 Iran's power brokers
The Rafsanjanis
By Kambiz Foroohar
April 21, 2004
Source: Bloomberg
The following will be published in June's Bloomberg
Markets. At 6 p.m. on Sept. 11, 2003, agents
from Oekokrim, Norway's financial crimes police unit, raided the
Stavanger headquarters of Statoil ASA, the nation's largest oil
company. They were seeking records of a $15 million contract with
Horton Investment, a London-based consulting firm with links to a
son of Iran's former president, Ali Akbar Hashemi Rafsanjani.
Oekokrim said in a Sept. 12 press release that a
$5.2 million Statoil payment that wound up in a Turks and Caicos
Islands bank account might have been a bribe to drill in Iran's
natural gas fields, the largest in the world after Russia's.
Oekokrim charged Statoil with violating Norway's
General Civil Penal Code, which prohibits influencing foreign officials.
The Statoil scandal reveals the risks of dealing
with Iran -- a country that ranks
with Armenia, Lebanon and Mali as "highly corrupt" in a survey by Berlin-based
Transparency International,
which polls business executives and academics on investing. Two
weeks after the raid, Statoil Chairman Leif Terje Loeddesoel, 69,
Chief Executive Officer Olav Fjell, 52, and Executive Vice
President Richard Hubbard, 53, resigned. None of the executives
has been charged with any wrongdoing. Iranian Revolution
Twenty-five years after Ayatollah Ruhollah Khomeini led the
revolution that toppled Shah Mohammad Reza Pahlavi, a dozen
families with religious ties control much of Iran's $110 billion
gross domestic product and shape its politics, industries and
finances, says Ray Takeyh, a professor and director of studies at
National Defense University's Near East and South Asia Center in
Washington and coauthor of "The
Receding Shadow of the Prophet: The Rise and Fall of Radical Political Islam" (Praeger,
2004).
The Rafsanjanis -- who have investments in pistachio
farming, real estate, automaking and a private airline worth a
total of $1 billion -- are among the best connected and most
influential of the families, Takeyh says. Rafsanjani, 69, has wielded power since the creation
of the
Islamic Republic in 1979, when he served on the Revolutionary
Council under Khomeini.
Mohsen Hashemi, 43, Rafsanjani's oldest son, heads
a $2 billion project to build Tehran's subway. Yasser Hashemi,
32, the
youngest son, runs a horse farm north of Tehran in the exclusive
suburb of Lavasan, where an acre of land costs $2 million. Mehdi
Hashemi Rafsanjani, 34, the son whose contact with Statoil led to
the police search, was a director at National Iranian Gas Co. and
heads the unit that develops compressed natural gas for cars.
"The whole Iranian economy is set up to benefit
the privileged few," Takeyh says. "Rafsanjani is the most adept,
the most notorious and the most privileged." Tempting Riches
Iran's riches are tempting to companies and private
investors. The country -- which, at 1.65 million square
kilometers (637,069 square miles), is slightly smaller than
Alaska -- holds 9 percent of oil reserves, second in the world
behind Saudi Arabia. Iran also holds 15 percent of global natural
gas deposits.
With two-thirds of Iran's 70 million people under
age 30, the country's appetite for consumer goods is ballooning.
GDP
will
climb 8 percent this year: the same rate as China and almost
double the 4.6 percent rate in the U.S., the International
Monetary Fund projects.
In 2003, the Tehran Stock Exchange All-Share Price
Index more than doubled to 10879.87 compared with a 26 percent
increase
for the Standard & Poor's 500 Index. The market value of the 350
companies on the exchange rose 7 percent to $37 billion in the
first three months of 2004. Automaker Iran Khodro Co.; Melli
Investment Co., a unit of Bank Melli, Iran's biggest bank; and
Kharg Petrochemical Co., the country's fifth-biggest company by
market value, powered the gains.
Stock Market
The government of President Mohammad Khatami, 60, who
replaced Rafsanjani in 1997, introduced legislation last year to
open the stock market to foreign investors. A 1996 ban keeps the
exchange closed to all but Iranians. Khatami also proposed
creating an independent regulatory body like the U.S. Securities
and Exchange Commission.
