U.S.-Iran Talks Will Falter Unless Abdolnaser Hemmati Is at the Table

By Esfandyar Batmanghelidj and Saheb Sadeghi

The United States and Iran may soon be sitting at the negotiating table once again. In just the last week, the Biden administration has offered to restart negotiations, and Iran has struck a deal with the International Atomic Energy Agency to slow moves to limit inspections of its nuclear program. A window of opportunity has emerged for the two sides to talk, likely in a format facilitated by the European Union. If and when the United States and Iran sit across from one another again, there is a key figure who ought to be present—Abdolnaser Hemmati, the governor of Iran’s central bank.

In many respects, Iran’s central bank was the primary target of former U.S. President Donald Trump’s economic war on Iran. Much of the economic hardship that Iran has experienced due to the reimposition of secondary sanctions can be attributed to the Trump administration’s success in limiting the central bank’s access to its foreign exchange reserves.

According to the International Monetary Fund (IMF), Iran retains access to just $8.8 billion of readily available foreign currency, roughly one-tenth of its total reserves. Without access to its reserves held in countries like Iraq, South Korea, Japan, and Germany, the central bank has struggled to forestall the weakening of Iran’s currency, which is today worth less than one-fifth of its value prior to Trump’s withdrawal from the nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). This deep depreciation made imported goods more expensive, contributing to annual inflation rates of nearly 50 percent.

Hemmati, a veteran banker, was appointed as central bank governor in July 2018, parachuting in just a few months before secondary sanctions were fully reimposed on Iran. He has performed remarkably well in difficult circumstances. Iran’s currency was regaining value for most of 2019, a trend disrupted by the COVID-19 crisis, which hit the country’s economy hard, throwing trade into disarray.

Since reaching a historic low in October 2020 of just over 320,000 rials to the dollar on the free market, the currency has since stabilized at around 250,000 rials to the dollar—with this stability helping to undergird Iran’s slow economic recovery. Along the way, Hemmati has proved an adept communicator, using his Instagram account, the central bank’s website, and even select interviews with international media to outline his priorities and reassure the Iranian public about the bank’s capacity to defend the rial from hyperinflation.

Iran has not faced a full-blown economic meltdown, despite the best efforts of the Trump administration. But the country finds itself in a painful period of economic stagnation, and sanctions relief will be needed should any government wish to deliver on promises of prosperity. However, Trump sought to make sanctions relief more difficult.

In September 2019, the Trump administration designated Iran’s central bank under a terrorism authority, a move that jeopardized long-standing exemptions permitting the bank to play a crucial role in facilitating the purchase of humanitarian goods such as food and medicine.

In February 2020, the U.S. Treasury Department issued a new general license to allay those concerns. But more troubling was the intention behind the terrorism designation, which was applied to Iran’s central bank for the express purpose of making it harder for a potential Democratic administration to lift sanctions on the bank in the future.

The Biden administration will likely need to remove this designation to bring the bank back to its original status under the JCPOA—but removing a designation ostensibly tied to Iran’s purported support for terrorism may prove politically tricky as part of U.S. reentry into an agreement focused exclusively on the country’s nuclear program.

Lifting sanctions was difficult even before the Trump administration’s cynical moves. Iran’s experience of sanctions relief following the implementation of the JCPOA was disappointing. International banks remained hesitant to process Iran-related transactions, citing unclear guidance on how to conduct business in a compliant manner and the risks of punitive fines if the remaining sanctions were inadvertently violated.

This limited the rebound in trade and, particularly, investment in Iran. While there had been some technical exchanges on banking during the JCPOA negotiations, including working-level exchanges with Iran’s central bank, these were largely focused on the unfreezing of Iran’s assets—the challenges Tehran faced in mundane banking blindsided the JCPOA parties.

In March 2016, then-Treasury Secretary Jacob Lew noted that the “experience with Iran demonstrates how difficult [sanctions lifting] can be.” Despite what Lew referred to as “widespread global outreach” by officials at the U.S. Treasury and State departments, the banking challenges persisted and continued to stymie trade and investment until Trump’s eventual withdrawal from the nuclear deal.

In an interview last July, Valiollah Seif, who was central bank governor at the time of the JCPOA negotiations, suggested that Iran had not had the right experts in the room. “The JCPOA could solve the problem related to oil sales at that time, but it could not solve our banking problems. … Our economic and banking expert team was weak in the JCPOA talks,” he said.

Understandably, Iranian leaders are keen to get sanctions relief right this time around. In a recent speech, Iran’s supreme leader, Ayatollah Ali Khamenei, insisted that any sanctions relief offered by the United States must take place “in practice” and not just “on paper.” Moreover, the efficacy of that sanctions relief will need to be “verified.”

What’s clear is that as new negotiations approach, the JCPOA parties cannot rely on diplomats to untangle the complex knots that have constricted Iran’s banking ties for so long. To ensure sanctions relief succeeds, Hemmati ought to be in the room as part of a high-level technical dialogue, which could eventually include top officials such as U.S. Treasury Secretary Janet Yellen and French Finance Minister Bruno Le Maire.

There are a few reasons why a dialogue on sanctions relief, which would be similar in structure to the pre-JCPOA exchanges on nuclear issues between then-U.S. Energy Secretary Ernest Moniz and Ali Akbar Salehi, the head of Iran’s atomic energy agency, ought to center on Hemmati.

First, Hemmati has emerged as a key figure of Iran’s economic diplomacy. In the last two years, he has made trips to Iraq, Oman, South Korea, and China in order to ensure Iran retained functional financial channels with key trade partners while the Trump administration sought to put pressure on the governments of these countries. His participation in the new talks would be a natural extension of this global outreach, and most of the sanctions relief benefits promised by the United States will need to be delivered via third countries. Hemmati is the only stakeholder to have full technical knowledge of the challenges U.S. sanctions have posed in economic relations with key trade partners.

Second, Hemmati’s stewardship will be critical for the implementation of both early and late-stage sanctions relief measures. Whether it is the easing of access to foreign reserves or the granting of Iran’s COVID-19 IMF loan—both under consideration as early economic gestures by the Biden administration—or the consideration of new economic incentives such as reauthorization of the “dollar U-turn,” an exemption revoked in 2008 that allowed U.S. banks to process Iran-related transactions in cases where a payment is being made between two non-Iranian foreign banks, effective implementation depends on Iran’s central bank.

