Is Iran Getting a Pass at the Financial Action Task Force?

In June, the Financial Action Task Force, which is an inter-governmental body responsible for setting global anti-money laundering standards, issued its quarterly public statement on high-risk and non-cooperative jurisdictions. Somewhat surprisingly, FATF suspended its call for member states to employ countermeasures against Iran for a period of twelve months. Since 2008, FATF has called for states to apply enhanced due diligence and counter-measures against Iran in order to “protect the international financial system from the on-going and substantial money laundering and terrorist financing risks” emanating from Iran. 

What are FATF countermeasures? Countermeasures go beyond due diligence, and can include implementing enhanced reporting and monitoring mechanisms, denying Iran from establishing local subsidiary branches, limiting business relationships, prohibiting third-parties within Iran from conducting customer due diligence requirements, requiring banks to review and possibly terminate correspondent accounts, and conducting external audits of financial institutions located in Iran. Determining which countermeasures to employ is left up to each FATF member state. In the United States, for example, there continues to be an almost complete prohibition on conducting business with Iran. In the European Union, sanctions relief provided under the Joint Comprehensive Plan of Action actually limits the practicality of applying countermeasures and enhanced due diligence against Iran.

Why did FATF temporarily suspend counter-measures? In its June statement, FATF noted Iran’s “high level political commitment” and recent progress towards addressing its anti-money laundering and combating terrorist financing deficiencies. To be sure, Iran has taken measured steps towards improving its anti-money laundering and terrorist financing laws. In March, for example, Iran’s Guardian Council approved new counter-terrorist financing legislation, which criminalizes financing an act of terrorism. FATF also took note of Iran’s expressed intent to join the Eurasian Group, which is a FATF-style regional body. According to the December 2015 IMF consultative report on Iran, Iran is seeking an IMF assessment of its anti-money laundering and combating terrorist financing laws and regulations. It is important to note, however, that Iran has been making overtures to join a FATF-style regional body since 2008, but has consistently failed to make even the most modest of reforms.

The question remains, though, is Iran doing enough? Although Iran is making progress towards increasing transparency of its financial system, significant challenges remain. First, Iran’s new terrorist financing legislation does not prevent Iran from continuing its financial support to organizations like Hezbollah, which the United States has designated as terrorist group. According to FATF standards, adequate terrorist financing laws should criminalize not only financing an act of terrorism, but also an individual or group even in the absence of a terrorist act. Second, despite new legislation and renewed political will, Iran does not have mechanisms in place to comply with UN Security Council targeted sanctions regimes. Of course, implementing a sanctions regime is somewhat problematic for Iran, considering that a number of its IRGC-linked entities are still subject to UN sanctions.

 What are the implications of removing the countermeasures? In the immediate term, suspending the countermeasures against Iran is unlikely to have any significant effect. To be sure, the economic benefits Iran expects from the JCPOA hinge on successfully re-integrating into the global financial system. If banks continue to view Iran as a high-risk jurisdiction, it is unlikely that Iran will be able to attract the foreign direct investment it needs to improve its economy. Rather predictably, Iran has directed its frustrations in failing to attract foreign investment towards US policy. At an event held at the Council on Foreign Relations in April, the head of Iran’s central bank, Valiollah Seif, heavily criticized US policy and its terrorism-related sanctions regime as the main obstacle preventing Iran’s return to economic normalcy.

Despite the rhetoric, however, banks perceptions of Iran as a high-risk jurisdiction may be waning. Iran now holds the number three spot in terms of greenfield foreign investment in the region. Moreover, according to the Bank for International Settlements, cross-border claims (i.e., loans) on Iranian banks declined only 2.4% in the first quarter of 2016 compared to a decline of 24% in the fourth quarter of 2015. This may signal that international banks are easing back into Iran.

 Is Iran getting a pass to help shore up the integrity of the Iran deal? According to Mark Dubowitzat the Foundation for Defense of Democracies, suspending countermeasures without any real change risks politicizing FATF, and sends a bad message to other high-risk jurisdictions. Looking at other cases, however, it is unlikely that FATF suspended countermeasures based on political considerations alone. But, others like Pakistan, which has similar anti-money laundering and combating terrorist financing deficiencies as Iran, underwent a mutual evaluation process before being removed from the high-risk list—something that Iran has yet to do.