At its plenary meeting in Paris last week, the Financial Action Task Force (FATF) renewed its call for enhanced due diligence when dealing with Iran, but continued to suspend more severe restrictions, or "countermeasures," against Iran for its strategic anti-money laundering and combatting the financing of terrorism (AML/CFT) deficiencies. This is the fourth time the FATF has opted not to re-impose countermeasures since Iran's Action Plan expired in January 2018,[1] despite Iran's failure to fully implement its July 2016 Action Plan. However, the FATF Public Statement announcing the decision included a warning: Iran's failure to enact the necessary AML/CFT legislation by June will result in an increased due diligence burden on financial institutions based in Iran. This could mark the first step in a phased re-imposition of full countermeasures, which would further restrict any financial dealings with Iran.

The FATF's February 22 Public Statement reflects the ongoing tension between the United States and the European Union on how to deal with the threat posed by Iran. The EU is seeking to balance its effort to preserve the economic benefit promised by the Joint Comprehensive Plan of Action (JCPOA) in the aftermath of the U.S. withdrawal and its effort to mitigate the threat posed by Iran to the international financial system, in particular through terrorist financing. Just weeks before the FATF plenary, France, Germany, and the United Kingdom (E3) established a special purpose vehicle, known as INSTEX, to facilitate some trade with Iran while calling on Iran to meet its FATF Action Plan obligations. In addition, the European Commission last week published an expanded list of nearly two dozen countries (including Iran) that have failed to address a high risk of terrorist financing and money laundering – a way of signaling to Iran that it is not being singled out for its deficiencies.

The U.S. maximum pressure campaign, on the other hand, seeks to fully isolate Iran from the international financial system. Following its withdrawal last May from the JCPOA, the United States re-imposed broad economic sanctions on Iran and has been lobbying countries and companies around the world to join this campaign. In a speech on March 16 at the Munich Security Conference, Vice President Mike Pence called on "our European partners to withdraw from the Iran nuclear deal and join us as we bring the economic and diplomatic pressure necessary to give the Iranian people, the region, and the world the peace, security, and freedom they deserve."[2] To that end, the United States has been critical of EU efforts to set up INSTEX and to develop a new, more expansive, method of identifying high-risk jurisdictions.  Instead, in line with its broader strategy, the United States presumably has been pushing for the full re-imposition of countermeasures against Iran at the FATF.

Countermeasures Remain Suspended, but is Time Running Out?
 

In its Public Statement the FATF acknowledged Iran has made some legislative progress but noted seven items from the Action Plan that remain outstanding. These items include a failure to criminalize terrorist financing, to identify and freeze terrorist assets, to enforce a customer due diligence regime, and to create an independent financial intelligence unit, among other deficiencies.[3] Since Iran's adoption of the Action Plan in July 2016, it has enacted two key bills to address AML/CFT deficiencies: a Counter-Terrorist Financing Act in August 2018 and an Anti-Money Laundering Act in January 2019. However, Iran has failed to implement bills to ratify the U.N. Convention against Transnational Organized Crime (Palermo Convention) and the International Convention for the Suppression of the Financing of Terrorism. While legislation passed parliament to ratify both conventions in 2018, the bills experienced further resistance earlier this month in Iran's Expediency Council, delaying their adoption.[4] Additionally, the Public Statement specifically notes that Iran must remove the carve outs in its draft laws for designated groups "attempting to end foreign occupation, colonialism, and racism." Maintaining such exemptions would not meet FATF norms.[5]

In a departure from previous Public Statements, the FATF announced that it will "require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran" if Iran fails to enact the legislation by June 2019.[6] Previously, the FATF noted that it would take "further steps" to protect against Iran's strategic AML/CFT deficiencies if Iran did not fully implement the Action Plan prior to the next plenary meeting.[7] This suggests the FATF may no longer be willing to fully suspend countermeasures if all legislation has not been adopted by June.

