Thursday, December 29, 2016

Inside The 37-Year Standoff Over Iran’s Frozen U.S. Dollars

Iran sought the money from every administration since Carter’s; will Obama’s deal encourage more claims?


By Jay Solomon and Carol E. Lee
The Wall Street Journal
December 29, 2016

When the shah of Iran fell in 1979, the U.S. froze at least $400 million of Iranian money sitting in a Pentagon trust fund. The Islamic Republic of Iran never stopped trying to get it back.

Tehran unsuccessfully sought the money from Jimmy Carter in return for 52 American diplomats held hostage for 444 days. It asked the Reagan administration for the same money during dealings that led to the Iran-Contra scandal. The issue came up yet again during negotiations with George H.W. Bush’s White House.

No administration agreed to surrender all the money, until Jan. 17, shortly after four American citizens were released from Iranian jails in a prisoner exchange. That is when an Iranian government Boeing 737 lifted off from Geneva’s Cointrin airport carrying $400 million—stacks of Swiss francs delivered on wooden pallets earlier that day by the U.S. government.

The history of the frozen money, based on interviews with U.S., Iranian and European officials involved in the negotiations over the decades, shows how it has been a constant sore point between the two countries since the 1979 Iranian revolution. That sore spot finally has been removed, although in keeping with the four-decade pattern, it has been replaced by other financial grievances and more American detainees, suggesting similar dramas may lie ahead.

Over the past 18 months, Iran has detained at least three more American citizens for allegedly threatening the country’s national security. Iranian President Hassan Rouhani wants the U.S. to return another chunk of Iranian money, $2 billion frozen in 2009 in a Citibank account in New York. He has suggested that a deal similar to the one involving the $400 million could resolve the issue.

“There were these two issues that were being talked about simultaneously on parallel tracks,” Mr. Rouhani told NBC News in September. “Perhaps these dialogues can be still conducted simultaneously…in order to free the sums of money that are still owed to us.”

The Obama administration has said the $400 million payment, and another $1.3 billion paid in interest, wasn’t ransom but was part of a deal to resolve the long-running dispute over frozen assets once controlled by Shah Mohammad Reza Pahlavi. The cash transfer, besides resolving the financial standoff, helped seal a nuclear agreement the U.S. and its allies negotiated with Iran’s leaders. White House officials also have said they hoped the deal might lead Iran to moderate its behavior.

Critics of President Barack Obama’s Iran policy, including President-elect Donald Trump, view the transfer of funds, as well as the simultaneous nuclear deal implemented with Iran, as payoffs to an Islamist regime that has shown no inclination to moderate its hostility to the U.S. Pentagon officials have accused Tehran of increasing its support for militant groups across the Middle East since the deal was concluded.

U.S. lawmakers have introduced roughly a dozen pieces of legislation seeking both to prevent any future cash transfers to Iran and to formally ban the U.S. government from paying ransom.

The Obama White House is trying to further cement the nuclear deal before leaving office next month by ensuring European and American businesses complete billions of dollars of contracts with Iran, including airplane sales. Mr. Trump has pledged to either scrap the Iran agreement or renegotiate it, something Tehran says it won’t do.

Under the shah, Iran was the world’s largest buyer of American weapons. Washington looked to Tehran as the linchpin for its strategy to secure the oil-rich Persian Gulf and thwart Soviet ambitions in the Middle East.

Dozens of U.S. defense companies, including Boeing Co., Westinghouse Electric Corp. and Rockwell International, were contracted to supply the shah’s armed forces. Iran’s government deposited hundreds of millions in the Pentagon trust fund to ensure the continued flow of U.S. weaponry.

The overthrow of the shah by supporters of the Ayatollah Ruhollah Khomeini shattered the U.S.-Iranian military alliance. The Pentagon canceled billions of dollars of defense contracts. The U.S. formally severed relations with Iran after students, angry about U.S. support for the shah, took American diplomats hostage at the Tehran embassy in November 1979.

In January 1981, Iran released the hostages after 444 days, but only after the Carter administration began transferring $12 billion of Iranian money back to Iran’s new rulers. Current and former U.S. officials involved in Iran diplomacy say that marked the first such financial trade-off. Some lawmakers argued it bordered on extortion or ransom.

The transfers didn’t include the money deposited in the Pentagon trust fund, a sensitive issue given Tehran’s revolutionary government, say the U.S. officials.

“Clearly, in Iran’s eyes, hostage-taking and coercion were the only leverage they believed they had against a superpower,” says Patrick Clawson, an Iran expert at the Washington Institute for Near East Policy who has advised families who have sued Iran.

The U.S. and Iran agreed in 1981 to establish a tribunal in the Dutch city of The Hague to resolve the financial disputes remaining from the shah’s era. Three Iranian and three American judges sat with three from other countries. Nearly 4,000 cases were filed after the arbitration panel got started in 1982.

Settlements were reached on many government-to-government and private disputes, but the issue of the Pentagon funds and many of the arms deals initially weren’t among them, according to U.S. and Iranian lawyers who took part in deliberations.

U.S. government lawyers questioned whether the U.S. was legally obligated to compensate Iran’s revolutionary government. They also argued the embassy takeover might have breached the terms of the defense deals.

“The arms disputes were largely pushed back or ignored,” says Koorosh Ameli, an Iranian arbitrator who served on The Hague tribunal until 2009. “The parties’ legal arguments were nearly impossible to separate from their politics.”

The Reagan administration faced the issue of the money in the Pentagon fund when it opened a secret channel to Tehran during the mid-1980s, in what led to the Iran-Contra scandal.

