The Nuclear Mechanic Proliferation Case Study Series

Transcription

1 Project Alpha Centre for Science and Security Studies The Nuclear Mechanic Proliferation Case Study Series Ian J. Stewart 1 and Cristina Rotaru 2 18 August 2015

2 About Project Alpha Alpha was established in 2011 at King s College London s Centre for Science and Security Studies (CSSS) with government funding to improve the implementation of trade controls. Alpha conducts research to understand both illicit trade and the effectiveness of supply-side controls in countering such trade. This research forms the basis of Alpha s outreach and capacity building activities. About the Case Study Series This series was developed to highlight individual cases of illicit trade so that broader policy lessons can be identified an enacted. The series draws upon a variety of open source information, including media reporting, trade data and social media information. Acknowledgements Alpha s work is funded from a variety of sources, including John D. and Catherine T. MacArthur Foundation and the Carnegie Corporation of New York. Copyright 2015 King s College London The author/s of this report invites liberal use of the information provided in it for educational purposes, requiring only that the reproduced material clearly cite the source, using: The Nuclear Mechanic, Proliferation Case Study Series, Ian J. Stewart and Cristina Rotaru, Project Alpha, 18 August About the Authors 1. Ian J. Stewart is head of Project Alpha at the Centre for Science and Security Studies, Department of War Studies, King s College London. 2. Cristina Rotaru is a researcher at Project Alpha. King s College London All Rights Reserved 2

3 Summary Four companies and five individuals have been charged by the US Department of Justice for allegedly devising an international network that supplied the Iranian military and Iran s nuclear programme with $24 million worth of controlled goods between 2010 and The case illustrates how such networks function at an international level and draws attention to some interesting factors regarding Iran s illicit procurement capabilities and the evasion of controls in light of the recently agreed Joint Comprehensive Plan of Action (JCPOA). Several financial and technical aspects of the network s alleged operations are taken into consideration in this regard. A current update on the status of the case is also provided. 3

4 Case Study Outline 1. Introduction 2. The alleged scheme 3. The alleged players 4. Evasion of export controls 5. Financial aspects 6. Technological aspects 7. Current case status 8. Conclusion 4

5 1. Introduction On 17 April 2015, the US Department of Justice unsealed an indictment which accuses five individuals and four corporations of violating US export control and financial transition laws in connection to a scheme to ship electronics goods to Iran The alleged scheme The indictment alleges that an individual named Barham Mechanic, an American citizen who is based in Houston, Texas, oversaw operation of the scheme, which was used to procure some $24 million dollars worth of equipment for Iran. Mechanic, a co-owner of a Houston-based electronics company, Faratel, is also accused of owning the Iranian entity involved in the scheme Faratel. The scheme reportedly operated as follows between July 2010 and 2012: 1) Faratel in Iran sent orders to Smart Power Systems in the United States. 2) Smart Power Systems in turn identified potential suppliers. 3) Hosoda Taiwan Ltd acted as a customer for the orders. 4) Hosoda Taiwan Ltd shipped the goods to Golsad Istanbul Trading in Turkey in the knowledge that they would be shipped on to Faratel in Iran. 5) Faratel assembled the items into their products, which were then passed on to customers. 6) Faratel paid for the goods primarily through Hosoda Taiwan Ltd. Faratel also explored other options for payment including a direct transfer from a US- and EU-sanctioned Iranian bank, Bank Mellat, and through a Singaporean bank. The alleged scheme s operation is shown in Figure 1. 1 United States District Court, Southern District of Texas, Houston Division, United States of America v. Bahram Mechanic et al, 15 CR 204, 16 April 2015, accessed 21 April

6 Figure 1. How the scheme is alleged to have operated Bahram Mechanic Tooraj Faridi Arthur Shyu Matin Sadeghi Khosrow Afghahi Image sources: US Justice Department (Sadeghi and Shyu), Facebook (Mechanic, Faridi), Donya-e Eqtesad (Afghahi) 3. The alleged players Five people have been charged as part of the indictment: Bahram Mechanic, aged 69: co-owner of Iran-based Faratel and its Houston-based sister company Smart Power Systems; Khosrow Afghahi, aged 71: co-owner of Iran-based Faratel and its Houston-based sister company Smart Power Systems; Tooraj Faridi, aged 46: vice-president of Smart Power Systems and engineer at Faratel; Shu Chien Chung (aka Arthur Shyu): senior manager at the Hosoda Taiwan Limited Corporation; Matin Sadeghi, aged 54: an employee of Golsad Istanbul Trading; 6