Current FATF president and U.S. Assistant Secretary of the Treasury for Terrorist Financing, Marshall Billingslea, echoed this sentiment in remarks to the press following the Public Statement's release. He called the Public Statement a "significant indication" that Iran's time to complete the Action Plan had run out and that the FATF expects it to be implemented immediately.[8]

Since the Public Statement's release, there have been renewed calls in Iran to enact the two remaining FATF-related bills. The Central Bank of Iran issued a statement asking the Expediency Council to rule on the remaining two bills as soon as possible. And President Hassan Rouhani voiced support for the legislation in an appearance at the Central Bank this week, reportedly reiterating that Supreme Leader Ayatollah Khamenei is not opposed to the legislation and that without the passage of these bills, Iran's banking system will continue to encounter problems.

While the FATF's decision to continue suspending countermeasures gives Iran a further period of reprieve, the beneficial impact is muted given the significant harm already caused by the re-imposition of sweeping U.S. sanctions aimed at Iran's banking, energy, and shipping sectors. Faced with the threat of U.S. secondary sanctions, and despite EU efforts to counter their impact, a large number of businesses have abandoned trade and investment with Iran. Although not as impactful as the U.S. sanctions regime, FATF countermeasures would further isolate Iran's financial sector.

Differing U.S.-EU Approaches on Financial Dealings with Iran
 

The United States has consistently pushed to keep the world focused on the terrorist financing and money laundering threat Iran poses to international financial system in order to isolate Iran. The U.S. Financial Crimes Enforcement Network (FinCEN) issued an advisory last fall to help financial institutions detect potentially illicit transactions with Iran. Specifically, the advisory described typologies used by Iran as a way to "help foreign financial institutions better understand the obligations of their U.S. correspondents, avoid exposure to U.S. sanctions, and address the AML/CFT risks that Iranian activity poses to the international financial system."[9]

The European Union, on the other hand, has sought to mitigate Iran's illicit finance threat while trying to ensure that Iran receives the economic benefit that the JCPOA was meant to deliver. To that end, the EU connected Iran's implementation of its FATF Action Plan to the operationalization of INSTEX, or Instrument for Supporting Trade Exchanges – the special purpose vehicle to facilitate certain trade with Iran.[10] Currently, INSTEX is limited to humanitarian trade exempt from U.S. sanctions. This connection may be an attempt by the EU to further incentivize Iran to come into line with its AML/CFT obligations. However, Iran rejected linking the implementation of its FATF Action Plan to INSTEX.[11]

The EU's new method for identifying high-risk jurisdictions may have the effect of changing Iran's perception that it is being singled out for its AML/CFT deficiencies. A week before the FATF's plenary meeting, the European Commission published a new list of high-risk countries that differs from the FATF's list. Based on an updated evaluation methodology, the EU list includes 23 countries deemed to be jurisdictions with "strategic deficiencies" in their AML/CFT frameworks. The EU list includes Iran, along with neighbors such as Afghanistan, Iraq, and Saudi Arabia, as well as, American Samoa, Guam, Libya, Nigeria, Panama, Puerto Rico, Samoa, and the U.S. Virgin Islands.[12]

The United States immediately opposed the creation of new EU list, questioning its substance and the European Commission's methodology. In a press release, the Treasury Department criticized the European Commission's review process, justifications for its determinations, and the absence of an opportunity for listed jurisdictions to challenge their inclusion. It also opposed the inclusion of four U.S. territories. Ultimately, the Treasury Department affirmed its support for the FATF list of 12 countries with "strategic deficiencies" and called on U.S. financial institutions to disregard the EU list.[13]

Countermeasures in June?
 

Despite the different approach taken by the United States and European Union regarding financial dealings with Iran, including at the FATF, the result may be the same if Iran fails to enact the necessary legislation prior to the FATF's next plenary meeting in June. It is unlikely that the FATF will continue to suspend all countermeasures on Iran short of Iran's adoption of legislation to complete its Action Plan. Even if the bills currently before the Expediency Council are enacted, they do not appear to meet FATF norms in their current form. And if these bills were modified, five additional items listed in Iran's Action Plan remain outstanding. These items represent important changes to Iran's financial accounting and due diligence regulations and practices. Given the pace of change in Iran, it seems unlikely that these additional items can be fully addressed in a timely manner. As a result, Iran may not avoid the re-imposition of countermeasures by the FATF for long.