Importantly, the international community will also expect Iran to continue to reform its banking sector in line with international standards. On this point, Hemmati has been a key champion, stating recently that if the JCPOA were revived, Iran would need to complete adoption of the action plan set forth by the Financial Action Task Force, a standards-setting body, in order to see the benefits of sanctions relief in the banking sector.

Finally, Hemmati would bring some technocratic continuity to the economic implementation of a restored JCPOA. There is considerable concern that the possible arrival of a new Iranian president in August could leave any diplomatic agreement vulnerable to changing politics in Tehran.

While it may be possible for some of Iran’s top diplomats to remain in their posts in a new administration, it is Hemmati, whose term ends in 2023, who is best positioned to offer institutional continuity on implementation issues. He has proved to be an adept political operator. By insisting on the central bank’s technocratic independence, he has largely avoided the attacks regularly made against members of the Rouhani government.

He also maintains a good relationship with Khamenei and has been able to turn to the supreme leader to insulate the bank’s policies from political attacks. It is often argued that restoring the JCPOA would help boost the fortunes of Iran’s political moderates, but it is equally important for U.S. President Joe Biden to strengthen the hand of Iran’s technocrats who work on policies, not politics.

The Biden administration’s early appointments made clear that when it comes to Iran, personnel is policy. The same holds true in Tehran. If the right people are not in the room during upcoming negotiations, not only will the agreed policies be deficient, but so too will implementation falter. The United States, the other permanent members of the U.N. Security Council, and Germany need to provide Iran a pathway to the normalization of its banking ties—to do so, it would make sense to engage Iran’s top banker.

Esfandyar Batmanghelidj is the founder of the Bourse & Bazaar Foundation.

Saheb Sadeghi is a columnist and foreign-policy analyst on Iran and the Middle East.

Photo: IRNA

The Plan to Save the Iran Deal Needs Private-Sector Buy-In

With the election of Joe Biden to the US presidency dialogue, between Washington and Tehran appears to once again be possible. Both Tehran and the Biden team have expressed a willingness to consider a “clean” return to the terms of the Joint Comprehensive Plan of Action (JCPOA, better known as the Iran nuclear agreement) if the other does the same. Namely – Iran would revert its nuclear activities to within the limits set out in the JCPOA, which it began breaching in May 2019, and the US would once again lift sanctions on Iran as prescribed by the agreement.

Reality, of course, will be more complicated. Securing economic benefits will be a priority for Tehran in any dialogue on the future of the deal, or any agreement that may succeed it. However, as became clear following the initial removal of US and international sanctions on Iran in 2016, the degree to which sanctions-lifting on paper translates to economic relief in practice depends in no small part on the willingness of the private sector to engage with the Iranian market. If the US and E3 hope to present renewed trade and investment as a credible and meaningful incentive for Iranian cooperation, it will be necessary to both address private sector concerns and manage Iranian expectations.

At the moment, many businesses around the world have opted out of engaging with Iran. The scope and complexity of US economic measures against Iran, as well as the high costs of potentially losing access to the US market and financial system in case of an accidental breach, is sufficient to turn even the most well-resourced compliance departments off of engaging with Iran. Iran is also one of only two countries—alongside North Korea—on the “blacklist” put forth by the Financial Action Task Force (FATF), the global standard-setter on countering financial crime. As a result of Iran’s failure to address “strategic deficiencies” in its financial crime regime the FATF currently requires jurisdictions to apply “enhanced due diligence” to their transactions with Iran, leading many banks to opt out of transacting with the country altogether. This means that businesses struggle to access financial infrastructure necessary for doing business with Iran.

There is some indication that, even if US sanctions on Iran were lifted, the uptake for private sector engagement with Iran would remain slow and limited. A few weeks ago, Iranian president Hassan Rouhani reportedly requested that Iran’s Expediency Council reprise its review of legislation that would address the deficiencies in Iran’s financial crime legislation called out by the FATF, which may help address some private sector concerns. However, persistent challenges in relations between Iran and the US and E3 will continue to create uncertainty for businesses. On December 17, the European Parliament passed a resolution condemning Iran’s detention and execution of human rights defenders and prisoners of conscience and called for the application of targeted financial sanctions on the Iranian individuals responsible. A few days earlier, a European Union-funded virtual business conference was postponed following the execution in Iran of journalist Rouhollah Zam.

Furthermore, some key US economic measures against Iran—for instance, sanctions on the Central Bank of Iran and on the Iranian Revolutionary Guard Corps (IRGC), as well as the designation of Iran as a jurisdiction of primary money laundering concern—are not related to Iran’s nuclear activities and may not be lifted as part of a return to the nuclear deal. These sanctions will continue to create complexity for banks and other businesses and will factor into private sector risk calculus. The possibility of another snap-back of US nuclear-related and secondary sanctions on Iran under a future change of administration in Washington will also discourage businesses investment. Persistent concerns over exposure to US sanctions within the financial sector in particular will complicate renewed economic engagement with Iran, as businesses will have trouble finding banks willing to support financial transactions with Iranian counterparts. Efforts by the incoming Biden administration to figure out the legal and regulatory logistics of sanctions-lifting, while ensuring that sanctions remain an effective tool of US foreign policy, will therefore also have to address challenges in the practical  implementation of sanctions-relief.

Reversing the economic impacts of private sector reticence to engage with Iran will be top of mind for the Islamic Republic as it engages with the new Biden administration. Tehran has previously called for compensation for “damages” to the Iranian economy caused by US sanctions – although Iranian leadership appears to have dropped such demands as a pre-condition for an Iranian return to compliance with the JCPOA in recent statements. And while Iran’s Supreme Leader Ali Khamenei expressed support for seeking sanctions-removal in recent marks directed at Iranian officials and the Iranian public, he also stressed the importance of “nullifying” the impact of sanctions on the Iranian economy. He distinguished “neutralizing” sanctions from sanctions-lifting and seemed to express scepticism over US and European ability to deliver on the former.

Assessing business’ levels of interest in re-engaging with the Iranian market and addressing concerns where possible will lend greater weight to US and European incentives of economic relief, hopefully encouraging greater cooperation from Iran in any future diplomacy—whether on its nuclear programme or more broadly. Relaying to Tehran the results of these private sector consultations may also help manage Iranian expectations on the level of foreign economic interest it can expect following sanctions lifting while also stressing the need for Iran to get its financial regime in order. On the part of Washington, this may include preparing comfort letters, granting sanctions exemptions, updating general licenses and expanding the guidance issued via the Office for Foreign Assets Control “Frequently Asked Questions” on Iran sanctions.

