Hiding in Plain Sight

KleptoCast 22: Casey Michel speaks to Quartz reporter Max de Haldevang about how Iran managed to buy a Manhattan skyscraper using anonymous companies based in the U.S. – and why there is nothing stopping it from doing so again. (You can also listen and subscribe on iTunes).

By Casey Michel

In the 1970s, the Pahlavi Foundation began funding construction on a 36-story skyscraper in midtown Manhattan. Located at 650 Fifth Avenue and running some 380,000 square feet, the building presented a slice of prime New York real estate – a value that’s since grown, by some estimates, to upwards of $1 billion. Unsurprisingly, the building has attracted blue-chip tenants over the past few years, ranging from Starwood Hotels & Resorts Worldwide to the Juicy Couture flagship store. Just a few months ago, Nike inked a 15-year lease in the building, worth an estimated $700 million.

However, the construct didn’t simply provide a choice location, or a chance to queue for the latest Air Jordans. In late June, a federal jury determined that the building acted as a front for funneling millions of dollars to Iran, skirting sanctions and misleading investigators alike. With the ruling, the U.S. received its largest-ever civil forfeiture jury verdict – as well as the largest terrorism-related civil forfeiture in American history.

But where prosecutors and American officials alike can find some satisfaction following the verdict, the trial’s result points to perhaps the most notable, or at least most egregious, abuse the U.S.’s company formation industry has ever seen. That is to say, the Iranian government’s ultimate stewardship of 650 Fifth Avenue wouldn’t have been possible without one key component: an American shell company.

Partners in crime

Utilizing a U.S.-based shell company is, of course, far from an atypical choice for those pursuing Manhattan real estate; at last check approximately half of the U.S.’s luxury residential properties have been purchased via shell companies. Not only is New York one of the jurisdictions included within the U.S. Financial Crimes Enforcement Network’s Geographic Targeting Orders, documenting those behind real estate purchases over $3 million, but the city itself has implemented its own program of ownership identification. And given the U.S.’s continued lack of beneficial ownership identification requirements – despite Washington’s commitments elsewhere – it’s an open secret that the U.S. has produced something of a shell company empire within its own confines, helping prop up state-level economies in places like Delaware, Wyoming, and Nevada.

As such, it’s little surprise that Iran didn’t look far for a shell company to help obscure its ownership of a Manhattan skyscraper. According to court documents, Tehran followed a relatively tried and true method for masking its ownership of 650 Fifth Avenue. Representatives from Bank Melli – an Iranian bank “controlled by Iran’s government,” per Bloomberg, that had helped finance the construction of 650 Fifth Avenue – formed Assa Co. Ltd., an entity domiciled in Jersey. Assa Co. Ltd. then turned to New York to form a shell company called Assa Corporation.

Elsewhere, the Pahlavi Foundation, following the Shah’s overthrow, transitioned into the Alavi Foundation, and formed a partnership with Bank Melli in 1989 “to avoid paying taxes on rental income” from 650 Fifth Avenue, according to the U.S.’s Department of Justice. Alavi then proceeded to transfer some 35 percent of its partnership with Bank Melli to Assa, which was followed some time later by another 5 percent transfer to the shell company. All told, Alavi ended with 60 percent of a stake in the Manhattan skyscraper – with the Tehran-controlled Bank Melli, via its New York-based shell company, retaining some 40 percent ownership. (As Alavi’s director wrote in 1991, “We were also able to successfully carry out cultural and Islamic activities in the country of the Great Satan.”)

For another regime, such obfuscation would have been simply that: obfuscation, via an American shell company. However, following the 1995 imposition of sanctions against Iran, the set-up wasn’t simply a means of highlighting how opaque the U.S.’s company-formation sector remains. Rather, Tehran’s entire scheme was now illegal – it was a move, as Global Witness wrote, “in direct breach of anti-terrorism sanctions.” Said Joon H. Kim, acting U.S. attorney for the Southern District of New York, “For over a decade, hiding in plain sight, this 36-story Manhattan office tower secretly served as a front for the Iranian government and as a gateway for millions of dollars to be funneled to Iran in clear violation of U.S. sanctions laws.”

Trouble in Tehran  

 The recent ruling is the culmination of a nine-year effort from American officials to wrest control of the building from its Iranian stewards. The trial didn’t simply see the beneficial ownership of Assa Corporation revealed – a fact that could have been made evident years ago, had the U.S. followed through on commitments to track those setting up American companies – but it also illustrated how Iranian ambassadors to the U.N. directed Alavi’s affairs, with notes illustrating one ambassador expressing interest in increasing Alavi’s scope moving forward. Prosecutors even shared stories of scouring for documents in strip mall trash baskets, and locating pertinent documents in a Long Island attic. The jury further determined that the U.S. could seize portions of related properties in Queens, Houston, California, and Maryland, as well as additional bank accounts.

Much like some of the U.S.’s more prominent civil forfeiture cases elsewhere – including the 2014 settlement with Equatorial Guinea Vice President Teodoro Nguema Obiang Mangue – the U.S. will allocate the coming proceeds from the sale of the property, or properties, seized toward over 20 groups of victims of Iran-linked terrorism, including the estates of U.S. Air Force members killed in 1996’s Khobar Towers bombing and families of servicemen and -women who died in the 1983 Lebanon bombing.

While the coming payments are certainly a step in the right direction, the fact remains that Tehran managed to spend years taking advantage of Washington’s inability to shed a bit of light on its domestic shell company industry. The U.S. may have just seen its largest terrorism-related civil forfeiture in history, but the scope of such a penalty comes so great only because adversarial regimes – to say little of oligarchs, autocrats, and extremist networks elsewhere – continue to take full advantage of the U.S.’s rampant lack of shell company oversight. Tehran may have suffered a blow, but there’s little stopping the regime – or governments in Pyongyang, Damascus, or Moscow – from setting up another shell company in Nevada, Wyoming, or Delaware, and starting all over again.

Casey Michel has worked as a journalist and researcher in the United States and former Soviet Union.