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.

Iranian members of parliament display their disagreement over a bill, one of four put forward by the government to meet demands set by the international Financial Action Task Force,  in Tehran on Oct. 7. (Atta Kenare/AFP/Getty Images)
Iranian members of parliament display their disagreement over a bill, one of four put forward by the government to meet demands set by the international Financial Action Task Force, in Tehran on Oct. 7. (Atta Kenare/AFP/Getty Images)

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.

The remaining three bills have been approved by the assembly but held up because of disagreements with the council. As of October, the FATF said Tehran had so far met just one of the 10 requirements it set. The Iranian regime now has until February to abide by them, or face “further steps,” which could result in the reimposition of countermeasures.

Conservative opposition to FATF compliance has clearly unsettled the reformist government of President Hassan Rouhani. Just last month, Zarif launched an extraordinary attack on his rivals, saying money laundering was a reality in Iran and that the groups benefiting from it were behind efforts to hamper the passage of the FATF legislation. Although he did not name individuals or institutions, it was clearly aimed at hard-liners, who responded by attempting to impeach him, a move that was subsequently dropped given that Zarif enjoys strong parliamentary support. Indeed, some of his allies have rallied to defend him and sought to back up his claims. Another deputy foreign minister, Morteza Sarmadi, said some $10 billion to $15 billion are laundered annually in Iran.

Back in 2016, reformists had to work hard to persuade hard-liners to back the newly implemented nuclear deal. And when the economic fruits promised under the agreement failed to materialize, mainly due to nonnuclear U.S. sanctions, the naysayers continued to berate Rouhani and his backers for making major concessions for little reward.

The reimposition of U.S. sanctions has already caused Iran’s ailing economy to deteriorate, with the rial plunging in value. Renewed FATF countermeasures would worsen conditions and could fuel public protests over hardships, now common across the country, leaving the regime vulnerable: Gatherings and marches might quickly become political as they have in the recent past. Demonstrators in several cities decried the regime’s financial backing for foreign proxies and even lambasted clerical rule, in some of the most serious displays of public discontent since the disputed elections in 2009.

The supreme leader, Ali Khamenei, has defiantly spoken of returning to a pre-nuclear deal “resistance economy”—self-reliance based on increasing domestic production and lessening imports—but the social unrest that has been brewing for some time suggests that Iranians have little stomach for further austerity, with the regime barely able to afford subsidies and other handouts to cushion the economic pain.

The FATF, more than the reimposition of U.S. sanctions, might compel Tehran’s conservatives to choose between some semblance of economic stability and curbing financial support for the likes of Hezbollah and the Bashar al-Assad regime in Syria. At present, their rhetoric suggests they are not prepared to rein in their backing for regional allies, but as February approaches, and the consequences of noncompliance become clearer, wiser heads may prevail.

Yigal Chazan is the head of content at Alaco, a London-based business intelligence consultancy.

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