FinCEN Issues Warning to Financial Institutions

The Middle East recently has seen a marked increase in terrorist activity, with Iran-backed Huthis launching attacks against shipping in the region and Iran’s proxies targeting bases in the region that house, among others, U.S. military forces. Iran, after helping plan Hamas’s attack on Israel in October 2023, according to media reports, devoted the Islamic Revolutionary Guard Corps’ (IRGC’s) foreign resources to coordinating, financing, and arming proxy militias against Israel. Groups receiving support from Tehran include designated foreign terrorist organizations such as Hamas and Hizballah.

Iran has been officially designated as a state sponsor of terrorism by the United States since 1984, so its support for terrorist militias is not new. This continued support to groups such as Hamas enabled the terrorist group to launch its attack against Israel in October, according to the Atlantic Council.

The U.S. State Department in 2019 estimated that Tehran in the past has spent as much as $700 million annually to support Hizballah and $100 million per year to support other terrorist groups, and in 2020 it assessed that Iran continued to provide support to terrorist organizations despite sanctions that were reimposed on Iran in 2018 after the United States pulled out of the nuclear deal with Iran.

• Iran in 2020 provided support to Hamas and other designated Palestinian terrorist groups, including Palestine Islamic Jihad (PIJ) and the Popular Front for the Liberation of Palestine-General Command. These organizations were responsible for numerous deadly attacks in Gaza and the West Bank, according to the State Department.
• Nathan Sales—former counterterrorism coordinator at the State Department—in 2018 announced charges against IRGC leaders and others in an effort to combat illicit trafficking of Iranian oil that funds terrorist organizations abroad.
• The Justice Department in February 2024 announced charges against IRGC leaders and others in an effort to combat illicit trafficking of Iranian oil that funds terrorist organizations abroad. U.S. Attorney General Merrick Garland said that the department seized more than $108 million and 500,000 barrels of fuel that would have enabled Tehran to support Iran-aligned terrorist groups.

Financial Institutions at the Forefront of Abuse by Iran

The Organized Crime and Corruption Reporting Project (OCCRP) in 2021 reported that major global banks helped Turkish-Iranian money launderer Reza Zarrab move the Iranian regime’s oil money around the world, evading sanctions. Zarrab was arrested in 2016 for, among other things, working with Türkiye’s Halkbank to move and launder Iranian oil funds using front companies, with some of the money moving through U.S. financial institutions.

OCCRP assessed that between 2007 and 2015 some of the biggest and most sophisticated financial institutions in the world––Deutsche Bank, Bank of America, JP Morgan Chase, Citibank, HSBC, Standard Chartered, UBS, and Wells Fargo––processed at least $6.5 billion in transactions for companies linked to Zarrab.

Prosecutors assert that these banks are “victims,” that were deceived by Zarrab and Halkbank, which in 2019 was charged with using money servicers and front companies in Iran, Türkiye, and the UAE to help Iran transfer $20 billion in restricted funds, convert oil revenue into gold, and cash the proceeds out on behalf of Iranian interests.

These major banks, according to OCCRP, ignored suspicious activities and adverse media reports and did nothing to end potentially problematic client relationships.

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) and other regulators have long recognized Tehran’s involvement in and financing of these and other terrorist activities and are providing guidance to financial institutions in an effort to curb Iran’s continued access to the U.S. financial system. To that end, FinCEN in May 2024 issued an advisory to financial institutions to help them identify and deter financing of Iran-backed terrorist organizations and their networks and urged banks to remain vigilant when processing transactions.

The U.S. Treasury’s Office of Foreign Assets Control in March 2023 identified one of several significant “shadow banking” networks, that  facilitate access to the global financial system to sanctioned Iranian entities such as Persian Gulf Petrochemical Industry Commercial Co. (PGPICC) and Triliance Petrochemical Co. Ltd. The network included front companies operating in Hong Kong, Singapore, and the UAE and run by exchange houses in Iran and the UAE that helped conceal the sale of billions of dollars’ worth of Iranian petrochemicals firms.

FinCEN in its advisory flagged the involvement of front companies, general “trading companies” with unclear business purposes, or other entities whose beneficial owners either are linked to Iran, have opaque ownership structures, or are located at residential addresses or co-located with other companies that have possible links to Iran.

FinCEN also warns that money services businesses (MSBs) or virtual asset services providers (VASPs) that operate in jurisdictions at high-risk for terrorist activities, coupled with lax AML/CFT controls can be an indicator of illicit activity. High-risk jurisdictions include, but are not limited to, Lebanon, Algeria, Sudan, Türkiye, and the UAE.

• The Financial Action Task Force—a global standard-setter for AML/CFT efforts—noted in a follow-up report in 2023 that Türkiye’s nonprofit organizations (NPOs) have been vulnerable to terrorist financing, especially within humanitarian aid associations that operate close to areas on the country’s southern border near conflict zones. Türkiye was included on the FATF grey list for failing to supervise its banking, real estate, and other sectors vulnerable to terrorist financing for groups such as ISIS and al-Qa‘ida that are sanctioned by the UN.
• The FATF in February 2024 highlighted that several countries in Africa, including Kenya, Burkina Faso, Mozambique, Senegal, and South Africa remain on its grey list and must continue making improvements to their AML/CFT regimes.

Iran has been using front companies to handle payments from foreign buyers for Iranian petrochemicals, which help Tehran fund multiple terrorist groups in the Middle East. Iranian exchange houses—financial institutions that deal in foreign exchange and transmit funds on behalf of individuals and companies—also serve as key conduits for Iran’s “shadow banking” networks, according to Treasury, establishing front companies abroad to enable trade for Iranian clients and acting as money transmitters to move illicit Iranian funds.

Global financial institutions must have the knowledge and guidance to detect and deter these activities. Recognizing jurisdictions vulnerable to terrorist financing or those located in close proximity to these countries is a vital part of the due diligence puzzle. However, understanding methodologies Iran-linked actors use to move funds to Tehran’s terrorist proxies is critical. Recognizing indicators of Iran’s “shadow banking” network, closely examining counterparties—especially charitable and religious organization—that may have falsified identifying details about their ownership structures or the nature of their transactions, acting as front companies for Iran.