Jim Rogers, 61, who founded the New York-based Quantum
Fund with George Soros in 1969, is among a handful of foreigners
who
bought shares in Iranian companies in the early 1990s, before
Iran's parliament banned outside investment. The exchange let
investors like Rogers keep their shares.
Rogers says his holdings, which he declines to name,
have risen "an enormous amount." He says he's aware of Iran's
attractions -- as well as its pitfalls. "The country has oil,
lots of minerals, a young population," Rogers says. "Transparency is a problem. They only send me information
about my companies when they want to." Legal Traps
Companies and investors that want to break into Iran need to
understand how to navigate legal and ethical traps like the one
that rocked Statoil, says Arwa Hassan, program director for the
Middle East at Transparency International.
In 1979 and 1980, U.S. President Jimmy Carter imposed
a series of bans on Iran that barred travel, trade and financial
transactions after militants held 52 American embassy staff
members hostage in Tehran for 444 days. In 1995, President Bill
Clinton banned U.S. companies from helping to develop Iran's
energy industry. In 1996, the U.S. Congress authorized the
president to impose sanctions on non-U.S. companies that invested
more than $20 million in Iran's energy assets. Interest From Europe
European and Asian companies aren't bound by U.S.-style
prohibitions against Iran -- and they're rushing to get a piece
of the action. France's Total SA, Europe's No. 3 oil company, is
in talks to construct a $2 billion liquefied natural gas plant.
Alcatel SA, the world's second-biggest maker of
telecommunications gear, is building Iran's phone system and
supplying lines for high-speed Internet service.
In February, Japan's state-run oil company, Inpex
Corp., and Osaka, Japan-based trading company Tomen Corp. agreed
to spend
$2.5 billion to develop the Azadegan oil field.
Michael Thomas, an adviser to the U.K. Department
of Trade and Industry, says Iran is ripe for foreign investment.
"Iran
has everything the West needs: cheap energy, lots of raw material
and a large labor pool," he says.
Statoil pursued Iran's oil and natural gas. The
North Sea reserves that produced more than 90 percent of Statoil's
output
began to decline in 1999. Hubbard, the former executive vice
president, said in a January interview that the onus of finding
new fields fell to him as head of international exploration.
Fjell and Loeddesoel declined to comment for this story. Meeting With Junior
In a letter given to Statoil's board after his resignation,
Hubbard said that when he got a chance to talk with the son of
Iran's former president, he took it. In 2001, Hubbard met Mehdi
Hashemi Rafsanjani, whom he called Junior, in Statoil offices in
Bergen.
According to Hubbard's Oct. 22 letter, Mehdi Hashemi
asked if Statoil would pay "a success fee" to develop the Salman
oil
field in the Persian Gulf. Hubbard turned down the proposal after
his development team rejected Salman on technical and cost
grounds.
"Junior led us to believe several companies had
paid success fees for various contracts," Hubbard wrote. Mehdi
Hashemi made other
proposals, Hubbard wrote. One was a plan to divert funds to Iranian Islamic
charities, or
Bonyads.
Hubbard rejected those. In early 2002, he found
one offer acceptable, he wrote in his letter: Mehdi Hashemi proposed
acting
as Statoil's political adviser and said he would commission a
consulting agreement with Abbas Yazdi, 34, an Iranian who had set
up Horton Investment and was living in London. In a September
interview, Yazdi confirmed that he ran Horton. Consulting Deal
In June 2002, Statoil and Horton Investment signed a formal
agreement for an 11-year, $15 million consulting deal, Hubbard
said in the January interview. Four months later, Statoil
announced plans to invest $300 million to drill and pump natural
gas from the South Pars field, the world's largest, with 800
trillion cubic feet of reserves.
That December, Yazdi asked Statoil to wire $5.2
million to his account in Turks and Caicos, according to Hubbard's
letter. A
few months later, Statoil's internal auditors questioned the
payment, says Jan Borgen, national director for Norway at
Transparency International.
"The auditors became suspicious because of the size
of the contract and the fact that Statoil paid a 35 percent lump
sum,
which is unusual," says Borgen, who followed the case as an
official at Transparency International. The consulting agreement
was for 11 years and Statoil paid 35 percent of the value after
six months, he says. Hubbard confronted Yazdi about the transfer, he
said in his
letter. Yazdi said it had always been his intention to use an
offshore account. "There was a clear understanding that
companies that are active in Iran are expected to contribute
to
the society one way or another," Hubbard wrote.