By consulting with their private sectors, the European governments can also better-understand business concerns and uncertainties around engagement with the Iranian market and how these may shift—or fail to do so—with the lifting of US sanctions. In October 2020, the European Commission launched a “Due Diligence Help Desk” aimed at supporting European companies in navigating European sanctions on Iran. While the platforms are well-intentioned and may provide businesses with helpful guidance, it is unclear how effective they will be in practice. The platforms do not address some of the key challenges raised earlier, including the lack of financial infrastructure to support transactions with Iran and concerns over exposure to US sanctions. The UK and European governments may wish to identify and reach out to specific sectors that are likely to be of greatest importance to renewed trade with Iran—for instance, the banking sector or those engaged in energy trade—to ensure they have the assurances, guidance, and infrastructure they need to proceed with confidence. Coordinated efforts across capitals—for instance, through the issuing of joint guidance by American, British, and European financial regulators, as well as dialogue with the US on the concerns of UK and European businesses—will also be valuable.

As renewed diplomacy on the Iranian nuclear question gets underway, it will have to be supplemented by consultations with businesses to assess whether the private sector will be able to make good on economic promises made at the negotiating table, as well as to manage Iranian expectations. At the same time, understanding and, where possible, addressing private sector concerns will help businesses do what they do best—moving goods, people, and capital to ensure that the lifting of sanctions on paper translates into real economic uplift for Iran.

Photo: IRNA

Trump Administration Pressures Global Financial Watchdog to ‘Blacklist’ Iran

This article was originally published by Responsible Statecraft.

The Financial Action Task Force (FATF), a global body that sets standards to combat money laundering and terrorist finance, has placed Iran back on its infamous “blacklist,” following the failure of Iranian policymakers to enact two key bills in accordance with an action plan set in 2016.

The FATF statement, issued on Friday at the conclusion of the body’s latest plenary meeting, calls on members to “to apply effective countermeasures” following Iran’s failure to implement “the Palermo and Terrorist Financing Conventions in line with the FATF Standards.”

Such countermeasures include increase monitoring, reporting, and auditing of Iran-related financial transactions for all financial institutions worldwide. While members can decide how to reimpose the countermeasures, the decision taken by FATF serves as a kind of external validation of the Trump administration’s claims that the Iranian financial system is regularly used to facilitate money laundering and terrorist finance on a massive scale. This characterization is a principle justification for the administration’s “maximum pressure” sanctions campaign and U.S. officials had been dogged in pressuring FATF to call “time out” on Iran’s reform process.

The FATF decision will be deeply disappointing to many officials in the Rouhani administration who had expended extraordinary political capital to try and get the necessary legislation enacted, succeeding in getting four key bills passed by parliament, but only managing to have two bills enacted into law. Opposition by hardliners had been fierce — the FATF issue was linked to the slow-rolling crisis around the nuclear deal and the Trump administration’s sanctions campaign. The politicization of the action plan reforms — both in Tehran and in Washington — was perhaps unprecedented in the history, putting “the task force is between a rock and a hard place,” as Tom Keatinge, as RUSI Director of the Centre for Financial Crimes and Security Studies, has recently observed.

The FATF’s decision could have a significant impact on Iran’s economy, but likely indirectly. Iranian officials who advocated for implementation of the action plan insisted that failure to do so would lead to international banks, including banks in Russia and China, to cut ties with Iran. More precisely, the reimpositon of countermeasures means that it will be exceedingly difficult for Iran to open any new cross-border financial channels. But the countermeasures set to be reimposed, including FATF’s exhortation of its members to impose enhanced supervision and reporting requirements for financial institutions handling Iran-related payments reflect a level of oversight already adopted by the few global financial institutions that continue to transact with Iran. For example, European officials do not expect the FATF decision to interfere with the operationalization of INSTEX, the mechanism established to support European trade with Iran, given the longstanding policies of the banks on which INSTEX will rely.

Existing banking channels are unlikely to be constricted for the express reason that Iran is back on the blacklist — although this does not preclude that the FATF decision will be used as a timely excuse to stop handling Iran-related payments by some banks.

The more likely damage to Iran’s economy will arise from the setback that FATF’s decision represents for the wider push for financial transparency reforms in Iran, which including everything from calls for greater fiscal transparency to the adoption of international standards for accounting. In May of last year, I wrote about how this broad campaign was suffering under the pressures of a “financial war” waged by the Trump administration. Although “transparency has become a discourse and ongoing demand” in Iran, to use the words of one reformist parliamentarian, a pervading paranoia got in the way of reforms, including those required by the FATF.

As I wrote at the time, many Iranians increasingly feared that when sanctions were being applied too aggressively, any increase in financial transparency was “akin to exposing the location of a piece of critical infrastructure and leaving it vulnerable to attack.” The Trump administration sought to actively stoke this paranoia through its use of public messaging and sanctions designations, causing a significant rift with European partners engaged in a technical dialogue with the Rouhani administration over the reform process.

I have been closely following the FATF issue for three years, during which time I have had the opportunity to discuss the action plan and its implementation with American, European, and Iranian officials as well as business leaders engaged in trade between Europe and Iran. There remain many unknowns about the economic impact and the damage the countermeasures will have. But what is profoundly clear is how easy it was for the Trump administration to seek to interfere with the apolitical work of FATF and the fragile process of financial transparency reforms in Iran, even though that process was driven in large part by the concerns of the Iranian electorate around systemic corruption.

In this way, the FATF experience offers a cautionary tale. To whatever extent the current nuclear deal will remain resilient in the face of the Trump administration’s maximum pressure and reduced compliance from Iran, and to whatever extent a new deal may be strengthened to avoid a repeat of the current crisis, any diplomatic reset with Iran will require greater protection of the myriad technical processes of reconnection and reform that will be necessary to ensure that promises are delivered. We promised to give Iran a chance. We failed those who tried to take it.

Photo: FATF

Europe Tries to Sidestep the U.S. Finance System

The standoff between the Trump administration and Iran is escalating, and Europe is caught in the middle. The U.S. is exerting pressure through renewed economic sanctions, and hardliners in Tehran are issuing fiery threats of retaliation.

Brussels and national governments in the U.K., France and Germany, meanwhile, have been criticized by both sides for promising to preserve trade with Iran while also treading softly with the Americans to avoid a full-blown diplomatic crisis. Europeans “speak eloquently”, Iran’s foreign minister Mohammad Javad Zarif said in February. “They also need to walk the walk.”

But it would be wrong to dismiss Europe’s efforts as hopeless.

