The differences within government institutions on the implementation of the Financial Action Task Force’s (FATF) stipulations are still ongoing despite the serious implications that Iranian banks and financial institutions may face if Iranian hardliners continue to reject the ratification of the two FATF stipulations regarding money laundering and terrorist financing.
Iran’s Expediency Discernment Council, which has opposed Iran joining the FATF for years, believes that the FATF’s regulations are against Islamic law and the Iranian Constitution. In addition, joining the FATF may hold Iran accountable internationally for its support for several groups designated in many countries as terrorist organizations such as Lebanese Hezbollah and the Houthis in Yemen. The Iranian political system’s concern about international accountability may be reflected in the conditions it has set for Iran to join the FATF, including a statement that excludes organizations which “struggle against colonial dominance and foreign occupation” from its definition of terrorism. If included, it will ensure Iran’s funding of Hezbollah and other groups will continue.
The Iranian government faces internal pressure due to the continuous deterioration of Iran’s economic situation following US sanctions and threats. At the same time, it is concerned that the hardliners’ opposition to Iran ratifying the two FATF stipulations will be a new pretext for the United States to impose further sanctions and for foreign pressure to increase. In particular, the United States will use any possible means to force Iran to submit to its demands. Recently, the United States began to exert maximum pressure on Iran to force it to implement FATF stipulations, to end Iran’s support for terrorism and money laundering as well as to bring the country’s banking sector in line with international standards. US Secretary of State Mike Pompeo expressed his country’s desire in this regard when he warned the Iranian government of its failure to ratify FATF stipulations regarding terrorist financing and money laundering, saying that Iran must ratify the stipulations without further delay and reservation.
In addition to US pressure, the Iranian government is concerned about possible sanctions from European countries. They have recently linked the activation of possible alternative financial channels with Iran to its ratification of FATF stipulations and they have repeatedly stressed that its banks must apply FATF standards and laws. The ongoing non-activation of financial channels means that Iran will not be able to access raw materials and commodities. In addition, its financial exchanges with European banks will be suspended.
At the regular FATF meeting on February 22 in Paris, the deadline for Iran to tighten its anti-terror and money laundering laws was extended by another four months. Otherwise, its financial institutions would face strict international inspection and scrutiny.
A few days before the expiration of the deadline set by the FATF, Iranian President Hassan Rouhani warned of the consequences if the two FATF stipulations were not ratified. He also linked the development of banking relations with other countries with the ratification of these two stipulations by Iran’s Expediency Discernment Council.
Rouhani is depending heavily on the ratification of FATF stipulations so that the European financial mechanism is activated, thus allowing Iran to evade US sanctions. Rouhani is also concerned about further sanctions related to money laundering and terrorist financing. However, Rouhani threw the burden on to both the Expediency and Guardian Councils, since they oppose the ratification of FATF stipulations. He also rejected any governmental or parliamentary responsibility for the difficult economic situation or any future sanctions that could affect Iranian banks.
The FATF deadline has expired but Iran has not achieved any progress in what was demanded of it. At the FATF regular meeting held on June 21 in Orlando, Florida, the FATF decided to extend punitive measures against Iran and agreed to tighten inspection and scrutiny on Iranian financial institutions as mentioned in the statement issued at the February 2019 meeting. The FATF also warned that it would reimpose its countermeasures against uncooperative countries on Iran, such as “reinforcing the mechanisms for regular reporting of financial transactions and increasing scrutiny and inspections of branches of foreign financial institutions inside Iran, if the latter does not enact regulations on combating terrorist financing and money laundering by next October.”
All indicators point to the possibility of divisions that have been ongoing for months within the institutions of the Iranian political system regarding the FATF. These divisions could lead to Iran rejecting it altogether. If the FATF’s latest deadline expires without Iranian commitment to its stipulations, strict economic measures will be imposed on Iran including actions and countermeasures, calling for high-level inspections, and banning foreign banks from opening their branches or offices inside Iran. Furthermore, the expiration of the deadline could also affect Iran’s financial assets in foreign banks, and these banks could also suspend their transactions with Iranian financial institutions due to the increased levels of risk emerging from money laundering and terrorist financing.