Suing Iran
Houshang Bouzari, 51, an adviser to Iran's oil minister in
the 1980s, says doing business in Iran without paying someone
in
power is impossible. When he refused to pay a bribe, he says,
he
wound up in a Tehran prison. Now a Canadian citizen, Bouzari
is
suing the government of the Islamic Republic of Iran for torture,
abduction and false imprisonment.
In 1988, Bouzari left his post and set up an oil
trading and consulting firm with offices in Rome and Tehran. Four
years
later, he says, he began working with Saipem SpA, Europe's second-biggest oil
field services company, and Tecnologie Progetti Lavori SpA, an Italian subsidiary
of France's Technip SA,
Europe's largest oil field services company. With Bouzari's help, the companies secured a $1.8
billion
contract to help develop Iran's South Pars gas field, the area
Hubbard targeted a decade later. Bouzari would have made as much
as $36 million, or 2 percent of the total contract, he said in
February 2002 in testimony at the Ontario Superior Court of
Justice, where he's taken his case against the Iranian
government. Tortured in Prison
Instead, Bouzari got nothing. He told the court that on June
1, 1993, three agents from Iran's Intelligence Ministry arrested
him as he was finishing his morning coffee. They took him to
Evin, a Tehran prison where Iranian political prisoners are
detained. Jailers whipped the soles of his feet with metal cables
and pushed his head in a toilet, he testified. On three
occasions, he was told to prepare for his imminent execution,
according to the court transcript.
Bouzari spent more than eight months in prison.
His wife paid $3 million to Iran's Ministry of Information before
he was
released, court documents show. Bouzari then paid another
$250,000 to secure his passport. He left Iran for Rome in July
1994 and emigrated to Canada in 1998.
Bouzari testified he was tortured because he'd refused
to pay $50 million as a bribe to Mehdi Hashemi. "I didn't believe
at that time in paying money to a government official or son
of
the president," Bouzari said. Pressed for a Commission
In a February interview in London, Bouzari elaborated on his
ordeal. "Mehdi and Yazdi pressed me to give them a commission,
but I didn't need the Rafsanjanis because I had done all the hard
work in lining up the contract," he said. "I was detained and
tortured illegally. No shred of paper was ever presented to me or
my family as to why I was jailed or tortured."
Bouzari sued in February 2002, seeking to regain
the $3.25 million he says his imprisonment cost him. That May,
Judge
Katherine Swinton said she accepted the truth of Bouzari's
testimony. She ruled the Canadian court had no jurisdiction over
Iran as a sovereign nation.
In December 2003, Bouzari appealed to
Ontario's Court of Appeal, where the case is pending. While he
waits, he has set up the International Coalition Against Torture,
which aims to end state-sponsored abuse.
"I would have been killed had I tried to take this
action in Iran," Bouzari says. 'Psychological Warfare'
Mohammad Hashemi, 52, Rafsanjani's younger brother,
dismisses such stories. He says his family is a victim of rumors,
gossip and propaganda.
In a December interview at the former Saadabad Palace
in
northern Tehran, in a complex of buildings that once belonged
to
the deposed shah's sister, Hashemi says enemies of the Islamic regime
are lying about the family wealth.
"This is part of the psychological
warfare to create a rift
between the people and their government," says Hashemi, who
abandoned his studies at the University of California, Berkeley,
in 1978 to join the revolution. He served as Iran's vice
president from 1995 to 2001 and headed state radio and television
for 13 years. Today, he often acts as family spokesman with
the
international press.
Tea and Almonds
"Our Mehdi has said he had nothing to do with bribery,"
Hashemi says, speaking over a snack of tea and salted almonds
in
a room furnished with Louis XVI chairs, silk wallpaper and a
Persian carpet. "If foreign companies want to do business, they
should do so in a correct way without resorting to any
middlemen."
