FATF’s blacklist, worst scenario for Iran amid reimposition of US sanctions

Iran Daily – Over 800 representatives from various countries and international bodies convened during October 14-19 at the Organization for Economic Cooperation and Development (OECD) in Paris to attend the Financial Action Task Force (FATF) Plenary and Working Group meeting.

Acknowledging Iran’s progress in implementing the organization’s action plan on Friday, the last day of the meetings, FATF extended the deadline for another four months, until February 2019, for Tehran to complete the remaining required reforms.

The Paris-based international group that monitors money laundering worldwide said after a meeting of its members that Tehran had acted on only nine out of 10 of its guidelines despite pledges to make the grade, calling on the country to adopt all of these measures by February.

In the meantime, the FATF said it had decided to continue suspending countermeasures, which can go as far as limiting or even banning transactions with a country.

As announced prior to the holding of the meetings, examining measures taken by Iran, Austria, Denmark and Malaysia to become members of the FATF, was on the organization’s agenda.

In the last FATF meeting in June 2018, Iran was given a deadline — until October 13 — to implement the measures required for joining the intergovernmental organization and was told that in case of failing to do so, it would, most probably, be put back on the international group’s blacklist.

As per the FATF’s action plan, Iran was required to pass or amend a number of laws and take a number of other measures. Although, out of the 41 FATF obligatory measures, the country has so far implemented a major part, due to bureaucratic delays, it has passed practically none of the laws pertaining to its membership in the organization.

Also, prior to the holding of the meetings, FATF Executive Secretary David Lewis described Iran’s fulfilment of the organization’s obligations as inadequate and unsatisfactory while more than 10 months had elapsed since the deadline set by the FATF for Tehran to pass the required laws.

The FATF’s Friday announcement as well as remarks by Lewis show that it is likely that Iran would be put back on the group’s blacklist. Given the implementation of the second round of unilateral US sanctions on Iran in November, as well as those already reimposed on Tehran, this would create a great deal of problems for the country in the area of banking transactions.

Iran returning to the FATF’s blacklist will have diverse consequences for the country, three of which will be discussed in this article.

The first negative impact of Iran being back on the organization’s blacklist would be an increased risk for international financial and banking institutes in carrying out transactions with the Iranian banking system, particularly in the field of transferring the country’s oil exports money.

As per the FATF recommendations No. 13 and 19, titled ‘correspondent banking’ and ‘higher-risk countries,’ financial institutions must be required to apply enhanced due diligence measures to business relationships and transactions with individuals, legal entities, and financial institutions in high-risk countries, if called for by the FATF. The type of enhanced due diligence measures applied should be effective and proportionate to the risks.

In fact, returning to the organization’s blacklist would mean that those financial institutions willing to cooperate with Iran’s banking sector would have to sever their relations with the country.

Perhaps the most adverse consequence of Iran returning to the group’s blacklist would be the failure of the EU’s Special Purpose Vehicle (SPV) mechanism to operate effectively and produce favorable results as, coupled with the US penalties, the high-risk of interaction with Iran’s banking system would dissuade foreign financial institutions, even European states’ central banks, from entering into transactions with Iranian banks.

Although Europe has committed itself to preserving the Joint Comprehensive Plan of Action (JCPOA), signed between Iran and P5+1 in July 2015, it would have to activate the SPV in order to be able to fulfill its commitment. Thus, Iran returning to the FATF’s blacklist would jeopardize the future of the JCPOA.

The second negative impact of being put back on the blacklist would be a drop in Iran’s Basel Anti-Money Laundering Index (Basel AML Index) that assesses the risk of money laundering and terrorist financing around the world. The importance of the Basel AML Index lies in the fact that it examines and grades a country’s political, economic and banking risks.

The third consequence of FATF’s blacklisting Iran would be a drop in Iran’s credit index. Given that the FATF is a sub-branch of the Organization for Economic Cooperation and Development – an intergovernmental economic organization with 36 member countries, founded in 1961, to stimulate economic progress and world trade – returning to its blacklist would lead to a decline in the country’s credit index. Currently, Iran’s credit index stands at six, whereas, following the signing of the JCPOA, it had risen to five.

Being put back on the FATF’s blacklist would cause Iran’s credit index to drop to 7. Under such a circumstance, even countries such as China, Turkey and Russia would have to bear higher costs to make investments in Iran, which might prevent them from funding Iranian projects. Therefore, being placed back on the international group’s blacklist might be the worst thing to happen to Iran at a time when other countries are making efforts to save the Iran nuclear deal.

* Mohammad Hadi Mousavi is an Iranian expert on political affairs.