Unintimidated, Iranian Lawmakers Pass Counter-Terror Financing Bill
◢ Over the last six months, the public debate in Iran around FATF-related reforms has reached a surreal crescendo. Seldom do countries experience such intensive political debates over measures as technical and obtuse as financial regulations. But 143 lawmakers voted bravely to pass the final of four bills required by the FATF action plan, in a landmark vote that may increases chances that Iran maintains ties with international financial institutions in the face of returning sanctions.
On Sunday, Iranian lawmakers approved a bill that may see Iran join the International Convention for the Suppression of the Financing of Terrorism of the United Nations. The bill passed by 143 votes to 120 in a highly contentious session of parliament. The landmark vote keeps hopes alive that Iran may yet earn closer ties with the international financial system.
The success of the vote comes despite a fierce campaign to try and derail crucial financial reforms. The legislation marks the last of four bills intended to address items on Iran's Financial Action Task Force (FATF) action plan to improve anti-money laundering (AML) and combating financing of terrorism (CFT) standards. The three others include a bill aimed at Iran's accession to the United Nations Convention Against Transnational Organized Crime—known as the Palermo Convention—and two bills to amend existing AML and CFT laws. The CFT legislation was signed into law by the Guardian Council, the country's highest constitutional entity, on August 1. The two other bills were passed by parliament on September 25 following amendments to assuage concerns raised by the Guardian Council.
The Guardian Council still needs to ratify the three remaining laws called for by the FATF action plan. The clock is ticking. The FATF will judge Iran’s progress with its action plan at its next plenary meeting, which commences on October 14. The intergovernmental organization had suspended active countermeasures against Iran pending completion of the action plan, but the tone of its last assessment suggests patience is wearing thin and that Iran could be returned to the so-called “blacklist,” jeopardizing its few operable international banking relationships.
No doubt, opponents to financial reform in Iran will continue their fight and seek to sway the Guardian Council’s deliberations. The council is comprised of six clerics appointed by Supreme Leader Ali Khamenei and six jurists elected by the parliament.
Iran's current saga with the FATF reform process began in earnest in June 2016 when then-economy minister Ali Tayyebnia accepted the action plan, prompting the initial suspension of countermeasures for one year in recognition of Iran's high-level political commitment. It has since extended suspensions three further times.
Over the last six months, the public debate around FATF-related reforms has reached a surreal crescendo. Seldom do countries experience such intensive political debates over measures as technical and obtuse as financial regulations.
On one side of the raging debate stand the administration of President Hassan Rouhani and a majority of parliamentarians, who are responding to the needs of private sector businesses, which have called for the adoption of the action plan through both official statements and individual appeals. Iran’s banking sector also backs the measures as financial institutions rightly fear they will be more isolated than ever—especially in face of U.S. sanctions—if Iran fails to show a serious commitment to reducing money laundering and terrorist financing risks.
The opposition is varied, but unified in fear. As conservative politician and parliament deputy Ali Motahari explained after Sunday's vote, the opponents are generally concerned that they will have to divulge financial information that would compromise opaque dealings. "There are some who may really have personal interests in the [FATF bills] not being approved because they will be cut off from massive profits if there are reforms in the banking system," Motahari said.
At a political level, opponents claim that adoption of the FATF recommendations could hamper financial support for Iran’s allies, especially Lebanon's Hezbollah, which the US has classified as a terrorist organization. Of course, some opponents are simply looking to undermine the Rouhani administration by delivering yet another political defeat.
Opponents to the FATF reforms have spent liberally to orchestrate a campaign designed to intimidate lawmakers into voting down the bills. For months, MPs have received near-daily anonymous text messages. The messages, many of which have been shared on social media by MP Mahmoud Sadeghi, an outspoken supporter of ratification of the bills, include content ranging from religious arguments to outright threats which aim to compel MPs to reject the proposed legislation.
The battle over the laws has also been fought through print and digital media. Hardliners have minced no words criticizing Rouhani's economic team from the moment FATF's action plan was published. Most dramatically, the ultraconservative Kayhan newspaper stunned many by saying FATF adoption would constitute betraying the blood of those who lost their lives in the recent terrorist attack in Ahvaz. The paper also engaged in fearmongering by claiming that FATF adoption would further depreciate Iran's currency against the U.S. dollar.
"This is a psychological war. Clearly, Iran's economic problems won't be all suddenly resolved through FATF," financial expert Mehdi Pazouki told Bourse & Bazaar in reference to the intensity of the political debate around what are basic economic reforms.
Sunday's vote was a bizarre spectacle. While high-level officials including Foreign Minister Javad Zarif and central bank governor Abdolnasser Hemmati attended the session in support of the bill, dozens of protester rallied outside, holding up banners and chanting in defiance.
