Snapback, FATF-style: Counter-measure Suspension Unlikely to Address Core Banking Issues

Since the signing of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the five permanent members of the UN Security Council plus Germany (the so-called P5+1), and the recognition of the JCPOA’s Implementation Day on 16 January this year, considerable attention has been placed on the economic dividend Iran might earn from reintegration into the global economy. Key to this reengagement is the willingness of financial institutions to reopen financial connections that were almost entirely severed as international sanctions were ramped up by the US and the European Union between 2011 and 2012. 

The removal of sanctions has been far from uniform, with the resulting transatlantic differences causing confusion and concern amongst those that are expected to recommence providing financial services to Iran. With the messages provided by governments and regulators mixed and memories of swingeing penalties on sanction violators still fresh, banks have shown limited appetite to re-engage with Iran, notwithstanding the exhortations of political leaders. For these political appeals remained contradictory: US Secretary of State John Kerry, for instance, travelled to London to encourage non-American banks to do business with Iran despite the prohibition that remains on US banks on this business, and the considerable and continuing financial crime risks inherent in such engagement.

Whilst concerns about contravening the remaining US sanctions - and thus being subject once again to the long, extra-territorial arm of the US legal system - remain, the Financial Action Task Force’s (FATF’s) classification of Iran as a ‘high-risk and non-cooperative jurisdiction’ has also contributed to the cautious approach of the banking community. At its February plenary meeting held shortly after Implementation Day, FATF declared that it ‘remains particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system’, and urged all jurisdictions ‘to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism risks emanating from Iran.’ For bankers, the message was clear: business with Iran is to be avoided.

As it seeks to safeguard global efforts to combat money laundering and terrorist financing, FATF identifies countries with significant weaknesses in their approaches to tackling these crimes, and protects the integrity of the international financial system by publicly warning of the risks posed by non-compliant countries, in the hope that such warnings will lead to rapid improvements. Those countries that pose a serious risk are brought to the attention of the international community via FATF’s regular public statements. These pronouncements call either for countries to apply counter-measures against failing and non-cooperative nations or, if FATF is of the belief that countries concerned are committed to improving their record, it encourages nations to ‘consider the strategic deficiencies identified for these jurisdictions’ and assesses the financial crime risks of engagement.

For many years, Iran found itself in the failing and non-cooperative category, alongside countries such as North Korea. Yet in recent months, Iran has, arguably, presented FATF with a more cooperative outlook: the country has adopted an action plan to address its strategic money laundering and terrorist financing deficiencies, and sought technical assistance with its implementation. It has joined the Eurasian Group on Combating Money Laundering and Financing of Terrorism, a FATF-style regional body, as an observer and in April, Iranian President Hassan Rouhani issued decrees to implement the country’s anti-terror finance law, thereby formally addressing a longstanding failure of the Iranian system. As a consequence, at its most recent plenary in mid-June, FATF chose to temporarily remove Iran from its position in the highest risk category, giving the country 12 months to demonstrate progress in implementing its action plan; Iran faces a return to the high-risk list if it does not comply.

The sentiment underpinning FATF’s action is honourable, but wrong-headed. Firstly, if FATF’s announcement is intended to thaw the on-going financial restrictions regime on Iran, it is highly questionable whether this decision - brought about (presumably) through consensus amongst FATF’s 37 members including all the P5+1 governments - will encourage foreign financial institutions to re-engage with Iran. Financial and investment decisions are built on foundations of clarity and confidence, and the risk of FATF ‘snapback’, placing Iran back on the high-risk list within a year is unlikely to encourage foreign re-engagement. In fact quite the reverse: it provides further reasons for banks and other financial institutions to wait and see and postpone any moves on Iran.  

Secondly, FATF encourages countries, competent authorities and banks to take a risk-based approach when implementing the body’s recommendations. This means that they should ‘identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk.’ Expecting banks to change their approach as a result of what, on the face of it, seems a politically-motivated gesture rather than a continuing assessment of the risks (including the risk of a reversal of FATF’s position) is naïve and adds support to those that view FATF is a body that is subject to political interference.

Of course, FATF’s action deflects criticism recently levelled at it by senior Iranian officials such as Valiollah Seif, the Governor of the Central Bank of Iran, who, in an interview with The Guardian, accused the P5+1 governments of not delivering on their commitments under the JCPOA, notwithstanding the fact that the fundamental stumbling block to global financial reengagement remains the complex and uncoordinated sanctions landscape to which Iran remains subject.

There is no doubt that Iran must raise its standards, both in introducing overdue legislation and in demonstrating its effective implementation. It also needs to upgrade its finance-related legal, regulatory and governance architecture in order to present the country as an attractive investment destination. The fact that the Islamic republic’s authorities are responding to the pressures to raise standards and implement effective financial crime measures is to be welcomed. 

Still, it would be wishful thinking in the extreme to expect that FATF’s recent action will be regarded as anything more than just gesture politics by those that matter most in financial re-engagement with Iran: the world’s banks.