FATF Leadership and Iranian Accountability

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The multilateral organization that sets and enforces global anti-money laundering and counter terrorist financing (AML/CFT) standards will meet early next week to determine how it will hold Iran accountable for its continued illicit financing activities. On the basis of Iran's commitment to implement a remedial Action Plan last June, the Financial Action Task Force (FATF) temporarily suspended countermeasures that it has historically called on countries to apply against Iran.  Such countermeasures were prompted by Iran’s systemic and chronic deficiencies in implementing global AML/CFT standards and for the ongoing threat Iran poses to the international financial system.

While Iran has reportedly taken several steps to address technical deficiencies in its AML/CFT regime, it has a long way to go before it ceases being an illicit financing threat. 

FATF serves a critical mission of protecting the international financial system from illicit financing risk by facilitating effective jurisdictional implementation of its AML/CFT standards.  FATF does this by assessing the AML/CFT regimes of its member countries and by publishing various lists of any countries that are substantially non-compliant with its standards.  For those countries whose chronic and systemic deficiencies threaten the integrity of the international financial system, FATF maintains a public blacklist.  

Iran and North Korea are the only countries that FATF has perennially blacklisted and subjected to countermeasures since re-instituting the blacklisting process several years ago based on FATF's technical assessments. 

In recent years, FATF has capitalized on its technical assessments and focused on the effectiveness of jurisdictional AML/CFT regimes. That was an important evolution.  A country’s technical compliance with the FATF standards, while necessary, is insufficient to protect the international financial system from systemic illicit financing risks.   Effective implementation of the FATF standards requires countries to actively demonstrate how their AML/CFT regimes meaningfully combat illicit financing in practice.   

Iran remains a threat to the integrity of the international financial system by any measure, including technical ones.

Iran’s criminalizing of terrorism financing carves out exceptions for organizations like Hezbollah and Hamas which it openly boasts of funding. Such carve-outs demonstrate clear noncompliance with FATF technical standards on a core FATF benchmark. 

The Basel Institute on Governance ranks Iran’s AML and CFT protections as the worst in the world. Only an estimated 10 percent of companies on the Tehran Stock Exchange (TSE) are “sanctions-compliant,” meaning that they are not exposed to entities that were previously or remain sanctioned. Ownership structures of legal entities in Iran are particularly opaque. Most important, Iran remains a U.S.-designated State Sponsor of Terrorism, including through the activities of the Islamic Revolutionary Guard Corps (IRGC), which remains subject to U.S. and EU sanctions because of its proliferation activities.

The IRGC controls approximately 40 percent of Iran’s formal economy. While there are 17 private banks in Iran (as of 2014), many of these banks retain ties to the IRGC and the Iranian government through their ownership structures.  Doing business in Iran presents a very real and high risk of doing business with the IRGC.

While the IRGC exports its revolution all around the world, de-stabilizing several countries, it has played a particularly nefarious role supporting the Syrian regime’s war crimes and atrocities, which in five years have killed half a million civilians through the most brutal means.

Iran’s clear technical non-compliance indicates FATF’s need to continue Iran’s blacklisting.  Such blacklisting also maintains FATF’s credibility and leadership in focusing on effectiveness, given Iran’s long and ongoing rap sheet.

Iran may threaten to end cooperation with FATF if it does not get the relief it seeks. Along with promises of change and the enticement of new revenue streams, that’s part of Iran’s playbook. But the stakes are too high for member countries to be misled or cajoled by these threats.

FATF could even re-impose countermeasures on Iran given Iran’s illicit activities.

Such a position may risk alienating reformers in Tehran that are working constructively to advance the FATF Action Plan. But that risk is preferable to diluting the integrity of the world’s leading authority on combating money laundering and terrorist financing.

This is an important moment for the FATF.  Notwithstanding the commitments Iran has made on paper, and notwithstanding certain technical actions undertaken by Iranian bureaucrats, what matters are the decisions and actions taken by those in power in Tehran, who remain committed as ever to their terrorist agenda.  

Toby Dershowitz is Senior Vice President for Government Relations and Strategy at Foundation for Defense of Democracies (FDD).