Before Western powers imposed sanctions on Iran in 2011, the US Treasury Department went on a roadshow in Europe and Dubai to persuade banks to stop transactions with the country.
But since the nuclear agreement in 2015 that eased the sanctions, the US Treasury hasnt had to arm-twist. Instead, private European and Gulf banks have voluntarily refused Iran-related transactions, leaving a mere handful of European banks willing to deal with the country.
The FATF is the most powerful organisation most people have never heard of. It doesnt figure much in the media but its hugely influential
– Tom Keatinge, director, RUSI's Centre for Financial Crime and Security Studies
A major factor in banks refusal to deal with Iran is the uncertainty around the Joint Comprehensive Plan of Action (JCPOA) – the “nuclear agreement”. US President Donald Trump has until 12 May to decide whether to withdraw from “one of the worst deals he has ever seen” and impose further sanctions.
“US sanctions have been extraordinarily extra-territorial in scope, and could be renewed,” said Mary-Ann Orr, a senior associate at Blackstone Solicitors in the UK.
“That is a reason why British and European financial institutions, which wouldnt be doing anything wrong by allowing clients to receive or send money to Iran, are very nervous, because of huge fines in the past (by the US).”
But it is not just the uncertainty around the agreement that Iran must contend with in order to reintegrate into the global financial system, one of the carrots offered for halting its alleged nuclear programme.
The US president has until 12 May to make a decision on the agreement (AFP)
Iran is also on the blacklist of the Paris-based Financial Action Task Force (FATF) for being a "high-risk jurisdiction", a status it shares with only one other country, North Korea. In the shadow of the shaky nuclear deal, Irans listing has shaken European investment confidence further.
But if Trump does in fact rip up the agreement, Irans compliance with the FATF could offer a glimmer of hope for much-needed investment: it might give European banks confidence to operate in Iran, regardless of the American stance.
Still, it all depends on whether Iranian politicians, who are currently debating the issue, will agree to the organisations requirements, including measures which would criminalise the financing of Hamas and Hezbollah.
Risking financial exclusion
The FATF was founded in 1989 by G7 countries to develop policies, and push countries to adopt anti-money-laundering (AML) and terrorism financing (CFT) standards.
"Its the most powerful organisation most people will have never heard of it, and one thats only grown more influential in recent years," said Tom Keatinge, the director of the Centre for Financial Crime and Security Studies at the RUSI think tank in London.
“A lot of aggravation that people suffer with their banking is FATF-related but they dont realise it."
Iranians withdraw money from an ATM in Tehran (AFP)
The FATF cannot impose sanctions, but individual states that are members can – for example, the US, as well as bodies such as the EU or the United Nations. The targets of such sanctions have included Iran and Syria.
While the efficacy of sanctions as a means to bring about policy change is frequently debated, countries with less global power have little choice but to adopt the FATFs requirements or risk financial exclusion.
“Over the past 20 years, the globalisation of the world has been supported by the globalisation of financial regulations. Countries can be very effectively financially isolated (if they do not comply), which drives up costs (of doing business), and makes life more challenging,” said Keatinge.
While there has been less push-back on adopting anti-money-laundering rules, because of the perceived benefits of curbing organised crime and other financial crimes such as tax evasion, countering the financing of terrorism (CFT) has been more controversial.
That's because there isn't a globally accepted definition of terrorism, reflected in the maxim "one mans freedom fighter is another mans terrorist".
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Dionysios Demetis, a lecturer in management systems at the Hull University Business School, said: “The expansion of the FATFs mandate for terrorist financing happened straight after the 9/11 attacks in the US, despite objections at the time. Strong US power influences are exerted in many inter-governmental institutions, and the FATF would be no exception."
Keatinge said that when it comes to Iran – which is not a member of FATF and has no allies among its membership of 35 countries and two regional organisations, the EU and the Gulf Cooperation Council – the organisation has become increasingly politicised.
The New York Stock Exchange (AFP)
“The FATF says, We are just a secretariat, the members make the decisions,' but then horse-trading between members leads to votes going one way or another, so it becomes politicised.”
Indicative of such politicisation is that the US and EU co-sponsored a motion for Pakistan to be placed on FATFs grey list in February, but strong lobbying from Turkey prevented what a Pakistani official said would have been “a political move and vengeful”.
