June 24, 2016 | Policy Brief

Iran is Still a Business Risk: Implications of FATF’s Decision

June 24, 2016 | Policy Brief

Iran is Still a Business Risk: Implications of FATF’s Decision

Following its plenary meeting this week, the Financial Action Task Force (FATF) is set to maintain Iran on its black list, with a one-year suspension, though not removal, of the mandatory countermeasures applied to the Islamic Republic.

FATF is an inter-governmental organization that serves as the preeminent global policymaking body for combating illicit finance. It does that primarily by setting global standards to combat money laundering, and finance for terrorism and proliferation. Its goal is to protect the international financial system from vulnerabilities and threats that emanate from countries that do not implement its standards, and to work with countries that seek to become responsible members of the international financial system.

FATF’s move signals that, notwithstanding intense pressure from Tehran, Iran’s effort to legitimize its malign activities has not been matched by changes to its underlying conduct – the reason Iran has, along with North Korea, maintained its place on this blacklist and been subject to mandatory countermeasures.

Following FATF’s action, the base assessment of the risks of Iran’s illicit conduct remains the same. Practically speaking, there is no change since, given the continued concerns over Iran’s illicit conduct, financial institutions will continue to voluntarily implement strict countermeasures. This signals a recognition by the global community that Iran continues to represent a threat to the international financial system.

Businesses considering ties to Iran will have to conduct enhanced due diligence that will prove a nightmare for them for a number of reasons.

Many Iranian companies – including sanctioned entities such as the Islamic Revolutionary Guard Corps (IRGC) – utilize opaque corporate structures and shadow companies to hide their true ownership interests. The IRGC controls an estimated 30 percent of Iran’s economy, and those seeking to do business in the country should be concerned that they may be inadvertently dealing with entities owned or controlled by sanctioned entities or those that may become sanctioned.

Iran’s nefarious financial activities go further. It ranked 150th out of 189 countries on the World Bank’s 2016 “Ease of Doing Business” Index on “protecting minority investors,” and 140th in “resolving insolvency.” It ranked 130th out of 168 countries on Transparency International’s Corruption Perceptions Index, and 108th out of 129 on the International Property Rights Index. In January, Reuters noted that “Iran’s shadow economy has been a breeding ground for corruption and nepotism,” and that “foreign companies will be wary of approaches by local ‘fixers’ who would pay bribes on their behalf.”

Iran has continued its support for terrorist groups, including Hezbollah, Palestinian Islamic Jihad, Hamas, and militias throughout the Middle East. It provides direct support for the Syrian regime, including arms, financing, training, and the facilitation of foreign Shiite fighters to support the regime’s brutal five-year crackdown.

Tehran’s efforts to pass laws that purport to address international counter-terrorism financing standards do not hold up even on paper. Its definition of terrorism excludes groups “attempting to end foreign occupation, colonialism, and racism,” and other language used to justify terrorism against American allies.

Most large banks that care about long-term protection of their assets are not rushing back into Iran because they understand it has a long way to go before it’s safe to do business there. Ultimately they are looking to avoid the massive sanctions, money-laundering, and corruption risk Iran poses to their stakeholders.

The one-year suspension will be up for consideration next June.

Even if countermeasures are removed next year, Iran likely will remain on the FATF blacklist until it stops its dangerous financial conduct. Global financial institutions understand that this illicit conduct, not empty expressions of intent, must be changed before risking business with Iran. FATF’s action this week serves as yet another reminder to “know your customer.” Buyers should beware: Iran may be open for business, but is it not yet safe for it. 

Mark Dubowitz is executive director of the Foundation for Defense of Democracies (FDD) and head of its Center on Sanctions and Illicit Finance. Follow him on TwitterFacebook, and LinkedIn.

Toby Dershowitz is FDD’s Vice President of Government Relations and Strategy.