Iran

Iran (8)

On 24th November 2013, Iran and the P5+1 (representatives of the US, UK, France, Russia, China and Germany) reached interim agreement regarding a pathway to resolving the country’s outstanding nuclear issues. This initial ‘interim agreement’ is likely to be followed by further negotiations with the intention of reaching a lasting deal over the coming months. The purpose of this article is to set out what the agreement means for businesses.

Key Points:

  • Between 2007 and 2012, entities thought to be controlled by Iran sought large quantities of Aluminium tube controlled because of possible use in nuclear and missile programmes;
  • Sometime after a US export licence to Malaysia for the shipment was refused, a European individual was allegedly co-opted into helping to evade US export controls;
  • The goods were substituted for low-risk alternatives in order to facilitate a prosecution;
  • The individual, Nicholas Kaiga, has been arrested in the US and faces up to 20 years in prison;
  • The case provides an example of various elements of the successful implementation of trade controls to prevent proliferation.

Overview

This case details the attempts of an unnamed individual – Individual A – to procure controlled Aluminium tubing. Individual A owns companies in the UAE – Super Alloys LLC – and in Malaysia –  NBH Industries and appears to be based in Iran. After being refused a license for the export of controlled aluminium cylinders to his company in the UAE, the individual sought to exploit loopholes in US export controls to tranship the goods via Brussels Malaysia, possibly for and end use in Iran. Individual A allegedly enlisted Nicholas Kaiga, European businessman, to facilitate the evasion of US controls. Kaiga is currently in US custody.

Initial Attempt

In 2007 UAE-based company owned by Individual A, ’Super Alloys LLC’, attempted to purchase 1800ft of Aluminium tube from an American company. Super Alloys, is believed to be a company registered to a post office box in Dubai.

Upon receiving the order, the American company began to prepare the materials and approached Individual A for end user details for inclusion on the export licence. Individual A claimed that the tubes would be ‘used for oil companies in the UAE… for low pressure steam transmission’.[1]  

The US company applied to the Department of Commerce for a licence, which was refused. This refusal came after a phone call between a Department of Commerce official and a Super Alloys LLC representative who revealed that the company’s owner was in Iran. A visit by an Dept. of Commerce official revealed that the only company to be listed at the address provided by  Super Alloys LLC  was ‘Sina Mountain General Trading’, which the ECO believed to be an Iranian company. Indeed, a Linked In profile shows that a ‘Partner’ at Sina Mountain had previously worked at Bank Saderat for 30 years, perhaps indicating the company’s links to Iran.[2]           

Following the license application refusal, the US company also decided not to ship other non-controlled goods that were being prepared for export to Super Alloys LLC. These included steel tubing and steel bars.

Transhipment via Belgium and Malaysia

Undeterred by the denial of the export licence, the owner of Super Alloys LLC – Individual A – ultimately attempted to take advantage of a loophole in US export control regulations that would allow the goods to be shipped without a licence to Belgium. Individual A allegedly co-opted Nicholas Kaiga, a European businessman and Managing Director of Industrial Metals & Commodities, into then transhipping the goods to Malaysia.

Industrial Metals & Commodities, a firm founded in 2009, is listed at an address in Brussels, apparently in a residential neighbourhood. The complaint notes that ‘nowhere at that address do there appear to be facilities suitable for receiving, storing or processing’ the shipped metals.[3]

In order to facilitate the shipment, Kaiga allegedly falsified the end user undertaking submitted to the Department of Commerce, suggesting that the end use for the tubes was resale to an ultimate consignee in Belgium for use in manufacturing ‘commercial helicopter parts’.[4] The ultimate consignee was identified as ‘Aerospace Industrial Metals & Commodities’ – a company which appears not to exist – and the address listed was the same as that listed for Industrial Metals and Commodities.

However, Kaiga actually went on to ship the goods from Belgium to a second company linked to Individual A, NBH Industries in Malaysia. Records show that NHB is a registered company, of which over half of the shares are held by an individual with a name similar to Individual A[5]. Department of Commerce telephone conversations with NBH industries to conduct a post-shipment verification revealed that the company was located within a ‘virtual office’ run by a company called ‘Sevcorp’. The employee with which the Commerce official spoke revealed that the managing director of NBH Industries was based in Iran.

