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The Justice Department has charged four companies and five individuals for participating in an international network that illegally procured $24 million in controlled goods for the Iranian military and for nuclear end-users. According to a 24-count federal indictment unsealed on April 17, the procurement network conspired to export sensitive American-made electronic components with military applications to Iran via companies in Taiwan and Turkey, in violation of U.S. law. The network allegedly began operating in July 2010 and was still active at the time of the indictment. Its exposure raises the question of how ongoing illegal procurement by Iran will be handled as part of a final nuclear agreement.
The alleged ringleader of the operation was Bahram Mechanic, a 69-year-old resident of Houston, Texas. Mechanic is the majority owner of Faratel Co. in Tehran and sister company Smart Power Systems (SPS) in Houston. Faratel and SPS design and manufacture uninterrupted power supplies (UPS), an electronic component critical for air defense systems, missile systems, and the nuclear energy sector. Faratel’s client list included the Iranian Ministry of Defense, the Atomic Energy Organization of Iran, and the Iranian Centrifuge Technology Company (TESA).
The network allegedly procured at least $24 million worth of U.S.-origin microelectronic components, including microcontrollers, digital signal processors, transformers, and ferrite cores, needed for the manufacture of UPSs. Using a shopping list of goods sought by Faratel in Iran, Mechanic directed one of his associates, a Taiwanese businessman named Arthur Shyu, to use his company, Hosoda Taiwan Ltd., to obtain the export-controlled items from sources worldwide. Shyu would then either ship the goods directly to Iran or through a “cut out” in Turkey, a shipping company named Golsad Istanbul Trading Ltd. Between July 2010 and the time of the arrests, Faratel received at least 250 shipments in Iran totaling 28 million parts.
According to the indictment, Mechanic was previously investigated by U.S. enforcement authorities for illegal trade with Iran, resulting in one criminal conviction and one civil action. Mechanic then used his knowledge of U.S. restrictions “to devise a sophisticated trans-national network of individuals and companies to mask their activities […] and continue to expand his illegal transactions with Iran.”
His experience showed. The network relied on well-known methods to get around U.S. export control law and international sanctions, including: transshipment through third countries to mask the final destination; undervaluing goods; falsifying product codes to remove military designations; mingling export-controlled items with non-controlled items to avoid scrutiny; falsifying shipment statements to remove reference to Iranian ports; modifying and tailoring payments to ensure that amounts and bank names would not raise flags; and the use of personal email accounts to discuss how to evade U.S. law.
In all, nine defendants are charged with violating the International Emergency Economic Powers Act (IEEPA). Mechanic and two U.S.-based associates, Tooraj Faridi of Houston and Khosrow Afghani, are in federal custody. Shyu and the operator of the Turkish shipping company, Matin Sadeghi, have outstanding arrest warrants and are believed to be outside of the United States.
Seven foreign nationals and companies were added to the Department of Commerce's Bureau of Industry and Security Entity List. In addition to listing Faratel, Shyu, Hosoda Taiwan Ltd., and Golstad Istanbul Trading, the Commerce Department also designated two managers at Faratel in Tehran -- Arash Servatian and Elaheh Siahpoush -- and Abbas Goldoozan, a company official at Golstad Istanbul Trading.
This Iranian-based network operated during nuclear talks with the United States, in violation of U.S. export control laws and despite international sanctions against Iran. This raises the question of how illicit procurement will be treated if a nuclear agreement is reached between Iran and the P5+1 countries.
According to the Obama administration's “fact sheet” on the framework agreement, a dedicated procurement channel will be established for Iran’s nuclear program “to monitor and approve, on a case by case basis, the supply, sale, or transfer to Iran of certain nuclear-related and dual-use materials and technology.” But many questions persist. How will violations of procurement channel restrictions be handled? Will the channel cover only items destined for Iran’s nuclear program? How will procurement of dual-use items for other sectors be monitored? As in this case, Iran’s civilian industries could act as procurement agents for illicit government activity. They provide additional avenues for evading sanctions on missile and other military technology. These critical questions must be resolved by the June 30 deadline.