Time for U.S. to Finalize Designation of Iran for Money Laundering

The U.S. has moved aggressively to sanction Iran’s exports of oil, industrial metals, and petrochemicals, yet a key systemic measure designed to prevent Iran’s money laundering remains in limbo. In 2011, the U.S. Department of the Treasury identified the Islamic Republic as a “jurisdiction of primary money laundering concern” under Section 311 of the USA PATRIOT Act, but the Treasury Department has yet to issue a Final Rule mandating the application of specific precautionary measures.

Treasury labeled Iran as a jurisdiction of primary money laundering concern based on “the illicit and deceptive financial activities that Iranian financial institutions – including the Central Bank of Iran” employ in order to facilitate illicit conduct such as terrorism and WMD proliferation. In response to such a finding, Treasury may require U.S. financial institutions whose foreign correspondents transact with Iran to implement enhanced due diligence or close certain accounts.

With its finding, Treasury took the critical step of determining that Iran’s entire financial sector poses a systemic threat to the global financial system. In its finding, Treasury established for the first time a comprehensive, unclassified record regarding the expansive nature of Iran’s illicit conduct. It detailed the involvement of government agencies, private banks, and Iran’s central bank in facilitating illicit conduct and sanctions evasion.

Along with its finding on Iran, Treasury issued a Notice of Proposed Rulemaking (NPRM), outlining the precautionary measures the U.S. would require to prevent further money laundering. In many instances, Treasury follows up on its NRPM with a Final Rule mandating the application of the proposed measures, which are sometimes modified based on public and industry comment. For example, in the North Korea context, Treasury issued the NPRM in May 2016, and the Final Rule in November of that year.

According to the Iran NPRM, Treasury would require U.S. banks, upon receipt of a written request, to report on whether they maintain correspondent accounts or payable-through accounts for foreign financial institutions that maintain correspondent accounts with Iranian-linked financial institutions designated by the United States. U.S. banks would also be required to inquire and report on whether such foreign correspondent banks have processed other transactions, directly or indirectly, for Iranian-linked and sanctioned financial institutions or for Iran’s Islamic Revolutionary Guard Corps.

Yet nearly eight years after designating Iran as a jurisdiction of primary money laundering concern, Treasury has yet to issue a Final Rule. This means there is no real force of law behind the designation, although U.S. banks have likely voluntarily instituted the measures contained in the NPRM. While other restrictions on transactions with Iran likely compensate for the absence of a legal mandate, the lack of a Final Rule remains a prospective long-term weakness in the U.S. sanctions regime if a future administration seeks to unwind the recent ramp-up in sanctions against Iran.

When framing a Final Rule for Iran, Treasury should consider expanding the reach of its Final Rule to include any foreign bank that is owned in part by a designated Iranian financial institution or any designated Iranian person, rather than the current threshold of 50 percent or more ownership. In addition to the Final Rule requiring enhanced due diligence, the administration could impose enhanced auditing requirements as a separate action.

The Final Rule should also update the evidentiary package with respect to Iran’s current practices in light of its central bank’s continued support for Hezbollah and other schemes to provide proxies with additional funding. These actions would reinforce the framework for the maximum pressure campaign that the administration is now waging against Iran.

Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based nonpartisan research institute focusing on national security and foreign policy.