Iran, Terrorism Finance, and Money Laundering: A Status Update Before FATF Meets Next Week

When the Financial Action Task Force (FATF) convenes its virtual plenary next week, while not formally on the agenda, buzz on the sidelines will concern Tehran’s constant push to be removed from the FATF blacklist. The global watchdog regards countries on the blacklist as “non-cooperative” on anti-money laundering and combating the financing of terrorism (AML/CFT).

FATF has been concerned about what it calls Iran’s “strategic deficiencies” for more than 14 years. In October 2007, FATF first stated its concerns about Iran’s AML/CFT regime and urged FATF’s members to apply enhanced due diligence measures when dealing with Iran.

In October 2008, FATF welcomed “initial” efforts by Tehran to address those shortcomings, but stated that problems still persisted. FATF therefore urged members to strengthen preventive measures “to protect their financial sectors.” In February 2009, FATF urged its members to apply effective countermeasures in addition to enhanced due diligence to protect their financial systems against the AML/CFT risk of dealing with Iran.

In June 2016, six months after the implementation of the 2015 nuclear deal began, FATF welcomed Iran’s “high-level political commitment to,” and adoption of, an action plan to address the “strategic deficiencies” in Iran’s AML/CFT system. As a consequence, FATF suspended the countermeasures against Iran for 12 months, until February 2020. The re-imposition of those measures further isolated Iran financially, making its desired reintegration into the global financial system more difficult.

As part of the action plan, FATF requires Iran, as it does other countries, to pass two pieces of legislation that would obligate the country to join two conventions. The first is the International Convention for the Suppression of the Financing of Terrorism (CFT Convention), which aims to criminalize terror financing and to promote police and judicial cooperation to prevent, investigate, and punish it. The second, the United Nations Convention Against Transnational Organized Crime (UNTOC, also known as the Palermo Convention), is the main international instrument in the fight against transnational organized crime.

The FATF-required bills became the subject of heated arguments in Iran. Opponents of the bills argued that they would block Iran’s path to fund its proxies, such as Hezbollah, and prevent Tehran from circumventing sanctions. Proponents of the bills responded that the legislation would not prevent Tehran from supporting its proxies or circumventing sanctions, because Tehran would find ways to circumvent the laws. The proponents also argued that refusing to pass these bills would prevent Tehran from using the global financial system and would be a self-sanctioning move.

Likewise, each time the two bills came before the Majlis, lawmakers sought to exempt organizations such as Hamas and Hezbollah from the CFT bill’s definition of terrorism. Iran sought this exemption as a way to continue funding Hamas, Hezbollah, and other terrorist organizations even after joining the CFT Convention. FATF has repeatedly asserted that Iran must remove this exemption.

Eventually, in 2018, Iran’s parliament, or Majlis, passed the FATF-required bills. However, Iran’s Guardian Council – a 12-member body that screens legislation for fidelity to the regime’s Islamist ideology – declined to ratify them.

When the Guardian Council declines to approve a bill, an arbitration body known as the Expediency Council determines the final outcome. To date, the Expediency Council has not issued any determination on these two bills, an apparent sign of its opposition to them. Some members of the Expediency Council have said that the bills would complicate Iran’s ability to circumvent sanctions and fund its proxies.

In a stunning admission of Iran’s systemic and officially sanctioned illicit finance, Gholamreza Mesbahi-Moghaddam, head of the Infrastructure and Production Commission of the Expediency Council, said in a January 2021 televised interview:

The [business] deals we make now are covert. They are masked and not transparent. The CFT and Palermo Bills both state that any transaction in which one or both parties are not transparent would be considered money laundering and terrorist financing. We have $40 billion in exports and $40 billion in imports that are not transparent. Most of our oil is exported through informal channels. All other products that we are exporting, such as gasoline, gas, petrochemicals, etc., all are done through front companies, and from the day after joining the FATF, front companies will be identifiable by the other party, because it will no longer be possible to use front companies.

Mesbahi then quoted an official who had been in charge of foreign exchange at Iran’s Central Bank, who said: “I used to buy low-cost banks in the region for approximately $20 million for the purpose of circumventing sanctions. I would buy them and use them as intermediaries in our exchanges. When the U.S. Treasury Department identified them, we would close them and open another bank.”

In June 2019, in response to Tehran’s failure to pass the two bills, FATF asked its members to “require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran,” but did not lift the suspension of countermeasures. In October 2019, FATF required further preventive measures without lifting the suspension, but announced that if Tehran did not ratify the Palermo and CFT conventions by February 2020, it would impose the countermeasures. Tehran did not comply, leading FATF to lift the suspension of the countermeasures that month.

