The Financial Action Task Force (FATF), the intergovernmental organization that sets global standards to combat money laundering and finance for terrorism and proliferation, had a clear message for financial institutions last week when it declined to remove the Islamic Republic of Iran from its high-risk blacklist: Iran may say it’s open forbusiness but it’s not yet safe to do it.
FATF’s directive was a clear rejection of the Islamic Republic’s lobbying campaign to legitimize itself as a responsible financial actor: “Until Iran implements the measures required to address the deficiencies identified in the Action Plan, the FATF will remain concerned with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system.” FATF urged its members and all jurisdictions to “advise their financial institutions to apply enhanced due diligence to business relationships and transactions” with Iran.
This enhanced due diligence will prove a nightmare for businesses for important reasons.
First, many Iranian companies — including entities such as the Islamic Revolutionary Guard Corps (IRGC) which is sanctioned by the U.S. and the EU — use nontransparent corporate structures and shadow companies to hide their true ownership interests. The IRGC controls an estimated 30% of Iran’s economy. Businesses should be concerned that they may be inadvertently dealing with entities owned or controlled by sanctioned entities or those that may become sanctioned when their ties to the IRGC become apparent.
Iran will use terrorism as it wishes
Second, Iran has continued its support for terrorist groups including Hezbollah, Palestinian Islamic Jihad, Hamas and sanctioned militias throughout the Middle East. It provides direct support to the Syrian regime through the IRGC and Hezbollah, and arms, finances and trains foreign Shiite fighters to support Syrian President Bashar Assad’s brutal five-year war that has killed almost 500,000 people.
Third, Tehran’s efforts to pass laws that purport to address international counter-terrorism financing standards are hollow and don’t conform to FATF standards. Iran’s definition of terrorism, for example, excludes groups “attempting to end foreign occupation, colonialism and racism,” and has other language used to justify terrorism against America and its allies. Iran’s leaders are telling the world “we will arm and bankroll whomever we want but won’t call them terrorists.”
Businesses should make no mistake about Iran’s commitment to use terrorism as it wishes. The Obama State Department recognizes Iran as the world’s leading state sponsor of terrorism. On Friday, Hezbollah’s Secretary General Hassan Nasrallah publicly announced, “We are open about the fact that Hezbollah’s budget, its income, its expenses, everything it eats and drinks, its weapons and rockets, come from the Islamic Republic of Iran.”
Violation of FATF requirements
Fourth, Iran is in violation of FATF requirements to comply with UN Security Council Resolutions to target proliferation financing. Tehran’s partnership with North Korea in both missile, and potentially nuclear, development is in clear violation of UN sanctions on Pyongyang.
Finally, Iran’s nefarious activities pose additional risk. It ranked 130 out of 168 countries on Transparency International’s Corruption Perceptions Index, and 108 out of 129 on the International Property Rights Index. Tehran ranked 150 out of 189 countries on the World Bank’s 2016 “Ease of Doing Business” Index on “protecting minority investors,” and 140 in “resolving insolvency.” The pervasiveness of corruption presents significant challenges for foreign companies since evidence of bribes triggers the U.S. Foreign Corrupt Practices Act and the UK Bribery Act, which involve severe civil and criminal penalties.
One issue though: While the FATF made the right decision to keep Iran on the blacklist, it also elected to suspend mandatory counter-measures against Tehran for one year. This could easily become a slippery slope that lets the foremost state sponsor of terrorism off the hook without changing its dangerous financial conduct. Counter-measures include, for example, requiring financial institutions to apply specific elements of enhanced due diligence to transactions and relationships with individuals and companies located in high risk jurisdictions.
A mixed message
It also sends a mixed message that risks politicizing the FATF’s work. On the one hand, U.S. officials have pushed back when Iran seeks to blame the U.S. for the slow pace of integration into the world’s financial system. On the other, the temporary suspension of mandatory counter-measures could signal a shift in FATF’s position and increase the likelihood that, under pressure from European countries eager to get back to business, Iran gets taken off the blacklist next year without a fundamental change in its financial criminal behavior.
Ranking Democratic member of the House Foreign Affairs Committee Eliot Engel underscored this problem. “I am deeply concerned about what appears to be a major policy shift by the Task Force…. Congress will certainly be watching…. Financial institutions should not enable Iran’s dangerous behavior.”
Rep. Steny Hoyer, the second highest member in the House Democratic leadership, expressed similar concerns: Hoyer said he is “alarmed by FATF or other bodies that give Iran’s leaders any reason to believe that their country can reintegrate into the international banking system without changing their dangerous behavior.”
Iran should remain on the blacklist
Most large banks for now may not be fooled by the Islamic Republic’s rhetoric. They will continue to implement strict counter-measures since FATF requirements are considered the floor not the ceiling for responsible risk management. Those who care about long-term protection of their assets are not rushing back into Iran because they understand the risks of getting entangled in massive money-laundering, corruption and terror finance schemes that pose unmanageable risks to their stakeholders.
But the past is an unsettling prologue. Under the Iran nuclear deal, Iran is getting conventional weapons sanctions lifted in five years and ballistic missile sanctions in eight years regardless of any changes in Tehran’s malign conduct. Nuclear restrictions will begin to sunset in eight years whether or not Iran has given up its nuclear weapons ambitions. For the reputation of FATF and the global financial community it is sworn to defend, financial restrictions cannot be disconnected from behavior. Iran should remain on the blacklist until it stops its involvement in illicit finance. Bankers should beware of getting too close, too quickly, to a country with a long rap sheet of financial crimes.
Toby Dershowitz is FDD’s Vice President of Government Relations and Strategy.