Iran was once again on the agenda at a plenary meeting of the Financial Action Task Force (FATF) last week in Paris. The body decided not to re-impose the severe restrictions on financial dealings with Iran that were suspended in 2016, despite U.S. efforts to build a case for such action in the weeks leading up to the meeting. These restrictions, or “countermeasures,” expand on the FATF’s existing due diligence requirements on Iran and may include preventing Iranian banks from establishing overseas subsidiary branches, requiring banks to review and terminate correspondent accounts with Iranian banks, and limiting business relationships or imposing enhanced monitoring and reporting requirements on transactions involving Iran.[1] The re-imposition of these restrictions would deal a further blow to Iran’s economy, which has been crippled by the U.S. decision to withdraw from the nuclear agreement and re-impose sanctions.
In Friday’s public statement, the FATF rebuked Iran for its failure to implement most of the Action Plan enacted in July 2016 to redress Iran’s strategic Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) deficiencies. While acknowledging some legislative progress, the FATF listed nine items from the Action Plan that remain outstanding and warned of “further steps” in February 2019 if Iran fails to address these deficiencies through legislation and regulatory reform.[2] These items include a failure to criminalize terrorist financing and money laundering offenses, to identify and freeze terrorist assets, to enforce a customer due diligence regime, and to stand up an independent financial intelligence unit, among other deficiencies. In the interim, the FATF called on its members to continue urging financial institutions to conduct enhanced due diligence when dealing with Iran, including robust monitoring of business relationships and transactions with Iranian entities.
In the lead up to the FATF plenary – and a few weeks before the full snapback of U.S. sanctions – the United States announced a series of measures intended to illustrate how Iran exploits the international financial system to fuel terrorism, proliferation, human rights abuses, and destabilizing actions in Syria, Yemen, and beyond. The measures also reveal how the United States will implement its “maximum pressure” campaign against Iran, including through enforcement actions and the application of anti-money-laundering authorities, primary sanctions, and the threat of secondary sanctions in an effort to induce governments, banks, and industry around the world to stop dealing with Iran.
On October 11, 2018, the U.S. Financial Crimes Enforcement Network (FinCEN) issued an advisory to help financial institutions detect potentially illicit transactions with Iran. Specifically, the advisory provides useful red flags designed 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.”[3]
This advisory was followed by another round of U.S. Treasury Department sanctions on October 16, targeting “a vast network of businesses providing financial support to the Basij Resistance Force, a paramilitary force subordinate to Iran’s Islamic Revolutionary Guard Corps (IRGC).”[4] In addition, the U.S. administration is debating whether or not to sanction the Belgium-based SWIFT financial messaging service if it fails to disconnect all Iranian financial institutions.
The FATF decision to maintain Iran’s status as a high-risk jurisdiction, but not to re-impose economic countermeasures on Iran, provides temporary support for efforts by the remaining parties in the nuclear agreement with Iran, or Joint Comprehensive Plan of Action (JCPOA), to preserve the agreement. The decision also reflects an ongoing struggle between the European Union’s effort to find a financial mechanism to allow European business to continue trading with Iran and U.S. efforts to end almost all such ties. The EU has created a “Special Purpose Vehicle” to support continued trade – essentially a channel to facilitate payments related to Iran’s exports (including oil) and imports, and which also could be open to countries outside the EU.[5] But it is unclear whether any business with ties to the United States would consider using this vehicle, particularly if the FATF re-imposes countermeasures in February.
U.S. Warns Foreign Firms against Iran
The October 11 FinCEN advisory describes typologies used by Iran to illicitly access the financial system, including: the misuse of banks and exchange houses; exploitation of commercial shipping; reliance on shell or front companies within complex procurement networks; reliance on senior officials from the Central Bank of Iran (CBI) to mask illicit transactions; and the use of precious metals and perhaps virtual currencies to evade sanctions.
Red flags for each of these deceptive behaviors are described as well, such as: the routing of transactions to personal accounts by CBI officials where funds may be withdrawn by entities with no affiliation to the Iranian government; the use of multiple exchange houses to conceal the origin of funds, accumulating fees and costs that are atypical of standard commercial practices; and the involvement of companies with opaque ownership structures, obscure names, or located at residential or multi-party addresses.
