Iran’s merry-go-bonds

Iran is now raising much-needed capital by issuing international bonds that provide investors with a healthy return, the ability to launder money and, for those in the US, the ability to hide their income from the IRS and the Treasury Department. Once again, the Islamic Republic is trying to circumvent international financial sanctions to obtain access to hard currency. Washington lawmakers and tax authorities all over the world should be aware of this clever scheme.

Iran announced in mid-March that it had issued approximately $4.2 billion in bonds to develop the South Pars gas field.

Located in the Persian Gulf, South Pars is the biggest such field in the world and represents eight percent of the world’s natural gas reserves.

Iran has the world’s largest gas reserves after Russia, but pressure in recent years has slowed the development of its energy sector. International sanctions levied by the US, Europe and the UN have led to credit conditions that make it difficult for Iran to raise funds internationally.

Sanctions in particular have targeted the refined petroleum and banking sectors. Major oil companies, including French-based Total SA, Netherlands-based Royal Dutch Shell, Norway-based Statoil and Italy-based Eni have finally turned their backs on this energy giant.

Twenty of Iran’s 30 banks have been blacklisted by the US government for involvement in terrorism, proliferating weapons of mass destruction or facilitating the Iranian nuclear program.

Major international banks, which in the past provided credit lines to the commodities industry in particular, have reportedly stopped supplying financial services to Iran. These include Credit Suisse, Deutsche Bank and UBS AG. Today, few financial institutions are willing to provide Iran with banking services.

Iran has been unable to issue a publicly traded bond since 2002, despite many attempts to do so. Issuing private bonds in bearer form, therefore, is a creative and effective way to access international capital. The mullahs have announced that their four-year bond issue will fetch a healthy and tax-free 8%.

By comparison, four-year US Treasury bonds yield less than 2%. In addition, the Central Bank of Iran will permit the issuing of “nameless” and transferable bonds. In other words, those purchasing these instruments are tacitly encouraged not to report their gains to tax authorities.

THE PARS Oil and Gas Company, a subsidiary of the National Iranian Oil Company, has announced that the Istanbul branch of Iranian Bank Mellat will act as the agent and guarantor for investors. According to a prospectus for the bond issue, Bank Mellat proudly announces that it has branches and subsidiaries not only in Turkey, but in Armenia, Germany, Malaysia, South Korea and the UK. In addition to Bank Mellat’s role, Ahmad Qalebani, managing director of the National Iranian Oil Company, reported that foreign exchange bonds would be offered by the Iranian Saderat, Tejarat and Sepah banks.

All these banks have been blacklisted in the UN, US and/or Europe for their involvement in illicit activity.

Why, then, are Mellat, Sepah and Saderat allowed to operate throughout Europe, Asia and the Middle East? Moreover, investment firms are now encouraging investors to buy these bonds. An exclusive consultant for the Gerson Lehrman Group (which has offices all over the world and is headquartered in the US) supports the purchase of Iranian bonds and presumably the evasion of taxes. Gerson Lehrman is the largest “expert-network firm” in the US, and was linked to an FBI investigation in 2010 related to insider trading.

According to its oil-and-gas-industry analyst Michael Lynch, “Tax collectors of the West are turning every stone looking for revenue. What can compete with a ‘nameless document’ for security?” Lynch exhorts his readers to consider these private transactions and declares, “Tehran beckons.” Encouraging tax evasion is not terribly smart at the best of times, but certainly not as the international community establishes punishing sanctions against the Iranian regime. Furthermore, US law does not permit American citizens to purchase such bonds unless they receive a license from the Treasury Department (which is unlikely under the best of circumstances).

Gerson Lehrman never explicitly uses the words “American investors,” but it is difficult to interpret its intention as anything but targeting all potential markets. Should firms with headquarters in the US really encourage investors to put their money in the Iranian bond market? What can the international community and the US, in particular, do to stop these types of transactions? Tax authorities all over the world should make clear to their citizens that purchasing such bonds is illegal.

Those who do not report these types of earnings should face stiff fines and prosecution. In addition, in the US, the IRS and Justice Department should consider prosecuting any firm that encourages its investors to buy bonds such as the ones issued by Iran.

If the sanctions regime is really going to yield fruit, the international community must get serious about stopping Iran’s abuse of global financial markets.

Those purchasing bonds, and those aiding and abetting these types of transactions, are officially on notice; when Tehran beckons, the IRS and other tax authorities watch closely.

Avi Jorisch, a former US Treasury official, is president of the Red Cell Intelligence Group and the author of Iran’s Dirty Banking: How the Islamic Republic is Skirting International Financial Sanctions. Lee Prisament is a financial consultant with more than 20 years of capital markets experience on Wall Street.