A big source of contention for both Washington and Tehran is INSTEX, a special-purpose vehicle unveiled by Paris, Berlin and London in January. Its ultimate ambitions are bold: To keep trade between Iran and Europe going without relying on cross-border financial transactions (which might fall foul of the U.S.). While not explicitly a sanctions-busting vehicle, it was clearly designed with President Trump in mind. It was his re-imposition of the U.S. trade ban that led to Iranian banks being cut off from the SWIFT banking network, and to international businesses scrapping their investment plans in the Islamic Republic.

By using INSTEX like a central clearing house, the idea would be that buyers and sellers in Iran and Europe could get their money without making transfers into and out of the Middle East country. It’s a complicated system, but in a very simplified form you could imagine having a European trader who wants to buy gas from an Iranian supplier and a European manufacturer who wants to sell aircraft parts to an Iranian company. Instead of the trader paying the Iranians for the gas, they would transfer the money to their fellow European manufacturer (in lieu of payment from its Iranian customer). At the same time, the Iranian aircraft company would pay its compatriot gas supplier for the supplies sent to Europe. Hence no cross-border money flows.

To be clear, INSTEX right now only wants to deal in humanitarian essentials – medicine and food, for example – but Europe has said it wants to expand the facility in the long term. Combined with new “blocking regulations” that make it an offense for EU businesses to comply with U.S. extraterritorial sanctions, there’s a loud message here that Europe’s leaders want to go their own way.

Criticism has focused on the everyday practicality of using INSTEX beyond those humanitarian aims, plus the wisdom of Europe resisting its key NATO ally, whose dominant currency affords it huge extra-territorial reach when waging economic war. For the Trump administration, the special purpose vehicle is a misguided attempt to “break” American sanctions and offer cover to the Islamic Republic. For Iran, it’s a paper tiger. Zarif says Europe has dragged its feet and is clearly reluctant to launch the system.

Neither complaint is entirely fair. INSTEX is obviously a work-in-progress, a sketch on paper more than a reality. But for London, Paris and Berlin, whose unity tends to crumble under U.S. pressure, a public commitment to this vehicle is a kind of success in itself. And it is being taken seriously by parts of the American establishment, who are aware of any risks—however distant—to the dollar’s dominance. “The plumbing is being built and tested to work around the United States,” former Treasury Secretary Jack Lew warned in February. “There will increasingly be alternatives that will chip away at the centrality of the United States.”

In Iran, behind the official skepticism, there are signs of progress. Press reports suggest Tehran has set up its own matching facility for INSTEX, which is needed to make the system work. Europe has also insisted that Tehran has to meet certain standards to participate, including conforming to global rules on money-laundering and terrorist financing. If this happens, it would be significant.

It will probably take years for INSTEX to become genuinely viable in terms of participating countries and trade flows. But it’s serving a political purpose already: Giving Iran an incentive to stay aboard the nuclear deal, and reminding the U.S. that sanctions overreach may harm its interests. INSTEX can’t stop the Middle East from sliding into war, but it’s a marker worth laying down.

Photo: Bloomberg

Iranian Bankers Fear IRGC Terrorism Designation Dooms Vital Financial Reforms

Reform-minded Iranians, especially those inside the ailing banking system, are worried that the US government’s step to designate Iran’s Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization has doomed a years-long effort to get the Islamic Republic off a consequential global blacklist.

The administration of Iranian President Hassan Rouhani has been working hard to meet the requirements of the action plan set by the Financial Action Task Force (FATF), the intergovernmental organization established with the mandate of combatting money laundering and terrorism financing.

The required reforms have caused deep political divisions, with opponents arguing that Iran will be compromising its sovereignty should it appease the FATF, while porposents argue that failing to pass the required legislation will eliminate final links Iran maintains with foreign financial institutions while under US sanctions.

Undaunted even as death threats were made against them, a majority of Iran’s parliament voted to pass all four FATF bills over the course of several months. The supervisory Guardian Council then ratified two of the laws, while two others were considered deficient. The council and parliament have failed to find a consensus on adjustments to these two bills, which pertain to regulations that deter terrorist financing and organized crime. Now the powerful Expediency Council must vote to break the deadlock on ratification.

Meanwhile, the clock is ticking for Iran to show progress on the FATF action plan. At the end of its February plenary sessions, the FATF announced, “If by June 2019, Iran does not enact the remaining legislation in line with FATF Standards, then the FATF will require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran.”

When the Trump administration took the controversial move to designate the IRGC a Foreign Terrorist Organization (FTO), the first time the FTO designation had been applied to a part of a foreign state, the condemnations in Iran came swiftly.

As Rohollah Faghihi reports for Al Monitor, hardliners opposed to engagement with the West pointed to the FTO designation to show the futility of the FATF reforms. The day after the FTO designation was announced, Expediency Council member Gholamreza Mesbahi-Moqadam said the designation has decreased the chances that the FATF bills woild be ratified. “The move has strengthened the council’s [unfavorable] stance about the FATF and the chances of the bills not being approved has increased,” he said. Others have even placed the chances of ratification at zero.

Members of Iranians banking community, who have been advocating for FATF reforms for years as part of a larger drive for modernization of the financial sector, share in this pessimism. A senior Iranian banker speaking to Bourse & Bazaar on condition of anonymity agreed that the FTO designation has harmed the odds of the bill passing, by shifting the environment away from constructive discussion and cooperation towards sloganeering.

“The designation has major political implications, the full scope of which has yet to become clear, but I find it unlikely that the bills will be approved under current circumstances,” the banker said. “Essentially whenever the situation gains an emotional aspect, decisions also become largely emotional.”

Several high-level Iranian officials have also confirmed that the FTO designation will have an impact on the FATF bills. Secretary of the Expediency Council Mohsen Rezaei, who counts himself among those opposed to the bills, has said the FTO designation will be factored in forthcoming decisions based on “national interests.”

Meanwhile, Laya Joneydi, Iran’s Vice President for Legal Affairs, suggested it was a mistake to conflate decision-making about the FATF bills and the FTO designation since the two issues are “fully separable.” She did, however, point out that the designation will prompt the Rouhani government to consider any new “reservations” about the two bills.

A source inside the Central Bank of Iran also confirmed to Bourse & Bazaar on condition of anonymity that the IRGC designation should be expected to have an impact on the FATF bills.

“The central bank has always been in favor of having the bills pass into law, but we have already concluded all expert reviews of the bills and now everything depends on the views of the Expediency Council. At at the moment it seems the number of council members opposed to the bills is higher,” the source said.