Speaking in advance of the vote, Zarif tempered expectations, explaining that the FATF bills will not resolve all problems. But he was adamant that the new regulations will prevent the emergence of future economic problems. According to Zarif, Russia and China, two of Iran's biggest trading partners, have asserted they will be forced to refuse financial services should Iran fail to adhere to FATF standards.
Taking the podium, hardliner MPs caused mayhem, symbolically tearing-up the proposed law and throwing the scraps at parliament speaker Ali Larijani.
Pazouki agrees that failing to satisfy the FATF action plan will amount to a kind of self-sanctioning. "If we wish to work with the global community, especially developed nations and European Union partners, we will need to adopt FATF requirements. We would have had to make these reforms even if the U.S. hadn't withdrawn from the JCPOA,” he explained.
Echoing the message sent resolutely by the 143 lawmakers who voted for the bill, Pazouki points to the cynicism of the opposition. "Only money launderers, terrorist financiers and tax evaders should be worried about passage of the bills," he says. "If we are proponents of fighting corruption and money laundering, the FATF regulations are certainly in favor of transparency.”
Photo Credit: IRNA
US Officials Warn of ‘Deceptive Web’ of Iran Business, But Hamper Transparency Efforts
◢ In a recent speech, Under Secretary of the Treasury Sigal Mandelker warned that foreign companies that maintain a presence in Iran must conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” But background conversations with several compliance specialists reveal that US sanctions are a major barrier to key AML/CTF reforms in Iran. Industry-standard compliance software is not accessible for Iranian end users, leaving some experts to conclude that Iran is being “set up to fail.”
In a recent speech, Under Secretary of the Treasury Sigal Mandelker warned that foreign companies that maintain a presence in Iran must conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” Mandelker has been touring countries in Europe, Asia, and the Middle East, engaging governments and businesses in order to “make clear the very significant risks of doing business with companies and persons” in Iran.
Many Iranian companies, particularly in the private sector, have long taken seriously the need to conduct enhanced due diligence, including on their own customers and partners. Improved transparency is a prerequisite of working with foreign companies, which remain wary of the wrath of US regulators for any inadvertent sanctions violations.
Since the implementation of the JCPOA nuclear deal, and in anticipation of new foreign trade and investment, many Iranian enterprises have hired specialist consultants to help establish internal compliance departments and institute robust anti-money laundering (AML) and counter-terrorist financing (CTF) processes. Technology solutions are central to any such transparency efforts.
While Iran is witnessing a wider push for transparency, particularly around Iran’s compliance with the Financial Action Task Force (FATF) action plan, there remains internal resistance to compliance reforms. As explained by one consultant who advises Iranian companies on compliance policies, "Elements of the Iranian government contribute to the problem by issuing instructions that foreign companies and technologies should not be engaged to assist the banks in their compliance efforts." These sensitiveness are especially acute for the Central Bank and Ministry of Economy, where Iranian officials fear that foreign technology could be used for espionage. Given that there are no homegrown compliance tools, system-wide implementation remains a distant prospect.
In the meantime, ambitious banks such as Middle East Bank and Saman Bank have been at the forefront of the effort to empower their compliance departments and to demonstrate competencies in know-your-customer (KYC) and know-your-transaction (KYT) due diligence.
However, conversations with several international compliance specialists, who agreed to describe their experiences on background, make clear that—counterintuitively—US sanctions pose the most significant challenges in the effort to improve sanction compliance within Iranian banks and companies. These sanctions prevent industry-standard technology, including software that enables the automated searches of companies and entities for hits against global sanctions lists, from being accessed by users with Iranian IP addresses.
For example, World-Check, a market-leading compliance tool from Thomson Reuters which allows users to “automatically and cost-effectively screen all of their customers, partners, employees, and business transactions for potential Iran sanction risk,” is inaccessible from Iran, despite the fact that the company advertises a specific “Iran Economic Interest Solution” comprised of World-Check and a second product called IntegraScreen. So while foreign companies can use the product to mitigate their sanctions risks, Iranian companies cannot do so for the benefit of their foreign clients or customers.
American companies such as Thomson Reuters are reluctant to enable use of their service from Iran due to primary sanctions prohibitions on exporting a service to Iranian companies, even if that service is intended to help Iranian firms improve their compliance with US and EU sanctions laws. Compliance professionals report that smaller European software companies, which could have filled the gap, are reluctant to do so due to the possible negative impact on their US business and difficulties in processing related licensing fees.