The advisory includes a description of U.S. sanctions that may be imposed following the U.S. withdrawal from the JCPOA and the subsequent 90- and 180 day wind-down periods. It warns foreign financial institutions that, as of November 5, they will be subject to “correspondent or payable-through account sanctions” for “knowingly conducting significant transactions for or with certain Iran-related persons,” and to “blocking sanctions” for “providing material support to designated persons.”[6]
The advisory serves not only as clarification to foreign financial institutions regarding the obligations of their U.S. counterparts, but also as a warning to non-U.S. banks and companies that may be doing business with Iran about the enforcement measures that U.S. authorities will focus on going forward.
U.S. Sanctions Target Iran’s Financial Networks
Last week saw the first major re-imposition of U.S. sanctions on Iranian state owned enterprises and financial institutions. Some 20 entities supporting the IRGC’s Basij paramilitary force were designated for supporting global terrorism, which allows for the imposition of secondary sanctions. The sanctioned entities included three Iranian financial institutions – Bank Mellat, Sina Bank, and Parsian Bank – that were removed from the U.S. blacklist following the implementation of the JCPOA. The United States has made clear that it intends to re-designate most or all of the entities that were removed as part of the JCPOA. However, the decision to begin doing so several weeks before the end of a 180-day wind-down period suggests that it will use the designation tool aggressively.
The United States also appears prepared to use the designation tool expansively. Last week’s sanctions targeted the Bonyad Taavon Basij network, which according to the Treasury Department “employs shell companies and other measures to mask Basij ownership and control over a variety of multibillion-dollar business interests in Iran’s automotive, mining, metals, and banking industries.”[7] Treasury designated four of the entities – Esfahan’s Mobarakeh Steel Company, Bahman Group, Sina Bank, and Parsian Bank – for their financial support to the network. Treasury’s use of the material support criterion rather than ownership or control to support the action demonstrates an expansive designation policy. A network map published with these sanctions illustrates this expansive targeting: Sina Bank and Parsian Bank, for example, are separated by several degrees from the Basij and the IRGC – the designated terrorist entities.[8]
This move follows narrower sanctions actions against financial networks in May, days after the U.S. withdrawal from the JCPOA. On May 10, in cooperation with the United Arab Emirates, the Treasury Department designated six individuals and three entities in an effort to disrupt a currency exchange network in Iran and UAE that transferred U.S. dollar-denominated bulk cash to the sanctioned IRGC Qods Force (IRGC-QF).[9] And on May 15, Treasury designated Iran’s Central Bank governor and part of Iraq’s banking sector for moving millions of dollars on behalf of IRGC-QF to Hezbollah.[10]
Both of these actions ultimately take aim at Iran’s Central Bank and preceded two key sanctions milestones: the re-imposition, on August 7, of secondary sanctions related to the purchase or acquisition of U.S. dollar banknotes by the Iranian government;[11] and the forthcoming re-imposition of secondary sanctions on persons engaging in certain significant transactions with the CBI on November 5.
The Specter of Secondary Sanctions against SWIFT
There is disagreement within the U.S. administration about how aggressively to target SWIFT, the Belgium-based financial messaging service that facilitates cross-border payments worldwide. SWIFT cooperated with U.S. and EU in the sanctions campaign during the years that preceded the nuclear agreement, by cutting off the CBI and other Iranian banks. However, SWIFT may be reluctant to do so at present, given the EU goal of maintaining the JCPOA and the economic sanctions relief the agreement is meant to deliver to Iran. Some in the United States conclude that SWIFT’s failure to disconnect Iran by a November 5 deadline would undermine the administration’s maximum pressure campaign; they argue that the banks represented on the SWIFT board and SWIFT officials should be targeted with sanctions. Others argue that such sanctions would pose a risk to the global financial system and would damage the U.S. ability to monitor illicit finance through information-sharing from SWIFT.[12]
The unusually public discussion of a potential target of U.S. secondary sanctions, especially against a high-profile entity like SWIFT, underscores the administration’s aggressive posture toward allies and foes alike in implementing its maximum pressure campaign.
Expected Enforcement Actions
The U.S. government may also use substantial financial penalties and the threat of criminal prosecution to deter major banks. One such expected enforcement action looms for Standard Chartered. The British bank disclosed that an ongoing U.S. government investigation into its past sanctions violations could yield considerable fines – reportedly up to 1.5 billion dollars. Since 2012, the bank has been operating with an independent monitor under terms from a deferred prosecution agreement with the Department of Justice and New York County’s District Attorney’s office for facilitating business with Iranian parties. Standard Chartered also entered into settlement agreements in 2012 with Treasury for these sanctions violations. Recently, there have been press reports that two former Standard Chartered employees could face criminal charges for their role in the alleged sanctions violations with Iranian-linked companies.