Central Bank Governor Abdolnasser Hemmati has on multiple occasions voices his support for enacting the bills into law, saying Iran needs to do more to comply with international financial standards. In his latest remarks in early March, he said safeguarding and strengthening what little international banking ties Iran retains is a “necessity.”

In late February, Rouhani mounted his strongest support yet for the bills, saying “we cannot give the country to 10-20 people and say we follow your decisions”. The president called on the Expediency Council to facilitate passage of the bills lest Iran lose its already tenuous link to the global financial system.

But not everyone inside Iran’s isolated banking system is pessimistic about salvaging the FATF action plan.

“The bills will certainly face delays, but we predict that they will ultimately be signed into law,” a senior member of a banking sector association told Bourse & Bazaar on condition of anonymity.

The official likened the situation surrounding the issue to the Iran nuclear deal, noting that many analysts thought such a multilateral agreement could never be reached given opposition from hardliners.

“I believe some members of the Expediency Council harbor doubts about some of the contents of the FATF bills but are not opposed to them outright. Those doubts will be cleared in time,” the official said.

The question remains whether the FATF will continue to show patience as Iran’s complex domestic politics slow the pace of reform even further.

Photo: IRNA

Bankless Task: Can Europe Stay Connected to Iran?

This article is re-published with permission from the European Council on Foreign Relations. 

As part of the effort to salvage the Iran nuclear deal, European governments have vowed to sustain their economic ties—not least their banking connections—with Iran. From 4 November, American sanctions targeting Iran’s banks will make it extremely difficult for European companies to engage in transactions with firms in the country. Many of the pathways to reducing the secondary impact of US secondary sanctions on the European financial sector present significant technical and political challenges—which stem from the US financial system’s global dominance and the integration of the US and European banking sectors. Moreover, the Iranian financial sector must take several proactive steps to ensure it meets the international compliance standards European banks require.

The Banking Blockage

With the incoming US sanctions, European companies face an even greater struggle to engage in transactions with Iran. For instance, Swedish automaker Volvo is leaving Iran because, as one of its spokesman put it, “with all these sanctions and everything that the United States put [in place] ... the [banking] system doesn’t work in Iran … We can’t get paid.”

This problem has driven most of the multinationals once active in the Iranian market to suspend their operations there, ahead of the new round of US sanctions. There is a widespread expectation that several Iranian private banks and the Central Bank of Iran will be designated entities under the measures.

Some European companies, such as Airbus and Total, require a licence or waiver from the US authorities to continue their operations in Iran, as they work in sectors subject to targeted sanctions. Many areas of Iranian trade, such as that in basic goods, are either unsanctionable or will be exempt from the measures. Yet US sanctions have adversely affected even these areas, as outlined in a recent ruling of the International Court of Justice.

Such restrictions on trade arise from the contamination risk that US secondary sanctions pose to European financial institutions, which generates unique pressure on the Iranian banking sector. This risk combines with Iran’s current shortfalls in meeting its commitments under a Financial Action Task Force (FATF) action plan – although the recent passage of the Combating Financing of Terrorism Bill suggests that Tehran is raising its compliance standards. Until the FATF changes Iran’s designation as a high-risk jurisdiction, global financial institutions will limit their dealings with Iranian banks.

Since President Donald Trump withdrew the US from the Iran nuclear deal in May this year and announced the re-imposition of secondary sanctions on Iran, banks in Europe have come under growing direct and indirect pressure from American regulators. Following the repeal of international sanctions on Iran in 2016, many large European banks began quietly facilitating transactions involving Iran for their largest industrial clients, especially those with long-standing operations in the country. Among these institutions, Danske Bank was the most visibly open to business with Iran, even opening a €500 million line of credit to support Danish firms’ expansion in the country. But as it falls into disrepute over suspected money laundering at its Estonian subsidiary, Danske Bank has opted to cease transactions involving Iran as an immediate show of responsiveness to US regulators. More broadly, banks tend to jettison their business with Iran if regulators exert pressure on them, even in the absence of a direct compliance issue.

Meanwhile, small European banks are coming under pressure from their larger competitors. When these institutions, which have relatively limited exposure to the US financial system, engage in Iran-related transactions, their routine SEPA transfers – payments to other banks within the Single European Payments Area – are often refused outright. This isolates the banks and complicates other aspects of their business. And the refusals extend beyond Europe. Asian banks have shown increasing concern about dealing with small European financial institutions that engage in business with Iran, understanding that they too could fall foul of the US authorities.

Europeans banks have been reluctant to engage with Iran due to fears about the response from their shareholders and creditors. This is most clear in the case of the European Investment Bank (EIB), which has refused to invest in Iran. European governments (which number among the bank’s shareholders) encouraged the EIB to consider lending to Iran, but the bank’s leadership felt that investing in the country would jeopardise its ability to raise capital from American institutional investors in the bond market.

Europe’s Possible Solutions

Despite their efforts to sustain economic channels with Iran, European governments have been unable to ease this pressure on banks. With US sanctions on Iran’s banking sector due to come into effect soon, European countries are now considering measures that would facilitate trade transactions with Iran through a new legal and institutional structure.

On the sidelines of the recent United Nations General Assembly, EU High Representative Federica Mogherini announced that “EU Member States will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue trade with Iran, in accordance with European Union law, and could be opened to other partners in the world”.

European governments have been reviewing this legal entity, known as a Special Purpose Vehicle (SPV), for months. The timing of this public announcement suggests that they have a degree of confidence that the SPV can become operational, and that Europe can use the model to showcase its ability to deliver on its commitments.

US Secretary of State Mike Pompeo immediately responded that he was “disturbed and indeed deeply disappointed” at the news. US National Security Advisor John Bolton commented: “we will be watching the development of this structure that doesn’t exist yet and has no target date to be created. We do not intend to allow our sanctions to be evaded by Europe or anybody else.”

There remains scant detail on the SPV. In her statement, Mogherini added that more information will become available “as the technical work continues in the coming days”. It may be advisable for European actors involved in the creation of the SPV to keep the details private for now. Operationalising the SPV will require a period of trial and error. Making the details of the project public in its early stages would provide the structure’s opponents with further opportunities to undermine it.

Can the SPV Model Work?

Reportedly, an internal European Commission paper describes the European Union’s efforts to “bundle and reduce cross-border payments to and from Iran”. In this way, the SPV would “avoid or severely restrict the role of commercial banks in the payment system and protect payment transactions with Iran from US sanctions”. European policymakers’ apparent consideration of this approach indicates that they want to avoid placing critical European financial institutions, such as the EIB, in the crosshairs of the Trump administration.