These circumstances leave some Iranian companies to pursue less-robust software solutions from markets such as India, which can contribute to screening failures. Alternatively, Iranian companies seek back office support “offshore,” in effect subcontracting their compliance work on an ad hoc basis. Neither of these solutions reflect the compliance best-practice that US officials insist upon for those companies that wish to pursue trade and investment in Iran. In the event of a compliance failure, such measures are unlikely to hold up to regulatory scrutiny.
US officials could remedy these issues through smarter sanctions policy. Given similar fears among consumer technology companies, the US government enshrined the accessibility of internet and communications tools in 2014 with the creation of General License D, which protects the provision of services and software “incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.” The license, which has been only partially successful at preserving access to technology products for Iranians, reflected an assessment on the part of US officials that protecting the free exchange of information was consistent with the aims of Iran policy.
Despite the consistent message from US Treasury Department and State Department officials that a lack of transparency in Iran’s economy represents a national security threat to the United States, particularly in regards to terrorist financing risks, there has been no similar effort to ensure the availability of compliance tools for Iranian end users. One compliance executive, who specializes in enhanced due diligence, wondered, “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?”
Photo Credit: Wikicommons
Europeans Beat Back Americans as FATF Gives Iran More Time on Financial Reforms
◢ At its plenary meeting in Paris, the Financial Action Task Force (FATF) opted “to continue the suspension of countermeasures” related to Iran’s inclusion in the so-called “blacklist” of countries with deficiencies in anti-money laundering (AML) and combating financing of terrorism (CFT) standards. The suspension will be in place until October 2018. The suspension can be seen as a victory for European and Iranian multilateral cooperation in the face of the increasingly hostile American posture.
At its plenary meeting in Paris, the Financial Action Task Force (FATF) opted “to continue the suspension of countermeasures” related to Iran’s inclusion in the so-called “blacklist” of countries with deficiencies in anti-money laundering (AML) and combating financing of terrorism (CFT) standards. The suspension will be in place until October 2018 and in this period jurisdictions will continue to “advise their financial institutions to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran.”
The outcome of the plenary was the subject of great anticipation. Progress on the FATF action plan is critical for Iran’s reintegration in the global financial system. The FATF expressed its “disappointed with Iran’s failure to implement its action plan to address its significant AML/CFT deficiencies” noting in a public statement that “a majority of the action items remaining incomplete.”
Iran’s slow implementation of the Action Plan reflects in part the considerable political scrutiny that has been placed on the process in Iran. Political leaders opposed to President Hassan Rouhani have decried the action plan reforms as an effort by international actors to exert undue influence over the Iranian financial system. They have also questioned the value of the reforms given the pending snapback of US secondary sanctions following President Trump's May 8 withdrawal from the JCPOA nuclear deal.
Iran’s hardliners were not alone in their disapproval of Iran's FATF efforts. American officials had made it clear in the run-up to the plenary that they would be pushing for the resumption of countermeasures against Iran. Congressmen Rob Portman (R-OH) and Ed Royce (R-CA) sent a letter to Treasury Secrtary Steven Mnuchin last week to “ to ensure action next week by the Financial Action Task Force (FATF) against Iran. For many in Washington, resumption of countermeasures is seen as a way to further hobble Iran’s financial system, given that banks that might otherwise be structured to work with Iran under secondary sanctions would likely refuse to do so if the FATF action plan had failed to be implemented outright.
Officials from the European members of FATF, noting that the resumption of countermeasures would effectively end the tenuous political support for financial sector reforms in Iran, coordinated in order to ensure that Iran’s case would receive a fair evaluation. Active dialogue with Iranian stakeholders at the Ministry of Foreign Affairs and the Central Bank of Iran helped European officials gauge the likely tides of political support for the action plan reforms, especially given outstanding legislative requirements such as the ratifying and implementing the Palermo and TF Conventions.
Iranian officials were keen to impress on their European counterparts that Iran’s compliance with FATF’s recommendations is presently commensurate with many countries, which are not currently blacklisted. An appeal was made for Iran’s case to be evaluated on a technical, rather than political basis, particularly as American antipathy towards the continued suspension of countermeasures has been understood as part of the Trump administration’s broader pressure campaign against Iran.
In addition, Iranian officials noted that the FATF issue was now a matter of direct discussion between President Rouhani and Ayatollah Ali Khamenei, Iran's supreme leader. Despite the contentiousness of the issues, there is some suggestion that a political consensus around AML/CFT reforms is achievable. Such a consensus may see reforms characterized as a national endeavor rather than one pursued at the behest of FATF. Overall, within the domestic and international political context, the suspension of countermeasures should be seen as a victory for European and Iranian multilateral cooperation in the face of an increasingly hostile American posture.
