At its plenary meeting in Paris this week, the Financial Action Task Force (FATF) decided to maintain Iran's status as a high-risk jurisdiction for money laundering and terrorist financing, while continuing to waive the most severe penalties for this listing.[1] The 38-member body sets global standards on how to combat these threats to the international financial system, through a series of recommended measures and public warnings about doing business with high risk countries.[2]

Iran has been included on the FATF's "blacklist" since 2008. In today's public statement, the FATF determined that the steps taken by Iran since 2016, following the implementation of the nuclear agreement, are not sufficient to merit a change in this status. According to today's statement, the FATF "urgently expects Iran to proceed swiftly in the reform path" by addressing remaining deficiencies in its laws against money laundering and terrorist financing.[3] For the first time, the FATF publicly detailed these deficiencies, notably not "adequately criminalizing terrorist financing."[4] The body warned that it would take further steps at its June meeting, "depending upon Iran’s progress."[5] 

Notably absent from this and previous FATF public statements is any mention of the threat to the international financial system posed by proliferation in and from Iran, and Iran's willingness to end this threat.

Iran's History with the FATF

Since 2007, the FATF has named Iran as a threat to the international financial system because of its lack of comprehensive anti-money laundering (AML) and combatting the financing of terrorism (CFT) regimes.[6] The FATF stepped up this warning in 2008, calling on its members to conduct enhanced due diligence (EDD) when dealing with Iran and urging financial institutions around the world to do the same.[7] Such enhanced due diligence includes robust monitoring of business relationships and transactions with Iranian entities.[8]

In February 2009, the FATF ratcheted up pressure by imposing countermeasures against Iran after it failed to address meaningfully its AML/CFT weaknesses.[9] Countermeasures expand on existing due diligence requirements and may include: enhanced reporting and monitoring of business relationships and transactions; preventing Iranian banks from establishing subsidiary branches; limiting business relationships; and requiring banks to review and terminate correspondent accounts.[10] The FATF specifically warned countries to protect against Iran's use of correspondent banking relationships to bypass or evade these countermeasures.

The timing of this increased pressure from the FATF tracked with increased international concern about Iran's nuclear program and its financing. In 2009, the U.N. Security Council adopted resolution 1929, which called upon countries "to take appropriate measures that prohibit in their territories the opening of new branches, subsidiaries, or representative offices of Iranian banks" if these activities "could contribute to Iran's proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems."[11]

Despite this pressure, Iran failed to remedy the deficiencies in its AML/CFT regime and has remained on the the FATF "blacklist" as a "high risk and non-cooperative jurisdiction." The listing, along with the broad economic sanctions regime against Iran that targeted the country's banking, shipping, and energy sectors, left it increasingly isolated from the international financial system.

Iran's "High-Level Commitment"

The 2015 nuclear agreement, or Joint Comprehensive Plan of Action (JCPOA), marked a turning point in Iran's relationship with the world, and with the FATF. In June 2016, the FATF welcomed Iran's "high-level political commitment to an Action Plan to address its strategic AML/CFT deficiencies."[12] Iran also agreed to seek technical assistance on how to implement the plan. The FATF rewarded Iran's new posture by suspending for twelve months the countermeasures in place since 2009, and further suspending the countermeasures at plenary meetings in November 2017 and February 2018.[13] However, Iran still is on the FATF's list as a high-risk jurisdiction and enhanced due diligence requirements remain in place.

Since 2016, Iran reportedly has engaged in several rounds of technical discussions with experts from around the world, including from the United States.[14] Iran's International Monetary Fund representative has sought technical assistance to implement proper AML standards in Iran's banking sector,[15] and the United Kingdom has provided assistance to Iranian banks on how to implement these standards.[16] In 2016, Iran became an observer in the Eurasian Group, or EAG, a FATF-style regional body that assists members in implementing AML/CFT standards.[17]

The Action Plan also spurred Iran to undertake four key legislative efforts. In January, Iran's Parliament approved a bill to join the U.N. Convention against Transnational Organized Crime (UNTOC).[18] A bill to join the International Convention of the Suppression of Terrorism Financing (ICSFT) is still pending in Parliament.

The two other regulatory efforts involve adapting Iran's current AML and CFT laws to align with the FATF standards. A bill amending Iran's Anti-Money Laundering Act was approved by Parliament on January 10, 2018.[19] A bill amending Iran's Countering Financing of Terrorism Act is more domestically controversial and has not yet been approved by Parliament.[20] It lays out a legal basis for confiscating terrorist assets, determines what constitutes terrorist offenses, and establishes enhanced monitoring and suspicious report transaction mechanisms.[21]

However, for both the U.N. conventions and its domestic CFT law and proposed amendments, Iran expressly exempts support for what it deems "actions taken by nations, groups, or liberation organizations for the purpose of putting an end to foreign occupation, colonialism, and racism."[22] In practical terms, this means exceptions to continue funding Hezbollah and Hamas[23] – both of which are designated as terrorist organizations by the United States. Maintaining such exceptions would not meet FATF norms.[24] Another issue may complicate Iran's ability to implement fully the FATF Action Plan: the entrenchment in the Iranian economy of the military and the Islamic Revolutionary Guard Corps (IRGC), parts of which remain subject to U.N. sanction.

