Between a Rock and a Hard Place: the Financial Action Task Force Faces an Iranian Crunch

The Financial Action Task Force (FATF) is notionally a technical body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating financial crime threats to the integrity of the international financial system. As well as setting standards it also conducts periodic reviews of countries’ compliance with, and implementation of, its standards, an exercise that should not be affected by the rising turmoil of geopolitics.

That’s the theory. But in recent years, decisions taken by members of the FATF have become increasingly politicised as the potential impact of its reviews on national economies and access to international markets has become better understood; its profile on the international stage becomes more prominent; and the desire of countries to find means by which to exert financial influence on each other increases.

The extent of this politicisation is open to debate and the closed nature of the FATF’s deliberations and decision-making process (if not its ultimate decisions) fan speculation and conspiracy theories. But the fact remains that the FATF’s decisions have become increasingly high profile; none more so than those it makes with regards to Iran.

When the Technical Becomes Political

Until June 2016, alongside North Korea, Iran was on the FATF’s ‘blacklist’. In the view of the FATF, Iran posed ‘ongoing and substantial money laundering and financing of terrorism risks’ to the international financial system. Following the implementation of the Iran nuclear deal in January 2016 the FATF entered into the spirit of entente.

The FATF suspended Iran’s blacklist status for an initial period of 12 months in light of its proposed Action Plan to address its strategic anti-money laundering and countering the financing of terrorism (AML/CFT) deficiencies. If, after a year, Iran had not ‘demonstrated sufficient progress in implementing the Action Plan’ the suspension would be reversed. Put simply, Iran was ‘promoted’ from the blacklist to the grey-list, as the FATF waited for the hoped-for improvements.

At the time, this seemed a curious stance. As a technical body, one imagines the FATF makes decisions on a technical basis to the exclusion of politics. Although the nuclear deal – together with the Action Plan – suggested a new spirit of cooperation and acceptance of international norms by Iran, it did not – as the FATF statement makes clear – remove the significant deficiencies in Iran’s AML/CFT regime.

The FATF plenary meets three times a year and the FATF has repeatedly extended Iran’s suspension since 2016. Although displaying increasing exasperation, the FATF has justified the decision through a combination of Iran’s demonstration of political commitment to, and steps taken towards, completing the Action Plan. For example, in June 2018, the FATF noted that the Action Plan had expired with a majority of the action items incomplete – many of them significant such as adequately criminalising terrorist financing.

Crunch Time

And thus, with the next plenary looming in the week of 17 February, it is decision-time for the FATF. According to its most recent statement in October 2019, the Action Plan remains incomplete and it thus threatens to return Iran to its blacklist if by then Iran has not enacted the Palermo and Terrorist Financing Conventions, the two key UN conventions on AML and CFT.

What is the FATF to do? How does it maintain its credibility? With an increasing number of countries feeling unfairly treated in their evaluations by the FATF and its regional bodies, and the consistency of its decisions being questioned, the task force is between a rock and a hard place.

From a technical perspective, the case for returning Iran to the blacklist seems clear. Iran was presented with a ‘final final’ warning by the FATF four months ago. It has failed to take heed of this deadline. The required legislation remains blocked, with opponents in Tehran branding the UN conventions ‘extremely dangerous’, ‘detrimental to national security’, and worse than the nuclear deal. Supporters of returning Iran to the blacklist will argue that this failure to comply represents a threat to the integrity of the international financial system.

Yet despite the vocal domestic opposition, supporters of a stay of execution point to the progress Iran has made on its Action Plan and the positive comments – albeit not turned into actions – of President Hassan Rouhani. Returning Iran to the blacklist will undermine those in the Iranian government – including parliamentarians and officials, such as the Central Bank governor – that support the necessary legislation. Furthermore, despite the slow progress, engagement on FATF-related matters represents an area of potentially constructive dialogue between Europe and key stakeholders within Iran’s establishment at a time when such dialogue is rare.

From a political perspective, offering Iran a further stay of execution would perhaps be wise. Following the killing by the US of General Qassem Soleimani emotions are running high, trigger fingers are itchy and every decision made by an international organisation will be scrutinised in Iran by hawks and doves alike for evidence of US interference. It is no secret that the US holds significant influence amongst the FATF membership (made up mainly of OECD countries, and not including Iran), although it remains to be seen how this influence will be used in the forthcoming plenary.

Whatever the FATF membership decides, neither potential outcome will be well received. A technical application of the FATF’s standards, making good on its final warning, will support those that see FATF’s decisions on Iran as US-influenced extensions of President Trump’s maximum pressure campaign. Yet a further extension will raise questions once again about the credibility of the FATF’s decision making process and will embolden those who view the FATF as representing a neo-colonialist tool of control.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other organisation.