7 The indictment also mentions two further known members of the conspiracy, both employed by Faratel, identified only as Employee A (designing manager) and Employee B (purchasing manager). Charges have also been laid against four companies: Smart Power Systems Inc. (SPS) (a manufacturer of Uninterruptible Power Supplies (UPS) based in Houston); Hosoda Taiwan Limited Corporation (a trading company based in Taiwan); Golsad Istanbul Trading Ltd. (a trading company based in Turkey); Faratel Corporation (a UPS manufacturer based in Iran). Separately, the US Bureau of Industry and Security (BIS) added to its Entities List two further associates of Faratel, and an additional employee of Golsad Instanbul Trading: 2 Arash Servatian (based at Faratel s address and employed as Faratel s technical director, according to a LinkedIn profile 3 ) Elaheh Siahpoush (based at Faratel s address and possibly employed as Faratel s sales manager.) 4. Evasion of export controls The indictment alleges that Bahram Mechanic put in place a sophisticated set of arrangements in order to avoid restrictions on trade of sensitive items and other goods with Iran between July 2010 and April It is important to note that Mechanic had been previously investigated by US authorities on at least three separate occasions two of which were linked to activities for or on behalf of Iran but was subject to no further enforcement action, until now. The indictment states that instead of being deterred by the US government investigations, Mechanic utilised his knowledge of restrictions to devise a sophisticated trans-national network of individuals and companies in order to mask his network s activities, evade export controls, and continue to expand his illegal transactions with Iran. 4 Mechanic is alleged to have conspired to obtain dual-use US-origin microelectronics for the purpose of exporting them to Iran in his position at Faratel, allegedly obtaining approximately 28 million parts valued at approximately $24 million. The principal aspect of these measures involved the use of additional companies, Hosoda and Golsad, located in Taiwan and Turkey respectively. Taiwan is known to be a hub for illicit trade, although its implementation of non-proliferation controls is relatively good by international standards. In this case it appears that subterfuge was used to evade detection by the Taiwanese authorities. Specifically, the goods were shipped to an apparently legitimate customer in Turkey rather than to Iran. 2 Department of Commerce, Bureau of Industry and Security, Billing Code , 15 CFR Part 744, 17 April 2015, accessed 21 April accessed 21 April US District Court, Southern District of Texas (Houston), Criminal Docket for Case #: 4:15-cr , Case title: USA v. Mechanic, filed 16 April 2015, p. 9, currently N/A online. 7

8 Turkey is also known to be a key route for goods destined to Iran s nuclear and missile programmes. The relative ease with which firms can be established and the challenges of policing Turkey s long border with Iran appear to be part of the reason for this. Faratel received at least 250 shipments in Iran during the five year time period, which included microelectronics, microcontrollers (MCU), digital signal processors (DSP) and other goods related to UPS technology. Some of these goods are controlled under United States law (see table 1.) Table 1. A selection of goods allegedly exported and their control status under United States law Commodity Export status under US law 5 UPS: Electrical device used for military Subject to the jurisdiction of the Export systems such as naval vessels, radar arrays Administration Regulations (EAR) but not and air defence systems with appliance in listed on the Commerce Control List, the nuclear energy sector. designated as EAR99, requires license from MCU: Mini-computer utilised in military operations with a design well-suited for weapons systems. DSP: Specialised microprocessor with applied functions in the avionics and missile computational sectors. Amtel product AT89C55WD-24PU: High performance MCU. Texas Instruments products TMS320F28069PZT and TMS320F28235PGFA: High performance MCUs. OFAC. Classified ECCNs 3A991 ( Electronic devices, and components ), requires license from BIS under EAR; Classified ECCNs 3A991 ( Electronic devices, and components ), requires license from BIS under EAR; Requires license from BIS or Office of Foreign Assets Control (OFAC); Requires license from BIS or OFAC. The indictment notes that at no given point did the defendants apply for a license or other permission from the US Treasury s Office of Foreign Assets Control (OFAC) or the Department of Commerce s Bureau of Industry and Security (BIS) to export or re-export any of these items. In addition, steps were reportedly taken to disguise these shipments by including extra items such as common electrical resistors to the transactions or removing the Mil-std (military standard) designation from the name of one of the shipped components to avoid scrutiny. Interestingly, Iran s own import controls appear to have made the subterfuge in this case more difficult for the accused. Iranian customs require the port of entry to be listed on shipments, which meant that the goods could not be shipped directly from the United States. Hence, third countries were allegedly used as transhipment points. The defendants were charged with one count of conspiracy to violate the International Emergency Economic Powers Act (IEEPA) and thirteen counts of violation thereof. 6 5 US Bureau of Industry and Security, Export Administration Regulations, updated 13 July 2015, accessed 7 August US District Court, Southern District of Texas (Houston), Criminal Docket for Case #: 4:15-cr , Case title: USA v. Mechanic, filed 16 April 2015, p. 31, currently N/A. 8

