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Sanctions Are Just the Beginning for Iran


The economic blow to Tehran will be compounded if it fails to comply with global financial transparency rules.


In an echo of the sparring between hard-liners and reformists that preceded Iran’s approval of the nuclear deal three years ago, the two Iranian political factions are again deeply at odds, this time over compliance with international financial transparency regulations. Should they be rejected, Iran would probably be left even more economically isolated than it already is.

As the government weighs the possible dire implications of opposition to the global measures, the hard-liners may in time be persuaded to support them. But it could prove difficult, as the adoption of greater financial transparency is likely to make it harder to support Iranian proxies across the Middle East.

In May, Washington’s withdrawal from the nuclear deal triggered renewed U.S. sanctions that Washington calculates will pressure Iran into addressing its concerns about ballistic missiles and regional proxies, as part of a renegotiated nuclear deal.

Following the unilateral U.S. move, other signatories to the nuclear deal, namely Europe, Russia, and China, have been trying to salvage it; however, they have insisted that Tehran comply with standards to prevent money laundering and terrorism finance set by a Paris-based intergovernmental organization, the Financial Action Task Force (FATF).

The FATF, set up at the behest of the G-7, monitors the integrity of the global financial system. It has been described by one financial crime expert as “the most powerful organisation most people have never heard of.” If a country fails to conform to its standards, the watchdog can place it on a blacklist. FATF members are then urged to impose so-called countermeasures, or sanctions, on the transgressing state. These can result in “a limitation or prohibition of financial transactions with the jurisdiction” in question.

In a recent paper, the Washington-based Wisconsin Project on Nuclear Arms Control noted that countermeasures against Tehran may include requiring banks to review and terminate correspondent accounts with Iranian banks, preventing them from establishing overseas subsidiary branches, and limiting business relations or imposing enhanced monitoring and reporting requirements on transactions involving Iran.

The U.S. measures on Iran are comprehensive and will likely be pursued energetically given Washington’s policy of exerting “maximum pressure” on the country, but their impact may be weakened by U.S. President Donald Trump’s decision to break ranks with U.S. allies that are determined to ensure that the agreement is preserved.

So while many non-U.S. banks and businesses with exposure to the U.S. financial system will be reluctant to defy Washington, Brussels is developing a so-called special purpose vehicle, a payment system that aims to provide a sanctions shield for European companies and those from other countries wishing to continue trading with Iran. While it is too early to judge how effective the mechanism will be, it is hard to see how it will operate if Iran does not adhere to FATF standards.

Iran’s foreign minister, Mohammad Javad Zarif, said in October that the special purpose vehicle required Iranian compliance with the watchdog and that Russia and China, Tehran’s allies, had told him that they cannot continue to do business with Iran otherwise. Deputy Foreign Minister Abbas Araghchi reiterated that assessment this month.

Predictably, Iranian hard-liners­—including members of the elite Islamic Revolutionary Guard Corps, the judiciary, the army top brass, and the clerical establishment—have been dragging their heels on adoption of FATF standards. They fear it will reveal sensitive financial information and frustrate efforts to fund proxies in Yemen, Lebanon, and Gaza, as well as put limits on the Revolutionary Guard’s Quds Force, responsible for Iran’s military activities beyond its borders,  Tehran’s hawks regard backing for these groups as a regional strategic priority.

In June 2016, following implementation of the nuclear deal, the FATF suspended countermeasures against Iran—though it remained on the watchdog’s blacklist along with North Korea. Tehran had been given until this October to adhere to the FATF standards. Yet by the deadline, of four Iranian bills addressing compliance deficiencies, only one had been passed by parliament and approved by the Guardian Council, a body that checks whether assembly decisions are consistent with Islamic law.

They fear it will reveal sensitive financial information and frustrate efforts to fund proxies in Yemen, Lebanon, and Gaza, as well as put limits on the Revolutionary Guard’s Quds Force, responsible for Iran’s military activities beyond its borders.

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