To operationalise the SPV, policymakers will need to quickly make progress in several technical areas. Firstly, European governments need to determine how aggressively they will push back against US sanctions; this is a consideration of the first order for the structure and operation of the SPV. Theoretically, the SPV could facilitate payments for what the US authorities consider to be sanctionable activity. Indeed, European officials have openly discussed their intention to use the SPV to support purchases of Iranian oil.

As guidelines from the US Treasury’s Office of Foreign Assets Control make clear, even barter arrangements involving petroleum or petroleum products from Iran are sanctionable – on the basis that they provide “material support” to Iran’s oil industry “regardless of whether a financial institution is involved”. However, because the envisaged SPV would bypass the US financial system and foreign branches of US banks, the American authorities would have no direct jurisdiction over it. Thus, transactions the SPV facilitated would not give rise to the same kind of civil liability that led to hefty fines on Europe’s largest banks in the previous era of sanctions.

The US authorities could, in theory, prevent entities engaged in the SPV from accessing the US market. American officials have stressed that US sanctions will target European central banks and SWIFT – an international payments messaging system headquartered in Belgium – if these institutions facilitate transactions with Iran. Furthermore, this targeting would extend beyond entities engaged in oil purchases, covering all companies that use the SPV to engage in transactions with Iran – even those in sectors that are exempt from sanctions, such food and pharmaceuticals.

European governments working on the SPV will have to find a way to counter such measures. On a technical level, they may be able to use creative structuring solutions. The SPV could be set up primarily as a payment mechanism for only small and medium-sized companies that are content to be excluded from the US market. And the mandate of the SPV could initially facilitate just payments for trade that is exempt from US sanctions.

The SPV is most likely to succeed if takes this approach, starting off small and gradually expanding. The basic structure of the vehicle is replicable. One SPV could focus on sanctionable trade related to support for Iran’s oil, automotive, or aviation sectors. Another could be limited to sanctions-exempt trade in consumer goods, food, and pharmaceuticals – allowing multinationals to use it as a convenient payment channel. With multiple SPVs available, companies could engage with Iranian entities in accordance with their appetite for risk and their business models.

Each SPV could take a different form. It could be a stand-alone, state-owned bank; a conduit for payments that European central banks ultimately facilitate; or simply a clearing house for companies that transfer money to Iran, repatriate funds from the country, or engage in barter trade with it.

The process of establishing the SPV will prove instructive in testing the limits of America’s sanctions power and US willingness to use sanctions as a weapon against its putative allies. Reports indicate that the US Department of the Treasury is already starting to push back against the White House over proposals to sanction European financial institutions, particularly SWIFT, for maintaining ties with Iran.

Of course, creating the SPV will require significant technical work. For its part, Iran will need to demonstrate that its financial system is also continuing to reform in accordance with international standards on money-laundering and terrorism financing. European governments will closely watch the country’s progress in implementing the FATF action plan ahead of an important review on 14-19 October.

From a political perspective, Iran has drawn encouragement from European countries’ sustained and unanimous commitment to the nuclear agreement. Iranian President Hassan Rouhani praised Europe for taking a “big step” to maintain trade. Iran’s foreign minister, Javad Zarif, stated that while implementing the SPV will be difficult, Iran is willing to show “a little bit more patience” with Europe. The SPV is an important immediate contribution to improving conditions for trade between Europe and Iran, but both sides must view it as the start of a road map for long-term economic engagement.

Photo Credit: Depositphoto

Unintimidated, Iranian Lawmakers Pass Counter-Terror Financing Bill

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.

پاسخ من به پیامک های انبوه درباره #FATF pic.twitter.com/A6LAWrssKQ

— محمود صادقی (@mah_sadeghi) October 6, 2018

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

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 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

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

High Stakes for Iran in Upcoming FATF Meeting

A few days ahead of an international meeting in which Iran’s efforts to improve anti-money laundering and counter-terrorist financing (AML/CFT) standards will be reviewed, Ayatollah Ali Khamenei appeared to pour cold water on the reform process. Yet, it is premature to assume that Iran’s consultations with the Financial Action Task Force (FATF) are suddenly over after two years of close coordination. FATF, a financial crime watchdog that develops and monitors international AML/CFT standards, faces an important decision on Iran. The stakes are high for Iran, which is seeking to reintegrate into the global economy and there are reasons to believe that FATF’s decision may have repercussions that go far beyond its June 24-29 plenary in Paris.

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 its 37 members to 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 service SWIFT. 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 FATF’s black list of high-risk jurisdictions and financial institutions will continue to be urged to conduct enhanced 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 with sanctioned entities. Due to ongoing fears of reputational and legal liabilities, Iran’s access to the international financial system is diminished by de-risking practices of global banks for the foreseeable future. 

How Iran Stands to Benefit from Reform

Although the chance to be removed from FATF’s black list is a clear reason for Iran to complete the organization’s action plan, the long-term economic impact of reforms provides another vital incentive. Mismanagement, corruption, and fragmentation in the banking sector dampens economic potential. Iran’s bad debt, estimated to be in the tens of billions of dollars, fuels fears of an imminent banking crisis. Strengthening Iran’s banking sector to align with international standards, a priority highlighted by the IMF, 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 Iran’s economy. This year the currency lost over 20 percent of its value against the US dollar (and much more on the black market) between January and June, foreign companies are considering plans to wind down billion-dollar investments, 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 from protests late last year: the need to root out financial sector corruption that enriches elites and undercuts economic opportunities for the working class. 

Iran’s Progress To Date

Despite Iran’s recent decision to delay vital CFT legislation, the government is taking several steps to satisfy the terms of its action plan. The Rouhani administration regularly engages with FATF experts even 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 the AML law was approved by parliament’s judiciary commission and legislators ratified Iran’s accession to an international convention on combating transnational crime. Similarly, Iranian officials are working to implement several technical AML rules that FATF cited in a statement following the organization’s 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 Iran’s commitments and FATF’s expectations remains on criminalizing terrorist financing. To fully comply with FATF standards, text would need to be changed in Iran’s legislation for amending the counter-terrorist financing law and acceding to a related international convention. Both bills contain CFT exemptions for certain types of militant groups, but there is no precedent for FATF accepting legislation with such conditions. Resolving these issues will not be easy, but the political will to be removed from FATF’s black list (if not eventually acceding to FATF) should prompt ongoing discussions.

