Iran is failing to adhere to Financial Action Task Force standards

Iran is failing to adhere to Financial Action Task Force standards
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On June 16, the global watchdog that sets standards for anti-money laundering and combating the financing of terrorism (AML/CFT) will convene at its plenary in Orlando and decide whether Iran has met the global body’s requirements. That organization is the Financial Action Task Force, known as FATF, which is comprised of 36 member countries. 

While Iran has been encouraged to reverse course, Tehran continues to defy FATF.

Ahead of the June plenary, U.S. Secretary of State Mike PompeoMichael (Mike) Richard PompeoPompeo: Countries should reject China's demands to repatriate Uighurs Trump says he will consider releasing transcript of Ukraine call White House officials, Giuliani come to Trump's defense on Ukraine allegations MORE declared that Iran had “utterly failed to meet its commitments under the Financial Action Task Force action plan that it had agreed to.” Pompeo echoed earlier calls by Germany, Britain, and France, which, in a joint statement in January, urged Iran “to swiftly implement all elements of its FATF action plan.”

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Iran’s subsequent action — or rather inaction — signals its rejection of these calls. Consequently, FATF should maintain Iran on its blacklist of high-risk jurisdictions and reimpose increased due diligence protocols, called countermeasures, aimed at protecting banks and financial institutions from AML/CFT risk.

In 2016, Iran agreed to complete a 10-item plan to meet FATF standards by January 2018. During this time, Iran remained on the FATF blacklist, but FATF agreed to suspend mandatory countermeasures. The Majlis, Iran’s parliament, announced it would pass four pieces of legislation to implement its plan. Yet more than a year after the deadline, Iran has failed to complete seven of the 10 items. The items include criminalizing financing terrorism, instituting penalties for money laundering offenses, and establishing a fully independent Financial Intelligence Unit to monitor suspicious financial activity.

Tehran has signed into law two of the relevant bills. These bills amend existing legislation on terror financing and money laundering. 

One of the two bills that has not been passed would ratify the International Convention for the Suppression of the Financing of Terrorism (CFT convention), which criminalizes terror financing. The other would ratify the United Nations Convention Against Transnational Organized Crime (UNTOC convention), which criminalizes transnational organized crime. Though the Majlis approved these two bills, the Guardian Council — a 12-member body appointed by Iran’s Supreme Leader that has veto power over legislation it regards as contrary to the regime’s Islamist ideology — rejected them. The Expediency Council (EC), the arbitration body that settles disputes between the parliament and the Guardian Council, has been considering them for many months but has taken no action.

Hossein Mozaffar, a member of the EC, said on May 31 that the Council planned to make final decisions on both bills before the June plenary, but that has not happened.

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Iran’s failure to implement its action plan makes clear that it does not intend to end its role as the world’s leading sponsor of terrorism.

The same day that Pompeo declared Iran’s failure to complete its FATF commitments, Mozaffar said he opposes complying with its action plan. “The kind of transparency that FATF seeks … is to find out our ways for bypassing sanctions,” he said. “For a country under sanctions, it is a very unwise move to show our hands and let them see and block all our strategies.” In other words, Mozaffar believes the bill’s purpose is to stymy Iran’s sanctions-evasion strategies, rather than to help global markets transact safely with Tehran.

Drafts of Iran’s past FATF-related legislation have often included loopholes or conditions; some of this legislation has even been signed into law. In October 2018, when the Majlis passed the bill ratifying the CFT convention, it contained at least seven conditions, including a clause that excludes organizations which “struggle against colonial dominance and foreign occupation” from its definition of terrorism. Iran sought this exemption as a way to continue funding Hamas, Hezbollah, and other terrorist organizations, even after it would join the CFT. FATF has repeatedly asserted that Iran must remove this exemption.

In February, FATF warned that if it did not complete its action plan by the organization’s June plenary, it would impose a countermeasure that required countries to increase supervisory examination of branches and subsidiaries of financial institutions based in Iran. That means that 11 FATF members with Iranian banks on their soil would have to inspect those branches’ activities with greater scrutiny. 

There should be consequences for Iran’s continuous attempts to circumvent FATF’s standards. Eighteen months have passed since Iran agreed to complete its reform plan. FATF should convey its seriousness about maintaining its standards by applying appropriate countermeasures for each uncompleted action item. FATF countermeasures include, for example, mandating increased external audit requirements for Iranian financial institutions and prohibiting foreign banks from opening branches or offices in Iran.

Over the last months, Europe has sought to establish a non-dollar-based mechanism for trade with Iran. Mindful of the risks, the E3 announced that they expect Iran to complete its FATF action plan so that the trade vehicle could “function under the highest international standards with regards to anti-money laundering and combating the financing of terrorism.” Iran’s judiciary head Sadeq Larijani deemed these expectations “insulting.” Moreover, the trade mechanism Iran established as the E3’s counterpart included sanctioned terror financiers and money launderers as shareholders.

Some countries may be tempted to put their desire to enter the Iranian market ahead of the safety and integrity of the international financial system. FATF’s credibility relies on its willingness to enforce its standards.

Toby Dershowitz is senior vice president of government relations and strategy at the Foundation for Defense of Democracies, where Saeed Ghasseminejad is a senior advisor on Iran and Serena Frechter is a government relations analyst. FDD is a Washington, DC-based non-partisan research institute focusing on national security and foreign policy. Follow them on @tobydersh, @SGhasseminejad, and @serenafrechter.