Consequences of Iran's AML/CFT Deficiencies
If FATF believes that Iran is not adhering to its action plan to upgrade AML/CFT standards, the intergovernmental body could call on its37 membersto reimpose strict financial safeguards. These so-called "countermeasures" would discourage or even lead to the termination of relationships between Iranian and foreign banks, and possibly include Iran losing access to global bank messaging serviceSWIFT. Alternatively, FATF may decide Iran has made sufficient progress to warrant an extension to the two-year suspension of the countermeasures. Regardless, there are no indications that Iran will be removed from FATFs black list of high-risk jurisdictions and financial institutions will continue to be urged to conductenhanced due diligence(EDD) on Iranian-related business relationships and transactions.
This type of guidance places a significant risk management burden on global banks. Through customer due diligence, banks collect information to identify and verify customers in order to comply with regulations and report suspicious activity. EDD comprises several extra steps, such as probing sources of funds, scrutinizing financial statements, and conducting thorough investigations of relevant businesses or individuals. Because of the high level of scrutiny required for the Iranian market, most foreign banks did not return even after the international nuclear deal was implemented in 2016.
Foreign financial institutions, especially those with a US presence, are unlikely to change this calculation without an improvement to transparency and governance in the local banking sector. In particular, foreign banks are worried about unwittingly facilitating transactions involving the IRGC (Islamic Revolutionary Guard Corps), an economic powerhouse and sanctioned entity. Due to ongoing fears of reputational and legal liabilities, Irans access to the international financial system is diminished byde-riskingpractices of global banks for the foreseeable future.
How Iran Stands to Benefit from Reform
Although the chance to be removed from FATFs black list is a clear reason for Iran to complete the organizations action plan, the long-term economic impact of reforms provides another vital incentive. Mismanagement, corruption, andfragmentationin the banking sector dampens economic potential. Irans bad debt, estimated to be in thetens of billions of dollars, fuels fears of an imminent banking crisis. Strengthening Irans banking sector to align with international standards, a priority highlighted by theIMF, would lay the foundation for a more stable economy and promote reintegration with the international financial system.
FATF-related reforms will not be a panacea for Irans economy. This year the currency lost over 20 percent of its value against the US dollar (andmuch moreon the black market) between January and June, foreign companies are considering plans to wind down billion-dollarinvestments, and a drop in oil revenue looms because of the impending renewal of US secondary sanctions. Nevertheless, if reforms convince some foreign banks to stay even after US sanctions are re-imposed, it could offer a lifeline to an economy under tremendous pressure. Moreover, new rules that improve Iranian banks transparency are vital to address a major grievance fromprotestslate last year: the need to root out financial sector corruption that enriches elites and undercuts economic opportunities for the working class.
Irans Progress To Date
Despite Irans recent decision to delayvital CFT legislation, the government is taking several steps to satisfy the terms of its action plan. The Rouhani administration regularly engages withFATF expertseven though there is fierce internal opposition from many of the same political, religious, and military actors who opposed the nuclear deal. In February, FATF credited Iran for establishing a cash declaration regime. In June, a draft bill to amend theAML lawwas approved by parliaments judiciary commission and legislators ratified Irans accession to aninternational conventionon combating transnational crime. Similarly, Iranian officials are working to implement several technical AML rules that FATF cited in astatementfollowing the organizations February plenary. Although full implementation will not be realized within two years of beginning the reform process, Iran continues to work toward compliance with international standards across several areas.
The widest gulf between Irans commitments and FATFs expectations remains on criminalizing terrorist financing. To fully comply with FATF standards, text would need to be changed in Irans legislation for amending the counter-terrorist financing law and acceding to a relatedinternational convention. Both bills contain CFT exemptions for certain types of militant groups, but there is no precedent for FATF accepting legislation with suchconditions. Resolving these issues will not be easy, but the political will to be removed from FATFs black list (if not eventually acceding to FATF) should prompt ongoing discussions.
It is in this context that Khameneis June 20 statements, intimating that parliament should abandon the FATF process, are important. Just like in the run up to the international nuclear deal, Khameneis maximalist comments are open to interpretation because they may be intended for several distinctive audiences. Domestically, Khamenei is trying to assuage fears from his traditional allies who believe the FATF process is a foreign ploy to weaken the IRGC and hamper Irans support for Hamas and Hezbollah. However, this sentiment must be balanced against palpable angst among Iranians that believe the troubled banking sector threatens their livelihoods. This could be why Khamenei mentioned that some of the provisions of the international treaties may be good before suggesting that Iran legislate on money laundering and terrorist financing issues independently.
From an international perspective, Khamenei is seeking to increase pressure on European countries to receive the most favorable economic terms possible after the US pulled out of the nuclear deal. Initially, Iran cited ongoing negotiations to salvage the nuclear deal as the primary reason for delaying by two months FATF-related legislation. Only three weeks ago, Khamenei indicated strong support for Irans newly established High Council for Economic Coordination. This council, which is composed of leaders from the countrys executive, legislative, and judiciary branches of government, is coordinating a unified response to US sanctions. That is why it should not be overlooked that their first decision was to speed up the process forimplementing the FATF action plan. Khamenei may be fed up with the FATF process, but he also may be negotiating.
FATF and Trans-Atlantic Tensions
Leading up to FATFs plenary session in February, there wereindicationsthat the US strongly supported reprimanding Pakistan for its failure to combat terrorist financing. Yet, the decision was delayed until at least the June meeting after three FATF members (China, Turkey, and Saudi Arabia) allegedlyintervenedon Pakistans behalf. The decision exposed a potential break from strong US influence within FATF. It was also a radical departure from the intergovernmental bodys typical decision-making process that relies on consensus rulings.
Coupled with risingtrans-Atlantic tensionson foreign policy and trade issues, this calls into question whether the US will be able to build consensus should it seek to reimpose countermeasures against Iran. Furthermore, it is hard to imagine European governments supporting FATF action that further constrains their efforts to salvage the nuclear deal. Beyond European countries, there are several FATF members (China, India, Russia, Turkey) that will be even less inclined to support countermeasures that hurt the foreign investment strategies of their banks, state-run entities, and private companies.
It is possible that neither the US nor Iran will be satisfied with the FATF meetings outcome. Still, Irans FATF process offers clear benefits to both. For Iran, staying engaged provides much-needed support for a weakened banking sector and a path to reintegration with the global economy. For the US, it provides a global forum to keep pressure on Iran to do more to combat money laundering and terrorist financing.
From an international AML/CFT perspective, it also makes sense to keep Iran engaged in the FATF process. Certain Iranian actors, including some banks, grew quite adept at facilitating transactions to evade sanctions over the past several decades. With the return of stringent US sanctions, these vested local interests stand to benefit once again. Re-imposing countermeasures now will reduce vital coordination to protect the global financial system from new money laundering threats. There may come a time when FATF countermeasures are viewed as the only viable option to combat AML/CFT threats emanating from Iran. However, more time is needed to support Iranian efforts to bring about legislative and regulatory reforms. For now, this is the best way to fulfillFATFs missionto counter threats to the integrity of the international financial system.
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