UNITED NATIONS - With international sanctions squeezing Iran, the Islamic Republic is seeking to expand its banking foothold in the Caucasus nation of Armenia to make up for difficulties in countries it used to rely on to do business, according to diplomats and documents.

Iran's growing interest in its neighbor Armenia, a mountainous, landlocked country of about 3.3 million people, comes at a time of rising international isolation for Tehran and increasing scrutiny by Western governments and intelligence agencies of Iranian banking ties worldwide as they attempt to stifle the country's nuclear program.

The most recent example is British bank Standard Chartered , which has been in the spotlight due to US charges that it hid from US regulators and shareholders some $250 billion of transactions tied to Iran.

An expanded local-currency foothold in a neighbor like Armenia, a former Soviet republic which has close trade ties to Iran and is working hard to forge closer links to the European Union, could make it easier for Tehran to obfuscate payments to and from foreign clients and deceive Western intelligence agencies trying to prevent it from expanding its nuclear and missile programs.

Armenian officials denied illicit banking links to Iran.

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While the four rounds of UN sanctions remain limited, with only two Iran banks blacklisted by the Security Council, the United States and European Union have implemented much tougher restrictions, sanctioning dozens of banks and other firms and making it increasingly difficult for Tehran to conduct business in US dollars and euros.

A UN panel of experts that monitors compliance with the sanctions against Tehran recently submitted a report to the UN Security Council's Iran sanctions committee that concluded Iran was constantly searching for ways to skirt restrictions on its banking sector.

"One state bordering Iran informed the Panel of requests from Iran to open new financial institutions," the report said. "The requests were not pursued apparently because of that country's burdensome legislation."

Several UN diplomats familiar with the panel's work confirmed that the unnamed state was Armenia, where Iran already has banking ties.

Despite Armenia's denials of illegal banking arrangements, Iran has not given up trying to expand in the country, the diplomats said, and US officials have repeatedly cautioned Armenian colleagues to tighten financial controls.

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