Photo Credit: FATF
FATF Faces Test of Fairness on Iran at Plenary Meeting
◢ Iran is facing the end of a four month extension given by the Financial Action Task Force (FATF) for the reform of the country’s AML/CFT regulations. Iran will be hoping for a further extension of the suspension of countermeasures at the June plenary of the FATF. Some FATF members have sought to characterize such extensions as exceptional. However, extensions are a common procedure, and FATF ought to treat Iran’s case in fair recognition of this fact.
Next week, Iran is facing the end of a four month extension given by the Financial Action Task Force (FATF), a global standard-setting body, for the reform of the country’s AML/CFT regulations. Beginning in June 2016, Iran gave its political commitment to the action plan, accepting technical assistance in order to effectively implement the action plan. This political commitment saw Iran removed from the so called “black list,” the informal name given to the list of Non-Cooperative Countries and Territories (NCCT). The common practice in recent years has been to apply "countermeasures" against non-cooperative countries. With countermeasures suspended, Iran was moved to a list of “high-risk” countries subject to “enhanced due diligence.”
As per the FATF procedure, Iran can only be returned to the countermeasure list if it proves to be non-cooperative. It should be noted that no country has been added to countermeasure list merely because of less-than-perfect compliance; if that was the case, in this world which is full of corruption and terrorism, the list of countries against which countermeasures should apply would be far more extensive. No country has managed to achieve perfect compliance with all forty recommendations that form the basis of FATF’s guidelines.
Iran will be hoping for a further extension of suspension of countermeasures at next week's plenary of the FATF, as it is in the process of amending its national laws. Some FATF members have sought to characterize such extensions as exceptional. However, a quick glance at the list of countries currently in the gray list or those which managed to get delisted, points to the fact that extensions are a common procedure.
Countries such as Iraq, Syria, Vanuatu, and Yemen have remained on the gray list for many years. Countries such as Bosnia and Herzegovina, Uganda, Afghanistan, and Myanmar were all eventually delisted in recognition of progress in enacting the recommended reforms, but were given between two and six years in order to proceed with their action plans. Iran has been under much more significant pressure, opening FATF to charges of unfair treatment.
For the purposes of a closer comparison, we can look to the case of one country delisted from the so-called gray list in 2017. Based on FATF’s latest evaluation, this country is non-compliant with numerous recommendations outlined in Iran’s action plan. First, the country is non-compliant in terms of “criminalizing terrorist financing.” Second, the country is non-compliant in terms of “Targeted financial sanctions related to terrorism and terrorist financing (identifying and freezing terrorist assets in line with the relevant United Nations Security Council resolutions).” Third, the country is only partially compliant with measures for “customer due diligence.” Fourth, the country is only partially compliant with establishing an effective “Financial Intelligence Unit.” Fifth, the country is non-compliant with wire transfer controls. Finally, the country is only partially compliant with recommendations on criminalizing anti-money laundering.
It is clear that this particular country has deficiencies equal-to or greater-than those of Iran as measured by Iran’s action plan. Yet the country was never included in the FATF blacklist and even managed to be delisted from the gray list as well. This raises the question—is FATF applying double standards against Iran?
FATF emphasizes that it is a technical and not a political body and that all countries are treated equally. Impartiality is important for a global standard-setting body, which seeks to ensure that countries cannot seek to politically undermine one another.
Iran has attended FATF’s face-to-face meetings and answered extensive questions. Moreover, the FATF recommendations call for the enacting of six laws: criminalizing money laundering (i.e. the AML law), criminalizing financing of terrorism (i.e. the CFT law) and four other laws regarding joining four UN conventions. Of these four laws, two had already been approved by the parliament—Iran has joined the UN Anti-Corruption and Vienna conventions. The remaining laws are being deliberated. These legislative measures are among the most difficult recommendations to enact, as they require the coordination of government agencies, parliamentarians, and other supervisory bodies and therefore it seems that the action plan of Iran has been a difficult one with a rather short deadline provided.
Passing a single law may require 18 months of work, as it needs to be reviewed by the committees of the government and the cabinet, parliamentary commissions and then the parliament itself, and finally the powerful Guardian Council. Iran has achieved a degree of compliance with some aspects of the action plan, a fact acknowledged by FATF itself. Therefore, it would be illogical for the country to be considered non-cooperative.
The authority of FATF derives from the number of countries that have trusted it as a technical body. Therefore, this is not only a sensitive juncture for Iran, but also for the legitimacy of FATF, which must strive to preserve its reputation as an impartial technical body that treats all countries equally.
Photo Credit: FATF Twitter