It is in this context that Khamenei’s June 20 statements, intimating that parliament should abandon the FATF process, are important. Just like in the run up to the international nuclear deal, Khamenei’s 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 Iran’s 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 Iran’s newly established High Council for Economic Coordination. This council, which is composed of leaders from the country’s 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 for implementing 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 FATF’s plenary session in February, there were indications that 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) allegedly intervened on Pakistan’s behalf. The decision exposed a potential break from strong US influence within FATF. It was also a radical departure from the intergovernmental body’s typical decision-making process that relies on consensus rulings.

Coupled with rising trans-Atlantic tensions on 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 meeting’s outcome. Still, Iran’s 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 fulfill FATF’s mission to counter threats to the integrity of the international financial system.

Photo Credit: Financial Services Commission

Iran’s Currency Crisis Spurs Action in Financial Reform Efforts

In the 2017 anti-money laundering (AML) index report published by the Basel Institute on Governance, which develops standards for financial regulations and compliance, Iran topped the list of the world’s 10 highest-risk countries failing to comply with AML standards. This index, published since 2007, ranks 140 countries in terms of their efforts combatting dirty money transactions and countering terrorist financing (CTF). Iran has made little progress to date in improving its standing. Yet, the recent reunification of Iran’s exchange rates by central bank is seen to be an effective step toward more economic transparency and part of wider efforts against smuggling and rent seeking in their diverse forms.

The high-risk assessment of Iran highlighted in the Basel Institute report is primarily due to weak AML/CFT regimes practiced in the jurisdiction. High rates of perceived corruption combined with poor financial sector regulations are major drivers of the structural and functional failures in the Iranian economy. Importantly, these are among the critical issues, which the Financial Action Task Force (FATF), an intergovernmental organization which develops politics to combat financial crime, had mandated Iran to address as part of its "action plan."

Following an extension granted in February, the deadline for Iran’s compliance with FATF’s action plans is set for June 2018. This means that Iranian authorities have limited time at their disposal to earn the continued suspension of counter measures against Iran. Lack of membership in organizations such as the World Trade Organization and the FATF, in particular, has led to a myriad of problems in the implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal agreed by Iran and E3+3 in 2015. Due to shortcomings in meeting FATF technical requirements and Basel II and III banking regulations, Iran has failed to expand its business and correspondent banking ties with International financial institutions, with significant consequences. For example, the number of letters of credit  opened since “Implementation Day” has been far lower than expected.

As such, financial reform in Iran is motivated by the need to spur economic growth. The mandate that the Supreme Leader of Iran Ali Khamenei gave to the Rouhani government to start negotiations with world powers over Iran’s nuclear program reflects the wider policy of the state to continue interacting with the international bodies on economic matters. To that end, cooperation with the FATF is set to carry on unless that authorization is withdrawn. Yet given the importance of such reforms, this authorization may remain in place regardless of what happens on May 12 with respect to President Trump’s decision to extend sanctions waivers issued as part of the JCPOA.

According to some estimates, the magnitude of organized money laundering in Iran amounts to some USD 26 billion per year. Transacting such sizeable amount of money outside the official financial system is impractical and requires that criminals abuse the conventional financial system to support their illegal activities. The Central Bank of Iran is seeking to increase its powers of supervision to monitor and prevent suspicious money transfers and smuggling of goods, ensuring the integrity of Iran’s financial system.

The central bank's recent moves to stem currency market volatility will make financing of illegal businesses in the economy more difficult. CBI’s new policies prohibit purchasing or holding of more than USD 10,000 or its equivalent in international currencies. In the same parallel, any bank account that whose aggregate debits and credits exceed IRR 50 billion rials  will be subject to anti-money laundering probes to monitor for suspicious activities.

Although it will remain possible to find loopholes in the new regulations, these moves reflect significant progress after years of unfulfilled promises to unify the dual foreign exchange rate regime. The move is also viewed as an important step towards obtaining approval from FATF in respect to countering money laundering and removing the rentierism prevalent in the country’s largely state-controlled economy.

In addition, based on the new legislation, revenues from petrochemical exports that are not repatriated to the country will be subject to greater supervision. Firms in the industry will now be required to report their trade transactions in the same system used to record the oil companies’ export revenues.  Previously earnings from petrochemical products sales were kept outside Iran in offshore bank accounts in the absence of proper supervision over their transactions and trades.

Interestingly, to further reinforce its oversight, the central bank has launched the an integrated system for monitoring foreign exchange deals or known as NIMA. This is a system which will monitor the activities of four groups of actors who shape the currency market: merchandise and service importers who purchase foreign currency, exporters of goods and services who earn foreign currency, banks and brokerages who act as intermediaries, and the policymakers who seek to manage supply and demand.

According to CBI governor, Valiollah Seif, the operationalization of the NIMA, will change CBI’s current reactionary response mechanism to one that is more proactive and will make controlling hazardous speculative or systematic fluctuations in foreign exchange markets possible by enabling the calculation of the effective demand so that the bank can aptly manage the available foreign exchange reserves.

In sum, the implementation of these targeted measures by CBI is expected to gradually put an end to capital flight and massive conversion of rial to other hard currencies. These moves can also undercut crimes such as smuggling and money laundering by increasing oversight and the likelihood of penalties for their perpetrators. But the effectiveness of CBI’s mandate will be determined by the political will of both the government and the state to fully enforce the letter and spirit of the new regulations and laws. A great deal is at stake. If the Rouhani government can continue to persist in its long-awaited macroeconomic policies and resist pressure from vested interests, then it remains possible that Iran’s economy could find new momentum after years of recession.

Photo Credit: Tasnim

A Swedish Training Program May Hold the Answer to Iran’s Banking Challenges

For nearly a year, “banking challenges” have vexed business leaders and investors seeking to work in Iran. While some corresponding banking relationships have been re-established between Iranian and smaller European banks, the scope and type of transactions remain limited. The largest European banks are unwilling to work with Iran. The reasons for these blockages are numerous, but the blame most often falls to the obstinance of the US Department of the Treasury, and in particular, to the Office of Foreign Assets Control, for not providing adequate guidance or licensing provisions to lend confidence to major European banks that transactions with Iran are acceptable.

