Is Citibank Being Used by the Government of Iran?

In a court decision that has received surprisingly little media coverage, a New York District judge ordered Citibank to freeze almost $2 billion of debt-securities allegedly belonging to the Islamic Republic of Iran. This past August, victims of Iranian terror sued Luxembourg-based clearing house and bank Clearstream for allegedly helping Iran move $250 million in frozen assets out of the United States. This case deserves more attention, not only in view of the high dollar amount involved, but also for its potential to reveal how the Iranian government could be exploiting international financial clearing houses to contravene U.S. sanctions.

According to U.S. judicial documents filed in New York and California in the case of Peterson vs. Islamic Republic of Iran, the funds are held at Citibank in the name of Clearstream, which in turn is owned by the Deutsche Börse Group. For years, Clearstream has been accused of being an international platform for money laundering and tax evasion. It has allegedly operated “hundreds of confidential accounts for banks so they could move money undetected.” It has also been embroiled in numerous scandals for maintaining secret accounts for French politicians, industrial leaders, and intelligence services.

The Peterson case was filed on behalf of the families of the 241 service members killed in the 1983 bombing of the U.S. marine barracks in Beirut–the worst terrorist act to be carried out against U.S. targets until the September 11, 2001 attacks. In 2007, a U.S. federal judge ruled that Iran should pay $2.65 billion to the families of that attack. This ruling allowed nearly 1,000 family members and estates to seek to collect Iranian assets globally in what U.S. District Judge Royce Lamberth described as “the largest-ever such judgment by an American court against another country.” Since then, these families have scoured the world for Iranian assets they could seize. On July 1, 2008, when the courts ordered Citibank to freeze the Iranian funds, it was a huge step in that collection effort.

Citibank, along with every other U.S. financial institution, is supposed to freeze all Iranian dollar transactions, with limited exceptions for certain foodstuffs, textiles and medicine. Under the International Emergency Economic Powers Act (IEEPA), institutions in violation of U.S. law are subject to a fine of either $250,000 or an amount that is “twice the amount of the transaction”–which could make Citibank potentially liable for a penalty of up to $4 billion if the U.S. dollar-denominated funds were indeed held on Iran’s behalf.Most of the information from the case remains sealed, and tantalizingly little has been made public. In addition to the $2 billion that was frozen, the public record lists that the court released $250 million back to Clearstream. The rest remains a mystery.

Are other banks involved in this case? The courts could make public all the information in the Peterson case that is not vital to the national security of the United States and clarify these issues. For its part, Citibank should be asking itself whether its customer due diligence program is working properly. Does Citibank carry out enhanced due diligence on the transactions it handles for Clearstream?

By doing business with Clearstream, and through these transactions in particular, Citibank has exposed itself to an immense amount of risk. Citibank shareholders should ask whether the risk of handling these transactions was worth a potential $4 billion fine, let alone the damage that Citibank’s reputation might incur as a result. The bank might ask itself what it should do differently in the future to avoid putting itself in this position.

If the U.S. government is serious about enforcing existing sanctions against Iran, the Clearstream case deserve more scrutiny. How much money is Iran actually moving in the U.S. through Clearstream or other financial institutions?

The U.S. government, and in particular the Treasury Department, might consider carrying out an extensive assessment of how to prevent Iran from abusing international clearing houses, and act accordingly. Otherwise, Iran will continue to have access to hard currency–including the U.S. dollar–which undoubtedly aids and abets its rogue behavior.

Avi Jorisch, a former U.S. Treasury Department official, is Senior Fellow for Counterterrorism at the American Foreign Policy Council in Washington, D.C.

Originally published in Forbes.com on 15 November 2011