Mehdi Hashemi declined telephone, fax and e-mail
requests for an interview. In a March interview with the Shargh newspaper,
a Tehran daily, he said he had no knowledge of Horton Investment
and has had no consulting agreements with Statoil or Horton. The discovery that a Rafsanjani figures in controversy
over
money and power doesn't surprise Ali Ansari, an Iranian lecturer
in Middle Eastern history at Exeter University in southwest
England.
"Rafsanjani operates on the principle of what's
good for him is good for the country," says Ansari, who has written
two
books on Iran: "A History of Modern Iran Since 1921:
The Pahlavis and After" (Longman, 2003) and "Iran,
Islam and Democracy: The Politics of Managing Change" (Royal Institute of
International Affairs, 2000). "His family has long tentacles."
Rafsanjani stepped down as president in 1997 after
serving Iran's limit of eight years. Today, he leads the religious
organizations that shadow Iran's official government. He's deputy
chairman of the Assembly of Experts, which appoints Iran's
Supreme Leader, the ultimate political and religious authority.
In 1989, the assembly named Ayatollah Ali Khamenei to the post. Extending His Reach
Rafsanjani also heads the Expediency Council, which sets
strategic economic policy and mediates between parliament and the
Guardian Council, a 12-member clerical body that oversees
parliament. "He is one of the most powerful men in Iran,"
Ansari says. "His reputation is that of a Mr. Fix-it."
Rafsanjani extends his reach through his family.
Cousin Ahmad Hashemian is managing director of the Rafsanjan Pistachio
Growers Cooperative, which dominates the $746 million pistachio
export market, according to the Web site of Iran's Customs
Ministry.
Older brother Ahmad, now retired, headed the Sarcheshmeh
complex, Iran's largest copper mine. Another brother, Mahmud, was
governor of Qom, Iran's most important holy city. Nephew Ali
Hashemi, 43, is a member of the parliamentary energy commission
that oversees oil and gas policy. Mohsen Rafiqdoust, 63,
Rafsanjani's brother-in-law, was Khomeini's driver and head of
security when the ayatollah arrived from exile. Role of Bonyads
One way the Rafsanjanis and other clerical families maintain
their grip is through the Bonyad foundations, says Shaul Bakhash,
a visiting fellow at the Brookings Institution, a Washington-based research
organization.
After the revolution, the Bonyads expropriated assets
of foreigners and the former shah's friends, says Bakhash, who
has
written extensively on Iran and is the author of "The Reign of
Ayatollahs: Iran and the Islamic Revolution" (Basic Books,
1984).
Companies under Bonyad control account for as much
as a third of Iran's economy, he says. The Bonyads don't disclose
their accounting or pay taxes; they get subsidized loans and
report only to the Supreme Leader, he says. "The economic power
structure is even more opaque than the political system,"
Bakhash says. "The Bonyads funnel money to senior religious
figures for patronage and suspected clandestine activities." Links to Terrorism?
The Bonyads have been linked
with funding terror organizations, he says. In 1989, Bonyad 15
Khordad offered $1
million to any non-Iranian who carried out Khomeini's charge to
kill author Salman Rushdie for writing "The Satanic Verses"
(Viking Press, 1989), a novel that mocks the prophet Mohammad.
Over the years, the bounty has increased to $2.8 million.
Rafiqdoust, Rafsanjani's brother-in-law, headed
the biggest Bonyad for more than 10 years, until 1999. The Bonyad
Mostazfan
and Janbazan, or Foundation for the Oppressed and War Invalids,
owns the former Hilton and Hyatt hotels in Tehran; Zam-Zam,
Iran's largest soft drink company; Bonyad Shipping Co., a global
shipper with offices in London and Athens; and industrial plants
and real estate, according to its Web site. A 2000 World Bank report put the value of BMJ assets
at $3.5
billion; Iranian economist Mohammad Jamsaz, a consultant to
Iran's Chamber of Commerce, estimates the number is closer to
$12
billion.
Student of Khomeini
Rafsanjani gained entry to Iran's political and religious
elite early on. He was one of nine children born into a pistachio
farming family from the village of Bahraman, near Rafsanjan, a
dusty town in central Iran. When he was 14, his parents sent him
to Qom, a seminary town on the northern fringes of the Dasht-e
Kavir Desert.