However, there are additional reasons unrelated to sanctions enforcement, that have reduced the appetite for conducting business in Iran. Across Europe and the United States, new and more stringent rules for banking risk management practices, which include the introduction of personal liability for compliance officers in the event of failures, have changed the risk appetite of financial institutions. On Monday, the Financial Times reported that three of the world’s largest financial institutions—BlackRock, Vanguard, and State Street—“have expanded their corporate governance teams significantly in response to growing pressure from policymakers and clients.” The “stewardship” team at BlackRock now includes 31 specially-trained individuals. Similar expansions are taking place in compliance and risk management departments. In short, international best-practice now requires more people and more specialized training than ever before. For Iran’s banking sector, these changes raise the prospect of being left behind even in the aftermath of sanctions relief.

But history teaches us that banking sectors can catch up quickly, if provided the right support. Following the dissolution of the USSR in 1991, the former Eastern Bloc countries were struggling not merely to establish connections to Western banks, but also to adopt the fundamental structures of market economies. At the same time, financial institutions in the West were rapidly adopting new technologies, as the financial industry met with the digitalization of the economy. Just as countries like Russia, Ukraine, and Poland were reformulating their basic economic priorities, the pace of change was increasing in the world’s dominant economies.

In response to these challenges, Western governments made significant efforts to institute “capacity-building” programs across a wide range of areas including democratic governance, economic liberalization, formation of commercial law, management of industrial sectors, and reform of education systems. Naturally, banking was a crucial area of focus. The provision of financial assistance by organizations such as the International Monetary Fund and World Bank was tied to participation in “training and technical assistance” programs that sought to ensure institutions in post-Communist states were able to make responsible use of the financial support. These programs were largely successful, with banking standards rising within a decade to levels that encouraged global banks to take ownership positions in regional banks—examples include both HSBC Bank Poland and Ukraine’s Raiffeisen Bank Aval.

If capacity-building programs were able to support the establishment of extensive banking relations in countries where an independent financial sector did not even exist prior to 1990, their application in Iran should be able to generate results even faster. Iran boasts a highly sophisticated banking sector which maintained significant relations with major European banks prior to the imposition of financial sanctions in 2011. Many of Iran’s top bankers were educated in the United States and Europe. Majid Ghassemi, Chairman of Pasargad Bank, and former governor of the Central Bank of Iran, holds a PhD from the University of Southampton. Vali Zarrabieh, Chairman of Saman Bank, holds masters degrees from both CASS Business School in London and from Manchester Business School. The CEO of Middle East Bank, Parviz Aghili, holds a PhD from the University of Wisconsin. Yet, while a strong knowledge base exists in the boardrooms of many of Iran’s largest banks, there is a gap in knowledge and technical ability in middle management, particularly as many of Iran’s best and brightest young bankers seek their fortunes abroad.  

Despite this fact, there has been little effort to rekindle education as a basis for the advancement of Iran’s financial sector in the post-sanctions era. In order to gain the confidence of the world's major banks, Iran's first prerogative will be to meet the standards of the Financial Action Task Force (FATF) in the areas of anti-money laundering and counter terrorist finance. While FATF officials have had an ongoing dialogue with senior Iranian bankers and financial regulators, there is little evidence of a comprehensive effort to provide training that would reflect capacity-building within the sector at large. Similarly, while senior IMF officials have visited Iran and assessed economic reform efforts, no major commitments have been made to provide training or assistance. The Governor of the Central Bank of Iran, Valiollah Seif, suggested the creation of an IMF training center in Iran during a meeting with IMF Managing Director Christine Lagarde in April, 2015. Lagarde, herself, raised the prospect of training in a meeting with Iran’s Minister of Finance Ali Tayebnia in October, 2016.

In the absence of training and technical assistance, European banks will remain skeptical that Iranian banks are applying exacting compliance and governance standards. In order to build trust in the Iranian banking sector, a more wide-ranging effort is needed to educate and train the next generation of bankers in Iran, with a specific focus on the new regulatory and governance requirements that are currently coming into force. Encouragingly, such programs already exist. These protocols have long been offered to bankers in developing sectors worldwide. It is simply a matter of getting Iranian bankers involved.

One possible model is the Risk Management in Banking International Training Program (ITP) designed by KPMG Sweden. For over a decade, the program has worked to transfer Swedish and international standard risk management practices to countries with developing financial sectors. ITP was created as part of KPMG Sweden’s commitment to corporate social responsibility, and also as a means to build deeper connections in growth markets worldwide. The program is delivered with the stewardship and funding of the Swedish International Development Cooperation Agency (SIDA).

The program seeks to improve capacity across five key areas: financial markets, lending processes, regulation and supervision, risk management, and project management. Participants hail from a wide range of countries, including African nations such as Kenya, Uganda, and Rwanda, post-Communist states such as Ukraine, Moldova, and Georgia, and countries further afield including Thailand, Indonesia, and even North Korea. Indicatively, there have been no participants from Iran. Of the participants, 82% were between 21-40 years old, reflecting an important focus on junior and mid-career training that can help establish improved practices for the routine function of the bank, while also empowering the next generation of banking leadership. A total of 216 financial institutions, of which 131 were commercial banks, were included in the program. The remaining institutions included central banks, finance ministries, pension authorities, and insurance companies.

An extensive evaluation of the KPMG program, published by SIDA in 2014, looked at the efficacy of the initiative over the previous decade, and made three key observations: the transfer of skills was broadly achieved, new technical skills were adopted in financial institutions, and finally, elements of the training were largely sustained in subsequent years. The SIDA evaluation also found that the effort, though delivered in partnership with a private company, was broadly consistent with the international development commitments of the Swedish government. While the KPMG example is among the largest and most successful in Europe, similar development programs exist in other European countries and could be extended to Iran.

With the big four advisory firms hovering and with European governments keen to support Iran’s re-entry into international markets, it would be relatively easy to coordinate the key stakeholders to make a training program similar to KPMG Sweden’s ITP available to Iranian participants. Moreover, by funding such initiatives, major European corporations and banks could address thorny reputational concerns. These companies could demonstrate their strong commitment to establishing relations with their Iranian counterparts, while simultaneously indicating that it is of the utmost importance for the Iranian financial sector to upgrade its standards. In an ideal world, even American banks and regulatory bodies could play a role in supporting capacity-building, particularly as US sanctions provide clear provisions for education and training initiatives. However, due to President Trump's brash and ill-advised executive order, the prospects of any such training remain limited.

It is clear that full banking relations between Iranian and European banks will take time to re-institute. Rather than simply wishing for change, capacity-building programs are the vital next step. There is plenty that Iran's banking sector can learn while it awaits the rightful opportunity to fully participate in the global financial marketplace. 

Photo Credit: President.ir