IranSource | Understanding and Analyzing a Multifaceted Iran

June 20, 2018
A priority for those in Iran seeking re-integration into the international economy has been banking reforms that conform to globally accepted standards.

But hardline factions oppose the reforms as surrender to US-led financial institutions and their views have been reinforced by the US decision to unilaterally leave the Iran nuclear deal.

On June 10, the parliament postponed for at least two months approval of key legislation establishing safeguards against financing terrorism and money laundering required for Iran to join the Financial Action Task Force (FATF), a Paris-based international financial watchdog institution. This decision could have a negative impact at the next FATF plenary June 24-29 where members will decide whether to keep Iran on a “gray list” of transgressors or put it back on a “black list” with North Korea.

Iran’s failure to attract significant foreign investment after the conclusion of the Joint Comprehensive Plan of Action (JCPOA) in 2015 was in part due to foreign concerns about financial mismanagement and corruption in Iran. Equally important, during a period of heavy sanctions, Iranian banks had fallen far behind international norms and standards established by FATF to monitor compliance with counter-terrorism financing and anti-money laundering conventions.

Iranian conservatives including the hardline Revolutionary Guards have argued against enacting such reforms and have undermined the reform process by using front companies and small banks operating outside FATF protocols.  

According to FATF, Iran “failed to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system.” The organization advised member states to guard against all transactions with Iran. But in the aftermath of the JCPOA, in 2016, 2017 and again in February, 2018, the financial watchdog decided to suspend countermeasures, which require foreign banks to perform enhanced due diligence and systematic reporting on transactions with Iranian counterparts, while Iran carried out a work plan addressing these concerns.

As a rule, member states are required to enact legislation that criminalizes acts of terrorist financing and money laundering. But Iran hardliners have opposed such legislation out of concern that it would expose and jeopardize the Guards’ extensive network of holdings. The Guards also favor a so-called “resistance economy” which calls for self-sufficient development without much integration into the global economy.

President Hassan Rouhani and his team have led efforts to persuade the hardliners that fulfilling FATF requirements is essential if the country wants to revive its economy and attract billions of dollars in needed foreign investment. Deputy Foreign Minister Abbas Araghchi noted, “Inside the country there are some holes and weaknesses in banking networks, which unfortunately facilitates terrorist groups and drug-smuggling….Without international cooperation and joining international conventions, it is impossible to confront it.”

Government spokesman Mohammad Baqer Nobakht said that if FATF-related legislation is not approved, “Iran’s enemies can accuse the Islamic Republic of funding terrorism, but if Iran joins the international treaty, it can defend itself against such allegations.”

Conservatives have been painting FATF as a US-controlled entity that seeks to interfere in financial transactions of the Islamic Republic in order to weaken Iran’s relationships with “resistance groups” such as Hamas, Hezbollah and the Yemeni Houthis. Kayhan Newspaper, a mouthpiece of Supreme Leader Ayatollah Ali Khamenei, wrote that “the first and final word of the global arrogance [the US] hidden in the language of the FATF is that Ansarullah [Houthis] of Yemen, Palestinian militant groups, Lebanese Hezbollah, oppressed Myanmar Muslims, Syrian and Iraqi Hashed Al-Shaabi [Shi’ite militias] are terrorist and we should not fund them.” The daily warned that “FATF is nothing less than accepting the humiliating JCPOA.2.”

Similarly, Tasnim News Agency, an outlet close to the Revolutionary Guards, wrote that the global institutions such as FATF and the International Monetary Fund are fully controlled by US and its European allies and are seeking to “put an end to Iran’s ties to resistance groups.”

On June 20, Khamenei himself weighed in, siding with the conservatives. While acknowledging positive aspects of the FATF convention, he questioned adopting measures without knowing “where they lead.” As he put it, “We do not need to approve treaties that have problems, [to be approved] for their positive aspects...”

Mohammad Reza Tabesh, deputy of the Majlis Hope Fraction, told Sharq Newspaper that members of parliament had received threats warning them against adopting the convention.

During the recent Quds [Jerusalem] Day rally, marking the final Friday of the fasting month of Ramadan, demonstrators brandished banners criticizing a vote for banking reforms as a self sanction that would lead to the arrest of Qasem Soleimani, the head of the Quds Force branch of the Revolutionary Guards. Another banner said that signing on to the FATF measures would be tying the hands of the country's defenders. 

The Basij militia distributed a flyer warning that by joining FATF, “our ability to support Syria, Iraq and Hezbollah will diminish.” It said that Iranians “should get prepared to defend yourself from Daesh (ISIS)” if parliament adopted the legislation.

The next day, a crowd organized on orders of Javad Karimi Quddosi and Hojatoleslam Hamid Rasaee, an ally of former president Mahmoud Ahmadinejad and a member of the hard-line Haqqani School network led by Ayatollah Mohammad-Taqi Mesbah Yazdi, rallied in Tehran against parliamentary approval of the convention. The demonstrators held banners reading “my representatives … will not let [Rouhani] hand over Suleimani handcuffed.” 

Friday prayer leaders in Tehran, Mashhad, and other cities also attacked supporters of the legislation. Ahmad Khatami, the hardline Friday prayer leader in Tehran, reminded his audience that “under the guise of fighting the terrorists, the FATF will be monitoring all Iranian actions.” According to Khatami, “FATF is the window for entrance of those traitors that we have expelled from the country 40 years ago.”

Seeking to counter the hardline onslaught, parliament speaker Ali Larijani traveled to Qom to try to persuade the clerical establishment to support the bill. He held a meeting with Ayatollah Mohammad Yazdi, the former head of the Guardian Council, and members of the Society of Seminary Teachers of Qom, a powerful religious body with strong influence among conservatives. However, Yazdi reportedly told him that he would oppose adoption of the legislation.

Resistance to bank reforms would jeopardize future capital inflows and could lead FATF to re-impose countermeasures when it meets next week.  This would further bolster hardliners, undercut Iran’s continued compliance with the JCPOA and lead to more conflict in an already unstable region.

Farhad Rezaei is an Iran analyst and the author of Iran's Foreign Policy After the Nuclear Agreement: Politics of Normalizers and Traditionalists, Palgrave MacMillan. He tweets at @Farhadrezaeii

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