The US authorities appear to have picked up the case following the initial refused license application. They substituted the AL7075 with AL6061, a material whose characteristics make it unsuitable for use in centrifuge rotors and which is thus not controlled. As such, if the goods were destined for Iran’s nuclear programme, the efforts of the US authorities were successful in thwarting the Iranian attempt this time around.  It is unclear whether the Aluminium was shipped to Iran from Malaysia. The complaint only details its transfer to Malaysia. However, when Individual A noticed that the product had been substituted, he sent an email with pictures of the product attached from an Iranian IP address.

Kaiga’s Involvement

Kaiga from Brussels, Belgium has left a significant digital shadow, including a detailed Linkedin profile. This details his role as ‘MD EMEA’ of ‘Industrial Metals & Commodities’.[6] This entry indicates that his role was ‘Overall, leading and managing European operations including sales, support and facilities’, and highlights the importance he placed in ‘reinforc[ing] and extend[ing] the unique / strong IMC culture, which is a strategic differentiator for us’. The profile also details that he worked as ‘Sales and account representative’ at ‘AMI Inc, AMI Metals Europe, The aerospace material specialist’, a US-owned airspace materials supplier, for 6 months in 2005/2006. He may have had experience in handling export licensing in this role.

Kaiga’s company which is alleged to have been involved in the transaction, Industrial Metals & Commodities SPRL, is said to have had a Brussels-registered address 16 Rue Goffart, 1050 Ixelles, Brussels. As noted in the complaint, the address is in a residential neighbourhood. Reports suggest that the company was declared bankrupt by the Commercial Court of Brussels in October 2012.[7]

Kaiga also registered his company in the UK in August 2012 -- as Industrial Metals & Commodities Ltd -- at a London address, Unit 12, 20 Lamb Street, London, E1 6EA.[8] The ‘unit’ appears to be a residential flat above a commercial property in Old Spitalfields Market. The UK branch of his company is not mentioned in official documents such as the complaint against him.

In this scheme, Kaiga’s involvement was as facilitator – allowing Individual A to acquire the aluminium in breach of US controls. Kaiga was also allegedly also complicit in substantially undervaluing the shipment ($5.90 per foot as opposed to $39.67 per foot) to reduce tax burden and in providing the details of a non-existent company -- Aerospace Industrial Metals & Commodities SPRL – to facilitate the delivery.[9] However, he is thus far the only involved individual to face justice for his actions.

Kaiga was arrested during a visit to the United States and was changed subject to the provisions of IEEPA and presidential executive order 132222 as the US Export Administration Act of 1979 actually expired in 2001 but has not yet been re-enacted. If convicted, he faces up to 20 years in prison.

Timeline

September 2007

Initial enquiry made to US company

November 2007

US firm applies for an export license

January 2008

License rejected by US BIS

2009

Kaiga sets up company in Belgium

June 2010

Steel shipment (non-controlled) made to Kaiga’s company in Belgium

January 2011

Second steel shipment made to Kaiga’s Belgian company

March 2011

Second steel shipment shipped from Belgium to Malaysia

August 2011

Kaiga tells US company that Aluminium will stay in Belgium

November 2011

Aluminium (wrong spec.) shipped to Belgium

February 2012

Aluminium shipped to Malaysia

August 2012

ECO calls Malaysian firm – told that Director is located in Iran

August 2012

Kaiga registers company in the UK

October 2012

Kaiga’s company declared bankrupt in Belgium

25 June 2013

Kaiga arrested

November 2013

Kaiga appears in court, pleads not guilty


Individual A

Individual A, the individual controlling the UAE and Malaysian-based companies and working to procure the goods destined for Iran is not named in official documentation. However, the documents suggest that he is based in Iran. On multiple occasions, Individual A sent an email from an IP address which is believed to have been located in Iran. When the Department of Commerce official contacted the Malaysian ‘virtual office’ in which NBH is said to be based, the employee claimed that individual A was based in Iran.