Following the November 2020 elections in the United States, the Islamic Republic’s president, Hassan Rouhani, asked Iran’s supreme leader to allow a new review by the Expediency Council of the two outstanding FATF-required bills. The fault lines between the opponents and proponents remain the same.

According to the secretary of the Expediency Council, Mohsen Rezaee, Rouhani aimed to persuade opponents of the bill to reconsider their position, proposing the addition of a condition to the bill that Iran “would not provide the other side with information about evading sanctions.” In other words, Tehran would attempt to conceal sanctions evasion from FATF members.

Rezaee added, “Now we must deliberate on it and see whether it is possible or not to provide all the information to the FATF office minus the information about evading sanctions” (emphasis added). This would undermine the intent of the FATF-required bills. FATF should not consider Iran’s plan as valid.

Rezaee said that the bill is now in the final stages of review by the Expediency Council, which will render its decision in March.

FATF does not allow exceptions to the bills, though each time the bills have come before the Majlis, Iran has sought to include an exception excluding from its definition of terrorism organizations that “struggle against colonial dominance and foreign occupation.” Iran seeks this exemption as a way to continue funding Hamas, Hezbollah, and other terrorist organizations even after joining the CFT Convention. FATF has repeatedly asserted that Iran must remove this exemption. FATF has specifically called on Iran to criminalize funding for designated groups “attempting to end foreign occupation, colonialism, and racism.”

Discussions about FATF between Iranian opponents and proponents of the FATF bills show that neither group intends to stop funding terrorism and circumventing international sanctions.

Tehran has continued to finance and launder funds for both radical Shiite groups as well as Sunni terrorist groups. Democratic and Republican administrations have determined that Iran – in addition to openly supporting Hamas, Hezbollah, and Palestinian Islamic Jihad – has allowed al-Qaeda, in the words of a State Department report, “to operate a core facilitation pipeline through Iran since at least 2009, enabling [al-Qaeda] to move funds and fighters to South Asia and Syria.”

The U.S. Department of the Treasury has documented many of these terror finance operations. In November 2017, Treasury designated an Islamic Revolutionary Guard Corps-Quds Force (IRGC-QF) network for a large-scale counterfeiting operation supporting Iran’s operations in Yemen. In May 2018, Treasury designated senior officials at the Central Bank of Iran for funding the IRGC-QF and Hezbollah through a network of financial entities, including a bank in Iraq. In November 2018, Treasury designated a Russian-Iranian oil network that facilitated the transfer of oil and funds to the Assad regime, Hamas, and Hezbollah. The network included Iran’s Central Bank, the Central Bank of Syria, and Mir Business Bank in Russia. In September 2019, Treasury designated Iran’s Central Bank for funding the IRGC-QF and Hezbollah.

Tehran’s support for terrorism is not limited to the Middle East. Tehran has used money laundering to support its terror network in Europe. Earlier this month, a court in Belgium sentenced Assadollah Assadi, an Iranian diplomat and member of Iran’s Ministry of Intelligence, to 20 years in prison for attempting to plant a bomb in a gathering in Paris of thousands of dissidents and high-profile Western politicians, including Ambassador Bill Richardson, former FBI Director Louis Freeh, former Senator Robert Torricelli, and former Canadian Prime Minister Stephen Harper. A court document showed that Tehran had moved hundreds of thousands of dollars in payments to agents involved in this terrorist operation.

The discussion surrounding Iran’s place on the FATF blacklist comes as Tehran has also breached its commitments under the 2015 Iran nuclear deal. Yet, as a technical body, FATF does not consider Iran’s compliance with the nuclear deal when assessing Tehran’s compliance with the AML/CFT action plan. Even if Iran halts its breaches of the nuclear accord, Tehran would also need to address its terror financing and money laundering to reap benefits from the action plan.

Iran’s place on the list of high-risk jurisdictions is merited until Tehran implements – without exemptions – its FATF action plan. This will require Iran’s recognition that access to the global financial system necessitates transparency as well as conduct that ensures that entities transacting with Tehran are not put at risk because of the Islamic Republic’s systemic malign financial activities.

Saeed Ghasseminejad is a senior advisor on Iran and financial economics at the Foundation for Defense of Democracies (FDD), where Toby Dershowitz is senior vice president for government relations and strategy. They both contribute to FDD’s Iran Program and Center on Economic and Financial Power (CEFP). For more analysis from Saeed, Toby, the Iran Program, and CEFP, please subscribe HERE. Follow Saeed and Toby on Twitter @SGhasseminejad and @TobyDersh. Follow FDD on Twitter @FDD and @FDD_Iran and @FDD_CEFP. FDD is a Washington, DC-based, non-partisan research institute focusing on national security and foreign policy.