Wednesday, January 14, 2015

Power-broking: Iranian sanctions and conflict in the Middle East

Money Laundering Bulletin

Negotiations at the end of November on whether limited relaxation of sanctions on Iran should be extended into 2015 will be coloured not only by evidence of the country’s non-military nuclear intentions but also its role as a potential ally in the fight against Islamic State. Paul Cochrane reports from Beirut on compliance and politics.

Multilateral talks over Iran's nuclear power programme have partly and temporarily eased certain sanctions against the country. Yet while businesses worldwide are keen to get into the lucrative Iranian market to offer all kinds of good and services, the overarching sanctions regime put in place by the United States, the European Union  (EU) and the United Nations remains in operation.

Review point

Last November, the USA, Britain, Germany, France, Russia and China (the ‘P5+1’ group), and Iran agreed to a Joint Plan of Action (JPOA), which partly relieves US and EU sanctions on Iran to encourage the Islamic Republic to follow certain steps to ensure its nuclear programme is for peaceful purposes - a long-term bone of contention internationally. With the talks ongoing, complicated in part by major security concerns in the Middle East, the JPOA was extended in July for a further four months, until November 24, 2014. 
In essence, the easing of sanctions in five areas – petroleum exports; transactions relating to Iran's automotive industry; the purchase and sale of gold and other precious metals; exports of US-origin parts and services for Iran's civil aviation; and exports of crude oil and petroleum to six countries that were already importing oil – was a carrot to push the negotiations forward, with the Iranian economy seriously suffering from the world's harshest sanctions regime.
“The last several months have been a small trust building measure by the international community, as they knew Iran was suffocating economically and needed to get back on their feet for negotiations,” said MarioAbou Zeid, a research analyst at the Carnegie Middle East Centre in Beirut. “As soon as some of the sanctions were removed, Iran had access to some of the funds they had overseas (USD2.8 billion), and exports and imports increased, which was very important for Iran.”

Military Intervention

In the lead up to the extension, a new challenge emerged in the region: the rise of militant group the Islamic State in Iraq and the Levant (ISIL), also known as the Islamic State, which has taken control of broad swathes of northern Iraq and Syria. The US-led military coalition against ISIL in Iraq, started in August and since expanded, is expected to impact on the Iranian nuclear talks, as Tehran is considered a constructive force in reining in ISIL given its influence in both Iraq and Syria.
“I believe that on 24 November, there will be a renewed (JPOA) deadline, as there's a new threat – ISIL. If it wasn't for ISIL, they would be forced to do an interim deal,” said Abou Zeid. “Iran won't give up this card they have in their hands. They will try to get more sanctions relief in exchange for the ISIL crisis, as all international issues in the region will impact on that.”
Indeed, with the ISIL crisis related to the conflict in Syria – an ally of Iran, and like Tehran supported by Russia and China – the Iranian nuclear issue has become further entangled at the global geopolitical level.
What is clear is that regulators, particularly the US, are taking recent developments seriously. “This is a complex area that is constantly changing due to global tensions in Ukraine, Russia, Iran, Syria and elsewhere, where the penalties for non-compliance are staggering. The record fine of USD8.9 billion against BNP Paribas for US sanctions violations is probably, or should be, causing CEOs of any financial institution sleepless nights and fines this size could be game over,” said Anthony Quinn, founder of Financial Crimes Consulting, in Australia.

US maintains tough line

Notably, the US's Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of July, 2010, is still in force. Furthermore, 300 US congressmen wrote to the White House in July, (2014), urging President Obama to expand measures against Tehran, demanding the “permanent and verifiable” termination of Iran’s terrorism, ballistic missile programme, and money laundering activities prior to any lifting of sanctions.
Additionally, the US imposed sanctions on over 30 organisations and individuals with ties to Iran in August 2014, including five Iranian banks, one Iranian-owned Russian bank, two airlines, two logistics firms, six vessels, shipping and energy companies, and the Organisation of Defensive Innovation and Research, and the Nuclear Science and Technology Research Institute. 
Such stances are not likely to disappear despite any back-door cooperation between Iran and the US-led coalition on ISIL. “There maybe some easing of tensions as there are greater demons to be fought – ISIL – which may win [Tehran] some points, but on the other hand, some organisations are still trying to get around the sanctions to do business with Iran,” said Joe Bognanno, an AML analyst at Nice Actimize in the US. “Iran also supports terrorism, so it will not be de-listed by the US and others. I don't think sanctions will be significantly eased.”