The Materials 

The material sought in this case was 15ft cylinders of Aluminium 7075T6 with a diameter of 4.125 inches. This grade and diameter of material appears to be the same as that used in the rotor Iran’s IR1 centrifuge. If used as rotor materials, this shipment would be sufficient for at least one centrifuge cascade, and potentially as many as three if flow-forming was employed[10]. During the period in question, reports by the IAEA show that Iran continued to expand the number of centrifuges installed at its Natanz enrichment site, and while it cannot be determined with certainty based upon the available information, it is very possible that procurement attempt could have directly aided Iran’s centrifuge programme.

Conclusions

This case appears to be an excellent example of the system working as intended. Specifically:

  • The exporter applied for a licence in line with its legal obligations.
  • The licence was rejected as there were reasons to doubt the true end use.
  • The exporter continued to exercise due diligence, sharing suspicions with the national authority. 
  • The national authority substituted the goods with low-risk equivalents in order to facilitate a prosecution.
  • An individual who attempted to work around the controls and supply a programme of concern was arrested.

The case does nonetheless highlight the on-going need for vigilance if prohibited programmes in Iran and elsewhere are to be constrained.

 

 

Sources Used Throughout

Department of Justice Press Release:

http://www.justice.gov/usao/iln/pr/chicago/2013/pr1030_01.html

Indictment: http://www.justice.gov/usao/iln/pr/chicago/2013/pr1030_01a.pdf

Compliant: http://www.justice.gov/usao/iln/pr/chicago/2013/pr1030_01b.pdf

 

 



[2] Profile accessed at Linkedin.com

[3] Criminal Complaint

[4] Criminal Complaint, p.19

[5]Criminal Complaint

[6] ‘Nicholas Kaiga’, Linkedin Profile, available at http://www.linkedin.com/in/nkaiga, accessed 5 November 2013.

[7] ‘Faillissement Industrial Metals & Commodities Sprl’, available at http://www.faillissementsdossier.be/nl/faillissement/585060/industrial-metals-commodities-sprl.aspx.

[8] ‘INDUSTRIAL METALS & COMMODITIES LTD’, Dellam Corporate Information Limited, available at http://www.dellam.com/08183184-INDUSTRIAL%20METALS%20%26, accessed 5 November 2013.

[9] Criminal Complaint, p.20.

[10] The IR1 centrifuge rotor is made up of four cylinders that are connected by three maraging steel bellows. The IR1 has an approximate effective rotor length of 1.8 meters, although it is unclear precisely how long each rotor segment of Aluminium cylinder is. Nonetheless, the 1800ft (or 548.64m) is sufficient material for 1.5-2 cascades worth of centrifuges. Flow forming could further elongate the tubes. 

 

As a leading manufacturer of capacitance manometers, an item used to measure near-vacuum pressures in semiconductor, pharmaceutical or advanced coating processes, MKS products are perhaps the best example of a dual-use ‘chokepoint technology’ - an item without which some forms of gaseous uranium enrichment could falter or even be set back. This paper describes one logistical technique referred to by MKS as the “Controlled Delivery” model (or Direct Factory Shipment Program, DFSP) for reducing the systemic risk of sensitive dual-use technologies being diverted to proliferation programmes of concern through illicit trade. The adoption of this voluntary approach by MKS is an example of “Anti-proliferation” in practice – the concept of resilience to proliferation in companies’ supply chains. Click HERE to visit the publications page. 

 

Bank Mellat is one of the largest banks, and the largest privately owned bank, in Iran. It has allegedly been involved in providing financial services that have enabled procurement in some areas of Iran’s nuclear programme. Sanctions were imposed on Bank Mellat by the US and the EU in 2007 and 2010.

More recently, Bank Mellat has been disputing the grounds on which these sanctions were imposed and seeking legal proceedings to bring about their removal. They have recently had some success on this front with a UK Supreme Court ruling that the UK sanctions were unlawful in June 2013, following a similar ruling by the EU General Court in January and lifting of the designation of the bank’s Chairman by the EU in 2012. However, EU sanctions remain in place whilst the EU appeals the ruling at the European Court of Justice. This case study explores the Bank Mellat case and some of the issues surrounding it.  

The panel of experts set up to monitor the implementation of UN sanctions on Iran has released its annual report. The report highlights Iran’s continued non-compliance with its international obligations and its continued defiance of UN Security Council orders to suspend the country’s controversial nuclear and missile programme and to halt procurement of sensitive technologies that could support these programmes.