Conclusion
Despite the FATF decision to maintain the status quo, the United States is seeking to compel foreign financial institutions to avoid dealing with Iran’s financial sector through the threat and application of sanctions. This is one part of a broader U.S. campaign to exert maximum pressure on Iran, with the stated aim of creating conditions for negotiations on a comprehensive agreement that addresses the full range of threats posed by Iran.
The coming weeks and months will be critical in this campaign. Hundreds of entities that are part of or supporting the Iranian government will be returned to the U.S. blacklist. These designations will include the ability for the United States to sanction foreign banks and companies for dealing with such sanctioned parties. In addition, countries that fail to sufficiently reduce their purchases of Iranian oil may find themselves the subject of U.S. sanctions. Despite EU efforts to facilitate ongoing trade and investment with Iran, the overwhelming majority of firms in Europe and beyond are reluctant to jeopardize their much larger trade and investment with the United States. As a result, by the time the FATF meets next February to consider the re-imposition of countermeasures, Iran may already be cut off from the international financial system.
Footnotes:
[1] “High-risk and non-cooperative jurisdictions,” Financial Action Task Force, available at http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/more/more-on-high-risk-and-non-cooperative-jurisdictions.html?hf=10&b=0&s=desc(fatf_releasedate).
[2] “Public Statement – October 2018,” Financial Action Task Force, October 19, 2018, available at https://www.iranwatch.org/library/multilateral-organizations/other-multilateral-organizations/financial-action-task-force/fatf-public-statement-october-2018-excerpts.
[3] “Advisory on the Iranian Regime’s Illicit and Malign Activities and Attempts to Exploit the Financial System,” FinCEN Advisory FIN-2018-A006, Financial Crimes Enforcement Network, U.S. Department of the Treasury, October 11, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/advisory-iranian-regimes-illicit-malign-activities-attempts-exploit-financial.
[4] “Treasury Sanctions Vast Financial Network Supporting Iranian Paramilitary Force That Recruits and Trains Child Soldiers,” Press Release, U.S. Department of the Treasury, October 16, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/treasury-sanctions-vast-iranian-financial-network.
[5] Implementation of the Joint Comprehensive Plan of Action: Joint Ministerial Statement, European Union External Action Service, September 24, 2018, available via https://www.iranwatch.org/library/multilateral-organizations/european-union/implementation-joint-comprehensive-plan-action-joint-ministerial-statement.
[6] “Advisory on the Iranian Regime’s Illicit and Malign Activities and Attempts to Exploit the Financial System,” FinCEN Advisory FIN-2018-A006, Financial Crimes Enforcement Network, U.S. Department of the Treasury, October 11, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/advisory-iranian-regimes-illicit-malign-activities-attempts-exploit-financial.
[7] “Treasury Sanctions Vast Financial Network Supporting Iranian Paramilitary Force That Recruits and Trains Child Soldiers,” Press Release, U.S. Department of the Treasury, October 16, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/treasury-sanctions-vast-iranian-financial-network.
[8] “Bonyad Support Network: IRGC’s Financial Lifeline,” U.S. Department of the Treasury, October 16, 2018, available via https://www.iranwatch.org/sites/default/files/irgc_chart_10162018.pdf.
[9] “United States and United Arab Emirates Disrupt Large Scale Currency Exchange Network Transferring Millions of Dollars to the IRGC-QF,” U.S. Department of the Treasury, May 10, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/united-states-united-arab-emirates-disrupt-large-scale-currency-exchange.
[10] “Treasury Targets Iran’s Central Bank Governor and an Iraqi Bank Moving Millions of Dollars for IRGC-Qods Force,” U.S. Department of the Treasury, May 15, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/treasury-targets-irans-central-bank-governor-iraqi-bank-moving-millions-dollars.
[11] “Frequently Asked Questions Regarding Executive Order of August 6, 2018, Reimposing Certain Sanctions With Respect to Iran,” U.S. Department of the Treasury, August 6, 2018, available via https://www.iranwatch.org/library/governments/united-states/executive-branch/department-treasury/frequently-asked-questions-regarding-executive-order-august-6-2018-reimposing.
[12] Mark Dubowitz, “SWIFT Sanctions: Frequently Asked Questions,” Foundation for Defense of Democracies, October 10, 2018, available via https://www.thefdd.org/analysis/2018/10/10/swift-sanctions-frequently-asked-questions/.