Iran's Action Plan expired on January 31, 2018 with "a majority of the action items remaining incomplete," according to today's FATF statement.[25] The statement went on to specifically list the nine (of ten) steps that Iran has failed to take. These include "adequately criminalizing terrorist financing" and "identifying and freezing terrorist assets" in line with UNSCRs.[26] For now, Iran avoids the reimposition of the countermeasures suspended in 2016. But Iran's continued failure to follow through at a technical level on its commitment to AML/CFT reform could lead to the reimposition of countermeasures when FATF meets in June. This step is advocated by some members of Congress and by the advocacy group United Against a Nuclear Iran (UANI).[27]

FATF and Proliferation Financing

Beginning in 2008, the FATF expanded its mandate to include combatting proliferation finance. It has taken incremental steps on the issue since then, publishing a series of reports and amending its recommendations to provide guidance to its members and financial institutions.[28] Recommendation 7 is specific to proliferation finance, providing guidance on the implementation of "Targeted financial sanctions related to proliferation" in order to comply with U.N. Security Council resolutions (UNSCRs).[29]

The FATF defines proliferation finance within the framework established by UNSCRs, including resolution 1540 mandating export controls to target illicit trafficking and related financing, and resolutions targeting specific countries of proliferation concern, including Iran.[30]

Yet proliferation finance has not been a FATF priority, despite the growing nuclear threat from North Korea and Iran (through 2015). For example, Iranian proliferation was never referenced in a FATF public statement as a reason for the country's classification as a high risk jurisdiction, even at the height of the nuclear crisis. And the threat from North Korean proliferation was mentioned for the first time in 2016, after the country had tested four nuclear weapons and countless nuclear-capable missiles.[31]

Iran's Ongoing Proliferation Threat

As a result of the JCPOA, a series of UNSCRs on Iran and their provisions related to proliferation financing were terminated and replaced by resolution 2231.[32] This resolution endorses the nuclear agreement but also maintains restrictions on Iran's military and ballistic missile programs, including targeted financial sanctions against several dozen Iranian entities.[33]

The proliferation threat from Iran has not disappeared as a result of the nuclear agreement. Rather, the nuclear proliferation threat has been reduced and contained for a period of time, while the missile proliferation threat expands.

Iran continues to develop its missile arsenal in defiance of resolution 2231, including by launching as many as 23 ballistic missiles since July 2015, according to some estimates.[34] Iran claims that such tests do not violate the resolution because these missiles were not explicitly "designed to be capable of delivering nuclear weapons," as the resolution specifies. The intertwined history of Iran's nuclear and ballistic missile development belies this claim, as do regular assessments from the U.S. intelligence community that "Iran's ballistic missiles are inherently capable of delivering WMD."[35]

In addition, Iran continues to rely on overseas procurement to advance its missile program, and thus is exploiting the international financial system to do so. A June 2016 German intelligence report noted "a further increase in the already considerable procurement efforts in connection with Iran's ambitious missile technology program."[36] And in 2017, the German government reported that Iran's "attempts to acquire proliferation-sensitive material for missile technology/the missile programme, which is not covered by the Joint Comprehensive Plan of Action, remained about the same."[37] Another German intelligence report described the global reach of Iranian procurement, which uses front companies in the United Arab Emirates, Turkey, and China to facilitate procurement and evade international restrictions.[38]

Finally, there is a practical and political question as to how Iran itself would implement targeted financial sanctions against individuals and entities on the U.N. blacklist, which include parts of its own government. The FATF's guidelines would require Iran to execute an unlikely campaign against organizations subordinate to the Ministry of Defense, as well as against military and IRGC officers, freezing their assets and ensuring that no funds are made available to them.[39]  

Iran also would have to demonstrate the ability and the willingness to implement sweeping U.N. sanctions against North Korea. This seems unlikely. According to the U.S. Treasury Department, U.N.-sanctioned entities in Iran and North Korea have shared missile technology and cooperated on the missile development, including "work on an 80-ton rocket booster being developed by the North Korean government."[40]

Conclusion

The FATF continues to focus its efforts with Iran on addressing the country's AML/CFT deficiencies. However, the proliferation threat from Iran has not disappeared as a result of the nuclear agreement. The immediate threat posed by Iran's nuclear program has been reduced, but quickly could reemerge if the agreement falls apart. Meanwhile, Iran's expansive ballistic missile program, which can serve as a means of delivering nuclear weapons, remains subject to international sanctions and to more stringent national sanctions.

In its ongoing evaluation of the risk posed by Iran to the global financial system, the FATF should not lose sight of proliferation, both the proliferation threat still posed by Iran and the risk that Iran continues to support proliferation in other countries, notably North Korea.