U.S. officials held dozens of meetings with Mr. Khomeini’s representatives in 1985 and 1986 in a bid to improve relations. At the negotiating table, the U.S. sought Iran’s help in securing the release of Americans kidnapped in Lebanon. In exchange, the U.S. offered Iran antitank missiles to aid in its war against Iraqi dictator Saddam Hussein.

The Iranians wanted more, according to participants in the meetings. They demanded all the money in the Pentagon trust fund, or the arms they believed they had already bought. The U.S. refused.

“They raised it in every single meeting we had,” says Oliver North, the former Marine colonel who oversaw the Iran-Contra arrangements, referring to the Pentagon money. “It was an obsession."

The U.S. sold Iran hundreds of missiles, secretly using the proceeds to fund Contra rebels fighting Nicaragua’s Marxist government. The Iranians claimed the missiles were defective and the eventual exposure of the secret transactions led to criminal charges against senior Reagan administration officials, including Col. North.

During the presidency of George H.W. Bush, U.S. lawyers at The Hague worked to settle all outstanding claims, an effort to improve ties with Iran under its business-minded President Hashemi Rafsanjani. In 1990, $200 million was returned to Iran from the Pentagon trust fund. Another settlement for a failed arms deal was reached in 1991.

American hostages held by Iranian-backed militias in Lebanon were released shortly after, prompting accusations in Congress that ransom had been paid. The Bush administration denied that, but the incident undercut the U.S.’s ability to settle more claims during Mr. Bush’s tenure, say former U.S. officials who worked on the cases.

“What should we have done? Not taken the Americans back?” asks Abraham Sofaer, the State Department’s top lawyer at the time.

The politics surrounding the funds grew more complicated as accusations of Tehran’s support for international terrorism multiplied, current and former U.S. officials say. Iran is a supplier of arms and funding to groups designated as terrorist entities by the U.S. government, including Hezbollah in Lebanon and Hamas and Islamic Jihad in the Palestinian territories.

Congress passed legislation in 1996 allowing victims of terrorism to sue foreign governments for financial damages. Two years later, the family of Alisa Flatow, a 20-year-old New Jersey woman killed in the Gaza Strip when a jihadist suicide bomber struck a bus, won a $250 million judgment again Iran in a U.S. court. The court ruled Tehran oversaw and financed the terrorist group’s activities.

The Flatows and their lawyers cast about the U.S. looking to seize Iranian assets. Stephen Perles, one of the attorneys, got wind of $400 million in the Pentagon trust fund. Alisa Flatow’s father, Stephen, said in an interview he wanted the judgment to be paid from that $400 million.

“I didn’t want to receive taxpayer money for this,” Mr. Flatow said. “It’s the Iranians who should be paying.”

Ultimately, the Treasury Department found taxpayer money elsewhere, and the $400 million remained in the Pentagon account.

During President Obama’s second term, his administration and U.S. lawyers at The Hague intensified negotiations to settle Iran’s financial claims from the shah era. Senior U.S., Iranian and European officials say they were certain by the spring of 2015 the tribunal would eventually order the U.S. to repay the $400 million, plus interest.

Some lawyers who worked on The Hague tribunal during Republican administrations agreed. “I think it’s pretty clear that at some point we were going to have to settle,” says John Bellinger, the top lawyer in George W. Bush’s State Department.

Iran was demanding as much as $10 billion, citing the high rates of interest in the 1970s. In an out-of-court settlement, the U.S. agreed to pay Iran the $400 million, plus $1.3 billion in interest. It said the payments were a key advance in settling all disputes linked to the shah’s era.

Nevertheless, the timing of the January payment and the use of cash led many U.S. lawmakers and diplomats to characterize the $400 million as ransom.

Obama administration officials say they needed to pay cash because of U.S. sanctions and to quickly meet Iran’s economic needs. Nevertheless, over the past 18 months, the U.S. used international banks to send money to Iran to settle other financial commitments, undermining the argument that normal banking transactions were impossible with Tehran.

“There were many vehicles that could have been used to pay that money, other than untraceable cash,” says Mr. Sofaer, the State Department lawyer in the Reagan and George H.W. Bush administrations.

In the days before the $400 million was handed over in Geneva, the Pentagon transferred the money to the Federal Reserve Bank in New York. There it was converted into Swiss francs and deposited into an account at Switzerland’s central bank. Then it was moved to Geneva’s airport, where U.S. officials waited for word that the four American prisoners had departed Tehran. The officials said they used the payment negotiated separately at The Hague as leverage to ensure the Americans were freed.

On Jan. 17, several Swiss plane spotters—amateurs who track air traffic—noticed a Boeing 737 owned by the Islamic Republic of Iran on the runway at the Geneva airport. They began filming. The jet taxied past a U.S. Air Force jet and a Gulfstream V that had arrived to pick up the prisoners, then lifted off into the sky.

“We have a secret event between Iran and the U.S. Department of State in Switzerland,” wrote one of the spotters in an internet posting. “At Geneva Airport an exchange for Iranian-American prisoners is being conducted.”

A Swedish flight-tracking service followed the Iranian plane as it flew east over central Europe. The plane’s signal eventually disappeared over Turkey. The Iranians had informed the flight tower of their destination: Urmia, an airfield on Iran’s western border with Iraq.

Later that day, The Obama administration announced that the four Americans, including Washington Post reporter Jason Rezaian, had been released. It didn’t mention the cash transfer in Geneva.


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