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"Iran and the Supernotes"




Testimony on S.277 before Congressman SpencerBachus

Chairman, Subcommittee on General Oversight andInvestigations

of the Committee on Banking and FinancialServices

Feb. 27, 1996



Kenneth R. Timmerman,

publisher of The Iran Brief


The Iran Brief is an independent monthly newsletter devoted tostrategy and trade, established in December 1994 as a tool forpolicy-makers and business leaders in their dealings with Iran. Priorto launching The Iran Brief, Kenneth Timmerman served on theprofessional staff of the House Foreign Affairs Committee, and wasthe editor of Middle East Defense News (Mednews) in Paris from1987-1993.

My name is Kenneth Timmerman, and I publish a monthlyinvestigative newsletter called The Iran Brief. I have writtenextensively on Iranian foreign terrorist networks in Time Magazine,the Wall Street Journal and elsewhere, and have done in-depthresearch on Iranian programs of weapons of mass destruction,including a study that was published by the Simon Wiesenthal Centerin 1992. I have also traveled widely in the Middle East and Europe,where in fact I was posted until 1993 when I returned to Washingtonto work on proliferation and arms control issues for the HouseForeign Affairs Committee during the previous Congress.

The U.S. dollar has long been the most widely accepted currency inthe Middle East. Israel came close to adopting it as official tenderduring its hyper-inflation crisis in the mid-1980s; Lebanon and Syriause it as unofficial tender for government to governmenttransactions. I can't tell you with any certainty whether I have everhandled a supernote. But I can say this: the moneychangers in the OldCity of Jerusalem, on Hamra Street in Beirut, and in the Damascussouk scrutinized the $100 bills I presented them on trips last yearwith an attention I had never experienced before. Either I havebecome more suspicious-looking in middle-age, or else we are talkingabout a problem which has become so widespread that even thesenon-institutional currency traders are aware of it, and areattempting to take their own precautions against losing money tofraud.

When an independent television producer whose investigation intothe supernotes will be airing on the A&E network on March 2,called contacts in Beirut to see whether they could obtain samples ofcounterfeit $100 bills, their only question was: "Do you want one, ora thousand?"

In this light, the fears we have been hearing in recent monthsfrom Russia are symptomatic. In an unclassified cable which I haveappended to my testimony, the U.S. Embassy in Moscow relates a Sept.13, 1995 meeting with Viktor Melnikov, the director of foreigncurrency regulation for the Russian Central Bank, during whichMelnikov "expressed great concern about the Russian banking system,citing estimates that anywhere from 50 to 80 percent of Russian bankswere under the control of organized crime." Melnikov also warned thatof the "15-20 billion dollars of U.S. currency in Russia (more, headded, than the entire value of ruble notes in circulation), 15-20percent is counterfeit."

I have no way of authenticating the figures presented by Mr.Melnikov. Indeed, one European intelligence source recently told methat the amount of counterfeits in Russia could be fully one-third ofthe U.S. bills in circulation. I certainly don't believe, however,that we can dismiss these reports as lightly as the Secret Servicemight want us to do. Evidence gathered by independent researchers andjournalists suggests that the supernotes are in fact widely presentin the Middle East and in Europe, and may be causing harm to U.S.credibility in subtle ways.

Trail to Tehran

The most credible theory currently circulating about the origin ofthe supernotes leads to Tehran. As other witnesses have explainedtoday, the Shah purchased intaglio printing presses that wereidentical to those used by the U.S. Treasury in the late 1970s, andwith U.S. approval installed them in the Tehran mint. These pressesare far too large and heavy for them to have been transported withoutdetection to Lebanon's Bekaa Valley or even to Syria, as some havemaintained. The Shah initially intended to build a special currencypaper mill as well, but sources at the British company he contacted,Portals-Delarue, say they never got beyond the earliest phases of afeasibility study for the project.

Some sources in the highly secretive currency paper industry havediscreetly been pointing fingers at a West German firm, althoughthere is no independent corroboration that this company has completedcontracts in Iran, either directly or through their Swiss subsidiary.This is clearly a matter for the intelligence agencies to pursue.However, I would simply point out that Germany has consistentlytopped the list of Iran's trading partners over the past fifteenyears, with sales to Iran averaging in the $2 billion range per year.It is certainly not inconceivable that Iran would have used itsoutstanding relationship with the German government - or its contactswithin other European governments - to purchase currency paperillicitly

A European intelligence official I contacted recently waved off myinquiries about other possible sources of the supernotes. "Everybodyknows it's Iran," he said. "Interpol has set up a special unit inLyons (France) devoted to tracking the supernotes. Langley knows it'sIran. The U.S. government knows it's Iran. They just don't want toadmit it publicly." This official said he had seen evidence toindicate that Iran was getting currency paper from Russia.