 

Summary:

  • MITEC, an entity involved in the construction of the Arak heavy water reactor in Iran, has been involved in the procurement of a large number of valves in breach of UN sanctions;

  • The new UN panel report provides some more insights into the case;

  • The report recommends the designation of ‘Pentane Industries’ for its involvement in the procurement process;

  • Firms should have in place a compliance system including a screening element to prevent possible involvement in trade with designated entities.
  • This case study also highlights some of the risks posed by Iran’s use of front companies based in Turkey, a country which shares a 499km land border with Iran, to transfer sensitive technologies.

Background

While Iran’s centrifuge enrichment programme is often the element of Iran’s nuclear work which generates the most attention in the press, there are also concerns surrounding the country’s work on a heavy water reactor at Arak. This research reactor is intended to produce radioactive isotopes for medical uses. However, once complete it could also be used by Iran to produce plutonium, which when reprocessed from the spent fuel could be used in the manufacture of nuclear weapons.

Modern Industries Technique Company (MITEC) is an entity that was listed by the UN Security Council in UNSCR1929, with the resolution detailing that the entity is ‘responsible for design and construction of the IR-40 heavy water reactor in Arak’ and has ‘spearheaded procurement for the construction’.[1] A US Treasury document indicates that MITEC is ‘owned or controlled’ by the Atomic Energy Organisation of Iran (AEOI), and has been involved in the Arak project since 2001.[2]

MITEC’s Procurement Activities

MITEC is alleged to have attempted to procure 1,767 valves for the heavy water research reactor under construction at Arak between 2007 and 2011.[3] 1,163 valves are alleged to have reached MITEC during the period. This number of valves is believed to be sufficient to equip the entire Arak facility in orders worth $7.7 million.[4]

MITEC is alleged to have contacted Hossein Tanideh, alleged to be an owner of a number of companies in Germany, to request the procurement of valves of three types.[5] T in turn contacted Rudolf M, a Weimar-based company owner, and successful negotiation led to a first shipment of valves being made in October 2010 via Turkey to Iran. Two other individuals, Gholamali and Kianzad K., are also alleged to have been involved in setting up following deals. The two Ks, Rudolf M and another individual, Hamid Kh, were arrested by German police in August 2012.[6] Tanideh was arrested in Turkey in June 2012.[7]

The table below provides a summary of the alleged shipments of valves derived from open sources (an incomplete account is currently available in open sources):

 

Valve shipments made to MITEC and Arak[8]

Date

Supplier

Product

Alleged End User

Actual End User

Comments

October 2010

Rudolf M. Weimar-based company

Valves (unstated quantity[9])

Fictional end user later provided in Azerbaijan

Iran

Shipments made via Turkey; believed to have reached Iran.

Prior to or during Spring 2011

Entrepreneur based in Halle, Germany

655 standard industrial valves (€1 mil value, unlisted)

Turkish firm?

Shipments made via Turkey; 51 valves alleged to have reached Iran.

Valves forged in India, transferred to Turkey

856 valves specifically designed for nuclear end use.

Turkish firm?

Allegedly sent on 4 occasions; believed to have reached Iran.

2013 UN Panel Report

The June 2013 UN Panel of Experts on Iran sanctions Final Report provides some more details regarding the case. This includes the technical specifications of the valves, the methods used to procure the goods and entities involved.

Technology

In terms of the valves procured, the Panel report notes that ‘One group of 856 valves had a number of features consistent with use in the context of a heavy water reactor. These included the material specified for valve body construction, welded, bellows-sealed valves, the valve stem packing material, valve actuators specified according to standard IEEE 382 (for nuclear power generating stations), and actuators with an IP rating of 67’.[10] IEEE 382 standard is particularly notable given that products meeting this specification are able to operate in a radiation environment.[11]

Methods

The report notes that ‘this procurement involved the use of front companies in other third countries and false end user documentation’.[12] Press reports highlight the use of front companies based in Turkey, and particularly one company, IDI which was owned by Tanideh. Reports from earlier this year indicate that Tanideh was arrested in Turkey and three other linked individuals were being sought by Turkish authorities.[13]

