corruption to control a lucrative gold-smuggling operation, which provided Iran access to foreign currency. The growth of illegal credit institutions—some controlled by the Islamic Revolutionary Guard Corps—now control up to 25 percent of banking operations, according to some estimates. Despite severe economic sanctions against key sectors and near financial isolation, however, economists forecast Iran's GDP to grow by 1.4 percent in 2014. Although it is unknown exactly how much of this illicit economy supports Iranian commerce, it nonetheless undermines U.S. Iranian policy objectives and contributes to increased regional crime, corruption, and instability.

Iranian businesses have normalized using transshipment points in Dubai, falsifying end-use certificates, exploiting loopholes in remittance regulations, and co-opting regional neighbors. While much of this illicit economy supports ordinary commerce, a portion facilitates the procurement and transshipment of items intended for Iranian nuclear and weapons programs. In April of this year, the U.S. indicted Chinese national Karl Lee. Lee, who is accused of procuring and shipping export-controlled items destined to Iran's ballistic missile program, relied heavily on a network of financial and shipping intermediaries. In the same month, U.S. Treasury Department designated several Dubai-based front companies for conducting financial transactions on behalf sanctioned Central Bank of Iran, as well as facilitating dubious oil sales.

Severe economic isolation from the West has cultivated an entrenched culture of sanctions avoidance and economic resilience. Iran's political rhetoric helps underscore the driving forces behind this hidden economy. Bijan Zanganeh, Iranian oil minister, criticized recent U.S. designations against UAE-based firms working for Iran's shipping sector, and noted that it is Iran's duty to circumvent sanctions. President Hassan Rouhani described U.S. sanctions as illegal and an infringement upon Iranians' rights, while Ayatollah Khamenei has repeatedly called for an "economy of resistance" to counter Western sanctions. Such statements have solidified a culture of sanctions evasion and resentment against the West as a source of national pride and feeding the underground economies that breed crime, corruption, and instability.

The legacy of more than three decades of Iranian sanctions is not entirely clear, and it would be unwise to assume a post-sanctions Iran would not entail incarnations of its current underground economy by both state and non-state actors. Those involved in facilitating sanctions evasion would have much to lose. As these illicit networks struggle to stay profitable, they will continue to act as a destabilizing force, hamper global efforts to stem illicit financial flows, and increase economic costs for foreign investors. While enforcement is necessary to legitimize the sanctions regime, over-enforcement can counteract effectiveness by constructing barriers to cooperation and forming partnerships. U.S. policy objectives should focus on increasing anti-money laundering and know-your-customer transparency among regional partners, fostering public-private stakeholder partnerships, and providing alternative legitimate business arrangements, while reducing the unintended consequence of further entrenching a culture of sanctions avoidance.

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, the Harvard Kennedy School, or the Belfer Center for Science and International Affairs.