Another key element investigators need to establish is how Irangained the expertise to engrave the plates for the supernotes. Someof the intelligence sources I have queried on this subject believethe plates were etched by Iranian engravers trained by the U.S.Treasury in the 1970s. Others speculate that the Islamic Republicused its extensive intelligence relationship with the East GermanSTASI in the mid and late 1980s to recruit master engravers fromGermany.

While I cannot tell you today what evidence the United Statesgovernment may have in classified form to corroborate this theory, myown examination of STASI documents, which I conducted two years agowith assistance from German government researchers in Bonn,establishes that from the first days of its existence the IslamicRepublic had forged an intimate working relationship with the EastGerman intelligence services, making this type of cooperationentirely feasible. The East German government sold the IslamicRepublic millions of rounds of conventional munitions for everythingfrom Kalashnikov assault rifles to 122 mm field guns all during theIran-Iraq war. They procured electronics equipment, advancedmachine-tools, and other military production gear for Iran throughthe extensive network of relationships they had established withlarge West German industrial concerns and from Toshiba in Japan,STASI documents show. One of the most ironic arms deals was the saleto Iran of 12 MiG-23 fighter bombers in 1988 or 1989, just as EastGermany was collapsing . STASI may also have played an intermediaryrole in some of the Iran-contra contacts between the Iraniangovernment and Reagan administration officials. A Germanparliamentary investigator who has personally examined more than 1million pages of previously classified STASI documents has told me inconfidence he is convinced that STASI was involved in the stillunexplained death of former German political leader Uwe Barschel, whowas found drugged in a hotel bathtub in Geneva on the night of Nov.12-13, 1987, just after he had met with Iranian Revolutionary GuardsMinister Mohsen Rafiq Doust and a mysterious intelligence contactidentified only as ROLOF.

State-sponsored counterfeiting?

I must emphasize again that this entire presentation ishypothetical at this point. As far as I am aware, the U.S. governmenthas never accused Iran of state-sponsored counterfeiting, at leastnot in public. Such an accusation would be tantamount to adeclaration of war. Because this is such a sensitive issue, I amafraid we will have to content ourselves for the moment withintelligent speculation.

We might start by turning the question around: What if the Iraniangovernment did not have access to the super-notes? Would Iran find itso easy to allocate $20 million out of a tight budget, as theyrecently have done, to counter "covert" operations against Iran bythe U.S. government? Would Iran find it so easy to allocate, as theyhave since the mid-1980s, nearly $100 million per year to supportHezbollah in Lebanon, and a variety of Palestinian groups (Hamas,Islamic Jihad, the Popular Front for the Liberation ofPalestine-General Command of Ahmed Jibril) which indulge in terroristattacks against Israel and against American citizens in the MiddleEast?

If Iran were compelled to rely on the $15.5 billion per year itearns from exporting its oil, and the additional $2 billion to $4billion it earns from carpets, pistachios, and light industrialexports, would it find it so easy to maintain its current armsprocurement program?

In 1989, Iran embarked on a $10 billion program over five years torenew the major weapons systems in its armed forces. It signed threesuccessive arms protocols with the Soviet Union, worth an estimated$8.6 billion, to purchase Su-24 and Su-25 fighters, T-72 tanks,Kilo-class submarines, SA-10 missiles, MiG-29s, and a vast array ofmilitary production equipment (including an assembly plant for theMiG-29) . By 1992, however, collapsing oil prices led Iran to cancelmost of these purchases, and most estimates now put its arms importsat around $500 million per year during this period - and not $2 to $3billion initially planned.

And then, something happened. Last year, despite U.S. sanctionswhich have taken a real hit on the Iranian economy, Iran suddenly hadmoney to reopen the arms pipeline with Russia. They revisited thoseearlier protocols - which Russia considers as "existing" contractsand therefore unaffected by Boris Yeltsin's commitment to PresidentClinton at the Moscow summit in May 1995; in some cases they evenexpanded them. And late last year, Iran and Russia finally resolvedthe dispute over how Iran would pay the $800 million Busheir nuclearpower plant project.

Also late last year, Iran announced that it would henceforthconduct all trade with the Central Asian republics in U.S. dollars,and in cash. This announcement, which was carried by Iran's officialstate news agency, IRNA, went unreported here in the West. But I feelit is significant, since it indicates a surplus of cash which Irancannot use in other state-to-state transactions.