Land of lost opportunity

Last year's ease in the sanctions has whetted businesses appetite for a new, populous market – Iran has 77 million people and a GDP of USD366 billion in 2013-4, says the World Bank. As a July report from the National Iranian American Council highlighted, the sanctions against Iran have lost American exporters an estimated USD175.3 billion in export opportunities over the past 18 years.
International business delegations have already visited Iran, and firms in the Middle East are eyeing up further relaxation, particularly following the crackdown in trade with Iran by the likes of Turkey and the United Arab Emirates (UAE) in the wake of CISADA; UN Security Council Resolution 1929 (2010) - which included restricted trade with the Iranian financial sector and required UN member states to freeze Iranian assets; and the US's Iran Threat Reduction and Syria Human Rights Act of 2012.

Grounds for cautious optimism

“The ease in sanctions was not as significant as many would have liked. More importantly is the potential for greater relaxation if things move further, which is what is keeping spirits high,” said Ghanem Nuseibeh, founder of political risk analyst group Cornerstone Global Associates, in Dubai, the UAE. “Qualitatively, people are seeing more potential business, although whether this has resulted in more traffic is too early to say. People that take more risks are looking for loopholes, but ostensibly they are exploiting those that were used earlier.”
One of the most significant easing of sanctions in relation to AML under the JPOA was for gold. Turkey had been a major conduit, as was Dubai, for gold sales with Iran, until US pressure reduced the trade in early 2013. Following the JPOA, the gold trade is presumed to have been resumed, albeit there are no reports or data available, primarily because there are no official checks on gold purchases in Turkey, while in Dubai ounces of gold are available from vending machines.
“Gold was definitely a key thing (in the JPOA), as it is obvious that people in the regime benefited from that relaxation and in a way, one of the supposed loopholes to move money around. Given Dubai's position on the gold front, I think it's one of the main beneficiaries,” said Nuseibeh.
The JPOA’s easing of sanctions does not seem to have caused any concerns in the compliance world.
“I've not heard from any compliance officers that they need more clarity, but as regulatory scrutiny increases, they have to do a better job to not violate sanctions, either intentionally by subsidiaries, or not knowing because of a previous inability to detect that in the analysis process. So they are not asking for greater clarity, just to be internally more prudent,” said Bognanno.

Not only but also

Sanctions have been the main focus of international regulators and for compliance officers to not fall foul of the law, as evidenced by high profile fines by the US against financial institutions in the past few years. Sanctions aside, Iran has major deficiencies in its AML and CTF (combatting the financing of terrorism) regime. Not being a member of the Financial Action Task Force (FATF), or any other regional body, Iran is not subjected to regular mutual evaluation reports (MERs). Such deficiencies were highlighted in the Basel Institute on Governance's Basel AML Index 2014, with Iran identified out of 162 countries as the highest risk country in money laundering and terrorism financing.
“You would imagine (Iran's ranking is) mostly due to sanctions, but basically there's a lack of data available for Iran. We do not consider the influence of political sanctions in the ratings, such as UN sanctions lists or FATF,” said Selvan Lehmann, project manager of the Basel AML Index. “Our indicators are not factually based on how much money laundering is going on, but how vulnerable it is, and that is what we stress. Iran seems overall to be performing badly in corruption risk, financial standards, and public transparency, and there is a lack of data and regulations.”
Lehmann added that suspicious transaction reports (STRs) are not available in Iran, and its financial intelligence unit (IRIFIU) is not properly assessed. “Our rankings consider other indicators, such as the US State Department's international narcotics control strategy report: money laundering and financial crimes, which reports that Iran is considered a jurisdiction of money laundering concern. This is partly as it is a financial centre in the region, which plays a role in Iran being at the top of the rankings.”
Of further concern is that neighbouring countries Iraq and Afghanistan are among the top 10 highest risk jurisdictions in the index, with Iraq having failed a FATF MER last year, and Afghanistan, ranked number two in the index, faced being on a FATF blacklist this year until it passed AML laws in June.

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