Main Image Credit A main entrance to the bazaar in Tehran, Iran. Courtesy of Bjørn Christian Tørrissen/Wikimedia
The latest FATF plenary has drawn the financial technical standard-setter deep into uncomfortable political territory.
The recent Financial Action Task Force (FATF) plenary meeting in Paris was, at least as viewed from the outside, a highly politicised affair. Claim and counter claim as to the possible ‘naming and shaming’ of Pakistan for failings in countering terrorist financing have ricocheted through social media. But it is the issue of Iran and its anti-money laundering and counterterrorist finance (AML/CFT) standards that have cast the FATF in an increasingly politicised role.
Founded in 1989 on the initiative of the G7, the FATF is as an intergovernmental organisation dedicated to developing policies to combat money launderingby monitoring and encouraging countries to raise their AML/CFT standards. Since at least 2016, the organisation has sought to walk a tightrope between positively engaging Iran in this technical yet fundamental endeavour while remaining mindful of the desire of many in the international community for Iran to benefit from being reintegrated into the global economy. The increasingly heated rhetoric emanating from Washington about the destabilising impact of Iran’s funding of proxies did not do the FATF any favours in this regard.
Since the signing and subsequent implementation of the Joint Comprehensive Plan of Action (JCPOA), controversy and disagreement have dogged the nuclear deal between Iran and the five permanent members of the UN Security Council plus Germany (commonly known as the P5+1 or EU3+3). Most famously, then US presidential candidate Donald Trump labelled the JCPOA ‘disastrous’ and ‘catastrophic’. Banks and other investors are hampered by fears of the snap back provisions of the deal, the difficulties in distinguishing legitimate business counterparts from those still subject to other forms of Iran-related sanctions, and the challenge of parsing the rhetoric emanating from the White House and the US Treasury. They have thus struggled to support the delivery of the economic dividend and ‘full benefit by Iran of the sanctions lifting’ that the Iranian government anticipated.
Yet it is not just the political rhetoric that has limited the economic reengagement offered by many industrial companies and financial institutions. While high profile deals have been signed by Total (gas), Airbus (aircraft) and Renault (cars), the state of the Iranian financial system and the legal and governance environment in which businesses operate do not encourage the commitment and investment Iran seeks. Iran sits at 124 (out of 190) on the World Bank’s Ease of Doing Business rankings, sitting in some categories, such as the protection of minority investors, as low as 170.
And so in Paris, a body that is at pains to depict itself as a purely technical one, entered once again into this politically-charged arena. The FATF already has a track record of dealing with Iran. Core to the role of the organisation is the regular review of countries to determine their technical compliance with, and effective implementation of, the taskforce’s 40 recommendations. Those countries that fall short are named by the FATF and are subject to regular review at each of the FATF’s three annual meetings.
Consistent with its longstanding concerns about the integrity of the Iranian financial system, in February 2016 – shortly after the JCPOA’s implementation day – the FATF announced that it remained ‘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’. It urged Iran to ‘immediately and meaningfully’ address these issues, drawing particular attention to the need for terrorist financing to be criminalised.
Banks and other investors have struggled to support the delivery of the economic dividend and ‘full benefit by Iran of the sanctions lifting’ that the Iranian government anticipated
At the subsequent FATF meeting in June 2016, and seemingly in support of the efforts of the P5+1 to deliver economic benefits to Iran as part of the JCPOA, Iran was moved from FATF’s highest risk category alongside North Korea, to a lesser category of risk, with the FATF welcoming ‘Iran’s adoption of, and high-level political commitment to, an Action Plan to address its strategic AML/CFT deficiencies, and its decision to seek technical assistance in the implementation of the Action Plan’.
Twelve months later, and consistent with its previously positive statements about Iran’s engagement with the FATF process, and despite the election of President Trump, the FATF maintained its positive sentiment. At the June 2017 plenary meetings, the FATF assessed that ‘in light of Iran’s demonstration of its political commitment and the relevant steps it has taken in line with its Action Plan, the FATF has decided to continue the suspension of counter-measures’. And again, in the face of Trump’s October 2017 refusal to certify, in the view of the White House, Iran’s adherence to the JCPOA, in November 2017 the FATF noted that as Iran’s Action Plan was to expire at the end of January 2018 it would assess progress during the task force’s February meeting. At that time, it would determine the extent to which Iran had undertaken ‘full and accurate implementation of the Action Plan, addressing all remaining AML/CFT deficiencies, in particular those related to terrorist financing’.
For many, the suggestion that Iran should be recognised for addressing its terrorist financing deficiencies is fantasy, for any identifiable technical or legal improvements in Iran’s financial architecture for countering terrorist finance take no account of the broader destabilising role the country plays in the Middle East. And quite a number of critics assess and argue that Iran has been, and remains, a material state sponsor of terrorism, and should, therefore, be subjected to the re-imposition of financial counter-measures.
And now the FATF has published its latest assessment. In a seemingly ‘through the looking glass’ moment, despite noting that ‘Iran’s action plan has now expired with a majority of the action items remaining incomplete’ – including nine items that seem fundamental to even the most basic anti-money laundering and counterterrorist finance regime – the FATF has kicked the can four months further down the road, by deciding to continue the suspension of counter-measures against the country.
Still, as this last FATF plenary meeting has shown, the power of (threatened) economic coercion beyond United Nations or unilateral sanctions remains a favoured tool of those seeking to force a change in the behaviour of other states. And the FATF has spent many years working to raise the technical standards of countries to combat money laundering and terrorist finance, using its central role in the global financial architecture to drive positive developments. Be that as it may, the fact remains that FATF’s central and influential position now faces a critical challenge as the technical approach that the organisation has sought to maintain becomes increasingly politicised.
The views expressed in this Commentary are the author’s, and do not necessarily reflect those of RUSI or any other institution.
Centre for Financial Crime and Security Studies