Comply or kowtow?
After the JCPOA was agreed, in June 2016 the FATF eased countermeasures and required Tehran to develop an action plan to address its AML and CFT deficiencies by June 2018.
One requirement the body says that Iran “should fully address” is “adequately criminalising terrorist financing, including by removing the [Iranian] exemption for designated groups attempting to end foreign occupation, colonialism and racism”.
Reformists in Iran want to demonstrate the fruits of positive engagement with Europe
– Omid Mojabi, senior associate, Aperio Intelligence
While the FATF does not name such exempted groups, they are widely believed to include Palestines Hamas and Lebanons Hezbollah, neither of which are designated by the UN as terrorist organisations.
For Iran to meet this requirement, it will have to amend article 154 of its constitution, which supports “the struggles of the oppressed for their rights against oppressors anywhere in the world”.
The FATF has made clear that it expects Tehran to comply. Iran currently has draft legislation in parliament to amend its rules to this effect, with the parliament economic committee and the legal and judicial committee to release reports on “the consequences of joining the FATF”.
The issue has caused significant debate in Tehran. “There is a feeling in some quarters (in Iran) that in kowtowing to the FATF, it is also kowtowing to the Americans, and those that oppose Iran,” said Keatinge.
The situation has pitted reformists, who have generally been supportive of the JCPOA, against hardliners.
Iranian President Hassan Rouhani speaks about 'a new chapter in Iran's economy' after the JCPOA in 2016 (AFP)
“Reformists in Iran want to demonstrate the fruits of positive engagement with Europe. From (President Hassan) Rouhanis perspective, he will only have a political mandate on, say, civil society, if the nuclear accord can yield enough benefit," said Omid Mojabi, a senior associate at Aperio Intelligence, a London-based risk consultancy that specialises on Iran.
FATFs formal acknowledgement of Irans efforts would be a good start, he added.
“The broader attitude is that Western banks dont want to work with Iran. In the UK, there hasnt been significant trade at all, as banks are not willing to have relations with Iran, while in Germany, Austria, France and Switzerland, it is only second- and third-tier banks (smaller banks) willing to do so, so not very significant,” said Mojabi.
“It almost seems like theres miscommunication, as at the executive level they have the political will, but that has not led to a change in attitude at the major banks as a result of the mixed messages from Europe.”
Mixed investment messages
European governments, including the UK, have encouraged the re-establishment of trade with Iran since the JCPOA was inked in 2015. But the reality is a different story, said Anna Bradshaw, a partner at Peters & Peters solicitors in London.
“Trade with Iran is ostensibly encouraged, in recognition of the key importance of trade for the success of the JCPOA, yet no steps have been taken to address the obvious obstacles to such trade: the reluctance of financial institutions worldwide to engage in any Iran-related transactions for fear of long-arm US enforcement action as well as money-laundering risk."
Trade with Iran is ostensibly encouraged… yet no steps have been taken to address the obvious obstacles to such trade
– Anna Bradshaw, Peters & Peters solicitors
“The current uncertainty in itself is a further disincentive to trade. There is very little to reassure businesses in the build-up to 12 May what the UK government's policy position would be if US secondary sanctions were to be resurrected, beyond its continuing support of the JCPOA.”
Trumps unpredictability has resulted in a flurry of diplomatic activity, especially by member states of the EU, to try to preserve the nuclear agreement.
Ultimately, European banks could still be in a difficult position, regardless of whether the JCPOA is kept or undermined by Washington, and even if the FATF takes Iran off its blacklist.
Western financial institutions have a low-risk appetite globally for engaging with less regulated jurisdictions due to AML and CFT regulations, while Iranian banks did not keep pace with the changes in the regulatory environment during the sanctions period, which overlaps with the rise of the FATFs influence and heightened fines for non-compliance.
The financial offices of banks in London's Canary Wharf (AFP)
Since 2009, the US has fined banks more than $16bn for AML compliance failings, according to data compiled by Hong Kong consultancy Quinlan & Associates.
“It falls on the EU to rescue any deal with Iran while still adhering to a growing list of anti-money-laundering actions,” said Theodore Karasik, a senior advisor to Gulf State Analytics, a Washington DC-based consultancy.
FATF did not respond to MEEs requests for comments.