Bloomberg
April 21 2004

Rafsanjanis Are Iran’s Power Brokers as Investors Seek Oil

April 21 (Bloomberg) — 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 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. On June 1, 1993, he told the court that
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 1984 and emigrated to
Canada in 1988.

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 1999, 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.”

Investors seeking riches in Iran are likely to run up against the
Rafsanjanis. The challenge is to avoid the pitfalls.

To contact the reporter on this story:
–Kambiz Foroohar in London at kforoohar@bloomberg.net

To contact the editor of this story:
Ron Henkoff at rhenkoff@bloomberg.net