Khomeini taught classes there, and Rafsanjani studied
Islamic law, morality and mysticism. Khomeini advocated giving
clerics more say in running the country, an interpretation that
contrasted with the then Shiite leadership, which shunned
political entanglements, Bakhash said in his book. In 1964, Iran's military arrested Khomeini and exiled
him to
Izmir, Turkey, and Najaf, Iraq. Khomeini opposed the shah's
policies on women's rights and land reform, under which the
government accumulated property from Iran's mosques. He also
fought the growing role of the U.S. military in Iran. During
the
next 15 years, Rafsanjani landed in jail five times for his own
activities against the shah.
Shah's Regime Falls
The shah's regime fell in 1979 after his modernization plans
and links to the U.S. sparked a revolution. Khomeini returned as
a national hero and pushed his idea that only the religious class
may rule. An assembly composed of 82 percent clerics changed
Iran's constitution to create an Islamic republic.
Rafsanjani stayed at the center of power. He was
a member of the Revolutionary Council, which ordered executions
of officials
in the shah's regime, Bakhash writes. He was speaker of the
Majlis, Iran's parliament, for nine years. He acted as Khomeini's
representative on the Supreme Defense Council -- or war cabinet -- during the
eight-year war with Iraq. The war ended in a stalemate in 1988, leaving a million
casualties. In 1989,
Rafsanjani was elected president, replacing Khamenei, the current
Supreme Leader.
Today, Rafsanjani's two terms are remembered for
corruption and nepotism, says Mehdi Haeri, a lawyer in Bochum,
Germany.
Haeri, himself a former student of Khomeini and a classmate of
President Khatami at Qom Theology School, spent four years in
jail for criticizing Khomeini's ideas on Islamic rule.
In 1997, Haeri testified before the U.S. House International
Relations Committee in favor of continuing U.S. sanctions against
Iran. "In every major industry and in every financial activity,
you find the Rafsanjani family somehow connected," Haeri said. Prevalence of Bribes
Siamak Namazi, managing director of Tehran-based consulting
firm Atieh Bahar Consulting, says bribes are prevalent in Iran.
"In a country where you have to pay off the postman to make sure
your international packages are delivered, bribes can be a way
of
life," says Namazi, who counts Nokia Oyj and BP Plc as clients.
Nokia, the world's biggest mobile-phone maker, sells
handsets in Iran and is seeking a contract to expand cell phone
coverage. BP, Europe's biggest oil company, is negotiating with
the oil ministry for drilling rights.
`Zero Tolerance'
BP spokesman Toby Odone says his
company doesn't pay success fees or bribes. Nokia spokeswoman Arja
Suominen says
the company
and employees won't pay bribes or illicit payments to government
officials or candidates. "You have to have zero tolerance toward bribery,"
she says. Namazi says he advises clients not to pay to win business.
"I would advise against paying a bribe," he says. "You'll only
bring fire upon yourself."
At Statoil, CEO Fjell's resignation makes the case
for Namazi's statement. "Looking back, I see that I entered an
ethical borderland," Fjell said at his September farewell news
conference in Stavanger. "This particular agreement shouldn't
have been made. I'm struggling with the fact that I could allow
that to happen."
Iranian Deputy Foreign Minister Mohammad Hossein
Adeli says the Statoil episode would have blown over had the company
been
more open. A former central bank governor and ambassador to
Canada, Adeli takes a deep breath, searching for the right words.
"If a Western company wants to come to Iran, should they
pay someone to show them around and to help them navigate the
Iranian market? Absolutely," he says. "They have to pay. The
only thing Statoil did wrong was to keep the payments a secret."
Foreign investors may not be so generous in their
assessment. "If there's a feeling a country has corrupt
officials, it's bad for investors," says Karina Litvack, head of
governance at Isis Asset Management Plc, a London fund manager
with about 62 billion pounds ($111 billion) under management,
including Statoil shares. "It makes it risky because corruption
breeds lawlessness."
Statoil shares fell as much as 11 percent on news
of the scandal before recovering as oil prices rose. The shares
dropped
1.25 kroner, or 1.4 percent, today to 90.75 kroner ($13) in Oslo.
Investors seeking riches in Iran are likely to run up
against the Rafsanjanis. The challenge is to avoid the pitfalls. .................... Say
goodbye to spam!
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Iran's power brokers