Entities

The report also notes the involvement of the entity ‘Pentane Chemistry’.[14] The technical details above were derived from correspondence between MITEC and Pentane. It is not the first time that Pentane has been involved in illicit procurement activities. Pentane Chemistry Industries was linked to an Iranian individual listed as the consignee on a shipment of phosphor bronze wire mesh which was intercepted at Seoul International Airport during transhipment between Tianjin, China and Turkey. The Panel investigated the interdiction and included findings in its 2011 report that this constituted a breach of sanctions.[15]

 

The 2013 Panel report includes a recommendation that Pentane should be designated following ‘documentary and factual evidence’ of violation of paragraph 12 of resolution 1929.[16]


 

[1] United Nations, Security Council Resolution 1929, 2010, http://www.iaea.org/newscenter/focus/iaeairan/unsc_res1929-2010.pdf.

[3] UN Panel of Experts established pursuant to UNSCR 1929, Final Report 2013, p.7.

[4] Cathrin Gilbert, Holger Stark & Andreas Ulrich, ‘Nuclear Technology for Iran: German Investigators Uncover Illegal Exports’, Der Spiegel, 1 October 2012,  http://www.spiegel.de/international/world/nuclear-technology-for-iran-german-investigators-uncover-illegal-exports-a-858893.html.

[5] Ibid; while German privacy laws prohibit the release of his full name by the German press, it has been released by the Turkish press.

[6] ‘Germany Accuses four of Breaching Iran Nuclear Embargo’, BBC News, 15 August 2012,  http://www.bbc.co.uk/news/world-europe-19267157.

[7] ‘Covert Iranian nuclear dealings via Turkey revealed’, Today’s Zamen, 12 March 2013, http://www.todayszaman.com/news-309539-covert-iranian-nuclear-dealings-via-turkey-revealed.html.

[8] Derived from Cathrin Gilbert, Holger Stark & Andreas Ulrich, ‘Nuclear Technology for Iran: German Investigators Uncover Illegal Exports’ and ‘Covert Iranian nuclear dealings via Turkey revealed’, Today’s Zamen...

[9] If 1,767 figure from 2013 UN Panel report is correct, likely number is 256 valves.

[10] Panel Report 2013, p.7.

[12] Ibid

[13] Covert Iranian nuclear dealings via Turkey revealed’, Today’s Zamen

[14] Ibid

[15] UN Panel of Experts established pursuant to UNSCR 1929, Final Report 2011, p.15.

[16] Panel Report 2013, p.3.

On the 5th June 2013, the UN Security Council extended the mandate of the expert panel established to monitor the implementation of Security Council sanctions on the Islamic Republic of Iran, following its failure to cooperate with the International Atomic Energy Agency (IAEA) about its nuclear programme. Dr. Jonathan Brewer, a visiting professor of the Centre for Science and Security Studies in King’s College London, has been a member of the panel since 2010. The new resolution extends the committee’s mandate for one year, through 9 July 2014. A description of the panel’s work can be accessed on this page.

While Iran insists its nuclear program is peaceful in nature, following the discovery in 2003 that Iran had been concealing aspects of its nuclear programme which should have been declared to the IAEA, and subsequent information of involvement in nuclear activities which appeared to have a military dimension, a number of countries have suspected Iran of harbouring intentions to develop nuclear weapons. The Security Council has enforced sanctions on Iran since 2006, including a ban on items which could contribute to its prohibited nuclear programmes and ballistic missile programmes, on arms sales to and from Iran, and a freeze of assets of designated individuals and entities. 

UN Sanctions Iran

Following publicity in 2002 of hitherto covert aspects of Iran’s nuclear programme, the international community has pressured the Iranian government to be transparent about the programme and its objectives , and to stop sensitive work, particularly that related to uranium enrichment. The IAEA has published a series of reports documenting concerns[1]. Iran in response has consistently denied military intent, arguing that its nuclear ambitions are civil in character and legal under its membership of the NPT.

The IAEA Board of Governors referred Iran to the United Nations Security Council in 2005 for non-compliance with its safeguards obligations. Since 2006 four sets of UN Security Council sanctions resolutions have been implemented.[2]

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