One more example of the same type: North Korea. Iran appears tohave been paid North Korea as much as $2.4 billion in cash for SCUD-Bmissiles at the end of the Iran-Iraq war, but for reasons that werenever explained, in 1993 North Korea suddenly reversed itslong-standing refusal to take payment in oil and in fact refused totake any more cash from Iran. This became apparent when a Member ofthe Iranian Majlis complained about the cash payments in an opensession of the Iranian Majlis . One can only speculate that perhapsthe North Koreans feared they had been getting bilked.

Iran's goals

We should not confuse the Islamic Republic with a thuggish regimesuch as that of Saddam Hussein. The mullahs ruling Tehran arerelatively sophisticated. They have a love of intrigue, and apenchant for conspiracies. They have a horror of laying their cardsface-up on the table, but love to exchange them behind theirbacks.

Iran knows that if it floods the market with counterfeit U.S.currency, no matter how good the fakes are, sooner or later the U.S.will react. In the current case, clear evidence that Iran was engagedin state-sponsored counterfeiting would justify a vigorous response -perhaps starting with a Tomahawk missile attack on the Tehran mint.While I am sure Iran's ruling clerics are gleeful at the thought oftweaking the Great Satan's nose by almost perfectly imitating theimperialist lucre, I do not believe they are actively seekingmartyrdom at the hands of the U.S. Navy or the Marines. If pastpractice is any guide, they will seek the limits of what they can dowith impunity, and carefully stay behind those red lines in the hopesthey don't get caught.

If what I have been hearing from various intelligence sources isright and Iran is behind the supernotes, then I see three directbenefits motivating their behavior:

• printing supernotes alleviates pressure on the Iraniantreasury, at a time when Iran's export earnings are dwindling and itsthirst for weapons of all sorts is growing;

• having a supply of ready cash gives the regime greaterflexibility in supporting terrorist and intelligence operationsabroad. The supernotes give them the possibility to finance suchoperations without having to dip into official government budgetswhich are subject to some form of monitoring by the Iranianparliament;

• large amounts of supernotes allow Iranian agents to bribetheir way into Russian and Central Asian nuclear facilities, topurchase material and equipment for their nuclear weapons program.

The most dramatic instance of this that has come out on the publicrecord was an apparent Iranian attempt to purchase 600 kilograms ofweapons-grade uranium from the Ulbinskiy Metallurgy plant outside ofUst-Kamenogorsk in Kazakhstan. Alerted by Kazakh officials of theIranian interest, the Department of Energy airlifted the material tothe United States in November 1994 - only to discover in the roomnext to where the HEU was being stored a number of empty canisterswith Tehran addresses. The CIA had learned of visits to the Ulbinskiyplant by Iranian procurement teams in August 1992, and apparentpurchases of a nuclear weapons triggering element - beryllium - in1992 and 1993. Several months after the airlift, U.S. intelligencesources reported that up to 300 kilograms of HEU remained behind atthe facility, although Kazakh officials insisted it had already beendiluted into civilian reactor fuel and would not be transferred toIran.

Secret Service reluctance to cooperate with Interpol

Several European judicial and intelligence sources have complainedprivately to me of their efforts to elicit help from the U.S. SecretService in tracking down the laundering networks for the supernotesin Europe.

One network several intelligence services were tracking wasapparently set up by the Syrian businessman Monzer al Qassar, who hasbeen called "the godfather of terrorism" because of his links to AbuNidal and other Palestinian terrorist groups.

The Spanish authorities arrested Monzer al Qassar on June 2, 1992on charges relating to the Achille Lauro terrorist attack, jailinghim for two years. As they were preparing to release him for lack ofevidence, the Spanish judge was called to Washington. The SecretService was seeking his cooperation in a new investigation tyingMonzer al Qassar to the supernotes. Monzer's brother Ghassan alQassar, who was expelled from Argentina on a variety of chargesincluding drug smuggling and money-laundering, was believed to be oneof the main contacts for obtaining the counterfeit notes. Ghassan, inturn, was in contact with an Iraqi Consul in Vienna, Austria, who wasalso believed to be passing the supernotes to procure technology onthe black market for Iraq's weapons programs. The bills have turnedup all over Europe, but especially in Spain and Austria; and I amtold that Interpol is increasingly frustrated at the lack ofcooperation they have received from the Secret Service.

After an initial meeting in Washington with the Spanish judge inJuly 1994, the Secret Service went to Spain to pursue its own leads.According to my sources, the Spanish judge has complained that he is"still waiting" for the Secret Service to inform him of the result ofits investigation tying Monzer al Qassar to the supernotes. Hisinvestigation into supernote laundering networks - which Spanishintelligence sources say are widespread in Spain - has been shelvedbecause of the lack of cooperation from the Secret Service.