9 5. Financial aspects An interesting aspect of this case relates to its financial aspects. It was necessary to transfer very large sums of money from Iran to the United States for the transactions to continue. However, a variety of US financial restrictions mean that it is usually not possible to transfer funds directly from Iran banks to banks that operate in the United States. This issue was highlighted in the indictment when the Iranian entity proposed to transfer funds from Bank Mellat an entity that has been subjected to US and EU sanctions because of its past role in proliferation. In the absence of an option to transfer funds direct, the parties are instead accused of trying to transfer the funds via an array of other mechanisms. This included using multiple currencies (Turkish lira, Japanese yen, US dollars and euros), additional jurisdictions (such as Singapore) and making smaller but regular payments instead of larger one-off payments. One such technique included Faratel initiating payment to Golsad in Turkey, which then transferred funds to Arthur Shyu and his company Hosoda in Taiwan. Though these mechanisms it is alleged that as much as $24m of funds were transferred. This is thus a rare case of alleged proliferation in which the mechanisms used to bypass financial measures can be observed. Further study of these measures should be undertaken as a way of strengthening the toolset for countering proliferation finance. Mechanic was said to have substantially profited from his illegal conduct, claiming personal assets of over $8.5 million in the US and $12.5 million in Iran, in addition to ownership of Faratel, estimated at $18 million. The defendants were charged with several ten counts of money-laundering and one count of money-laundering conspiracy. 6. Technological aspects The indictment states that the end use of the goods relates to Uninterruptible Power Supply (UPS) equipment, which is a common industrial product used to ensure a continuous power supply to electrical equipment in the event of a mains power outage. UPS equipment is dual-use, in that it has a wide range of potential applications in civilian, military and nuclear-related industrial contexts. Some of Faratel s customers, the US indictment states, were from Iran s military as well as its UN-sanctioned nuclear programme. Faratel, according to the indictment, was a supplier to Iran s Ministry of Defence and Armed Forces Logistics (MODAFL), as well as the Centrifuge Technology Company of Iran (TESA) and the Atomic Energy Organisation of Iran (AEOI). The AEOI is the main agency responsible for Iran s nuclear programme, and is sanctioned by the UN Security Council. TESA is a key entity involved in Iran s uranium enrichment programme, and has been sanctioned by the EU and US. As the US State Department has stated: TESA plays a crucial role in Iran's uranium enrichment nuclear program. It is involved in the production of IR-1 centrifuges, the type of centrifuge Iran has used to enrich uranium 9

10 and has used in facilities belonging to the AEOI entity Kalaye Electric Company, as well as the AEOI enrichment plant in Natanz, where TESA also operates an assembly complex. 7 Although it is unclear whether any US-origin goods supplied by the Mechanic network ended up in Iranian nuclear facilities, sites run by the AEOI including the uranium enrichment complexes at Natanz and Fordow would have a need for UPS equipment of the sort made by Faratel. Centrifuges require an unimpeded power supply, and UPS equipment is usually used for this purpose. This being said, it is possible that the goods could have been intended for another related use which is also of concern: the construction of frequency inverters. Iran requires frequency inverters to drive its centrifuge cascades. Inverters capable of driving centrifuges are controlled by the Nuclear Suppliers Group and under the various sanctions measures on Iran. While at least one Iranian company is known to make frequency inverters suitable for centrifuge use, Iran is known to have attempted to procure some inverters in violation of these sanctions. Moreover, the 2014 report of the UN Security Council s Iran Panel of Experts speculated that Iran may be shifting its efforts to procure components and parts as a result of difficulties in getting hold of entire units. 8 The case that components supplied by Faratel might have been used in frequency inverters for Iranian centrifuge facilities is based on two circumstantial elements. The first is that one of the customers of Faratel is TESA, an Iranian centrifuge supplier. The second is the nature of the technology that Faratel produces: UPS equipment, voltage stabilisers and automatic voltage regulators all devices that operate on similar principles to frequency inverters. Indeed, one of the engineers working for Faratel Arash Servatian has published academic papers on subjects related to the design and construction of motors (see Figure 2), which is of relevance to frequency inverters. 9 7 Office of the Spokesperson, US State Department, Executive Order Designations on Iran, Fact Sheet, 21 November 2011, accessed 21 April Final report of the Panel of Experts established pursuant to resolution 1929 (2010), accessed 26 August

11 Figure 2. Research on electrical drive systems by Faratel s Arash Servatian 7. Current case status In a hearing dated 16 April 2015, the defendants were notified by the Court that upon conviction, a money penalty may be imposed equal to the value of the property subject to forfeiture, which includes (but is not limited to) at least $1.3 million. At the time of the indictment, Mechanic, Afghahi and Faridi were placed in federal custody. Shyu and Sadeghi were said to have outstanding arrest warrants and are believed to be outside of the United States. On 28 April 2015, the Court released a modification order for the employment restrictions of Tooraj Faridi as a condition for his release. Instead of a blanket prohibition on working for Smart Power Systems, the defendant incurred a ban on engaging in commercial, financial or other transactions with any company or individual in Iran on the basis that, although charged as a codefendant in the indictment, the company conducted legitimate business with relatively common electronic products and should continue to do so, lawfully, subject to the Court s conditions. 11

12 At another court hearing on 15 June 2015, a Senior United States District Judge ruled that it was in the public interest to grant the defendants Counsel additional time to prepare a defence. This period of excludable delay commenced on 5 May 2015 and will continue until trial. A pre-trial conference has been set for 26 August Conclusion The allegations against members of the Mechanic network are yet to be proven in court, and further details of their alleged activities may yet come to light. The case stands as a reminder of the necessity for the requirement for proliferation-related due diligence, particularly as the JCPOA is implemented. 12

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