April 11, 2016
US Should Facilitate Dialogue between Iran and Financial Action Task Force
By Tyler Cullis
Lots of attention has focused on the potential for a broader regional conversation in which the US and Iran can work together to resolve the ongoing conflicts in Iraq and Syria. But alternative venues exist for the US and Iran to continue to talk to each other. One particular area in which the Obama administration should seek to engage Iran is in regards to Iran’s efforts to rehabilitate its financial sector and adopt global anti-money laundering and countering the finance of terrorism (AML/CFT) standards.
This past February, the Financial Action Task Force (FATF), an inter-governmental body that sets and promotes standards for combating money laundering and terrorist financing, issued a public statement again identifying Iran as a “high-risk, non-cooperative” jurisdiction for persistent AML/CFT deficiencies and called upon member states “to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions.”
The FATF statement repeated ones issued since 2008, when Iran was first designated as such a high-risk financial jurisdiction.
With the nuclear deal in hand, however, Iran has a renewed interest in rehabilitating its financial sector and cooperating with international authorities. Faced with serious, ongoing difficulties reconnecting with the global financial system despite the lifting of nuclear-related sanctions, Iran’s political leaders have signaled their preparedness to undertake the requisite steps to restore the reputation of Iran’s banking institutions and to rescind Iran’s designation as a “high-risk, non-cooperative” jurisdiction.
The Obama administration should welcome this development and facilitate dialogue between the FATF and Iran.
Currently, Iran is taking unilateral steps to beef up its AML/CFT laws. Last month, Iran’s Deputy Foreign Minister Majid Takht Ravanchi noted that legislation aimed at addressing Iran’s AML/CFT deficiencies was awaiting approval before the Guardian Council and would soon take effect. Moreover, Ravanchi pointed to recent amendments made to Iran’s current laws to resolve issues with existing legislation.
In a sign that Iran is prepared to close the gaps and more closely align its AML/CFT laws with FATF standards, the Central Bank of Iran’s Vice Governor Hamid Tehranfar noted that Iran had asked the International Monetary Fund – itself an FATF observer group – “to review [its] regulations so other countries’ banks feel reassured.” Such an IMF assessment is due in 2018.
But the IMF has already been publicly identifying gaps in Iran’s current AML/CFT laws and the efforts Iran is taking to remedy them. In April 2014, the IMF released its staff report for the 2014 Article IV Consultation with Iran, in which it noted that “the recent progress on the external environment [i.e., the nuclear negotiations] provided a good chance to advance on the AML/CFT legislation.”
The IMF staff report pointed to progress that had been made “in strengthening [Iran’s] regulatory framework, most notably the adoption by the AML High Council of 14 new AML instructions, the establishment of an economic crime prosecutor office, and a defined roadmap for improving the AML system [in Iran].”
In sum, the IMF staff report concluded that “there was scope to move towards a risk-based AML/CFT supervision [in Iran] and encouraged the authorities to adopt a CFT law that is improved regarding the criminalization of terrorism financing and related activities, the freezing and confiscation of assets, the reporting and analysis of suspicious transactions, and international cooperation.”
In December 2015, the IMF’s latest consultative report with Iran was released. Encouraging Iran to adopt FATF standards, the report argued that “bolstering the AML/CFT framework [in Iran] would facilitate [Iran’s] re-integration of the domestic financial system into the global economy, lower transaction costs, and reduce the size of the informal sector.”
The report also noted that the administration of President Hassan Rouhani “expressed commitment to advancing reforms to [Iran’s] AML/CFT framework...[and] have requested a Fund assessment of the AML/CFT regime against the FATF standard, which they intend to use for joining the Eurasian AML/CFT group.”
The Eurasian Group is an FATF associate member whose purpose is to facilitate implementation of FATF standards and to conduct evaluations of the effectiveness of existing AML/CFT policies.
These developments in Iran are ones that the US ignores at its own peril. Indeed, as the Obama administration considers a more limited re-authorization of the U-turn license that existed up until 2008 and would allow Iran limited access to the US dollar, critics point to Iran’s continued designation by the FATF as a “high-risk, non-cooperative” jurisdiction to argue against any measure that would provide Iran even indirect access to the US financial system.
Resolving the persistent concerns over the integrity of Iran’s financial system would not merely serve to build confidence that Iran’s banks are acting in accord with global standards, but would also make it easier for the Obama administration to resolve ongoing issues relating to sanctions lifting under the nuclear deal.
To do this, the US government needs to encourage dialogue between the FATF, its regional bodies, and Iran regarding the steps Tehran must take before the FATF will rescind its designation of Iran as a “high-risk, non-cooperative” jurisdiction.
The FATF and its associate members can work with Iran in a good-faith manner to identify the expected scope of Iran’s AML/CFT laws and to ensure that Iranian financial institutions are adopting the right policies to implement such laws. In doing so, the US will be giving Iran an effective invitation to re-join the global financial system – provided that Iran is prepared to take the required steps to adopt global AML/CFT standards.
The Obama administration should pursue this path. Undoubtedly, some will criticize any action aimed at permitting Iran, which is still designated as a state sponsor of terrorism by the State Department, to re-enter the global financial system. But any measures that improve the transparency and integrity of Iran’s financial sector would be squarely within the interests of both countries and the wider global community. It is time to take advantage of new channels opened by the nuclear agreement and move towards a more constructive US relationship with Iran.
Tyler Cullis is a legal fellow at the National Iranian American Council.