By Samantha Sheen, AML Director Europe, ACAMS
27 May, 2016

This spring has proven to be a very busy time in London around potential business opportunities in Iran, following the Joint Comprehensive Plan of Action (JCPOA) on 16 January 2016. Meetings and discussions have taken place with Secretary of State Kerry of the United States and members of the British Bankers’ Association and FAQs and guidance have been published by both the US and UK authorities to supplement the JCPOA.

In some European countries, meetings have taken place between US representatives, local regulators and local banks to encourage consideration of establishing business relationships in Iran. Most recently, a conference was held at which representatives from Iranian banks and European businesses and intermediaries met to better understand potential business opportunities.

One of the issues arising from these discussions has been an apparent reluctance amongst larger banks to provide the financial services necessary for business to be undertaken in Iran. This is due to the continuing requirement to comply with sanctions surviving the JCPOA.

During the ACAMS 12th Annual AML & Financial Crime Conference Europe (“ACAMS Europe Conference”), both panelists and delegates held considered discussions about the lifting of secondary sanctions and the extent to which European financial services businesses could establish relationships with businesses based in Iran.

A key factor underlying these discussions has been a question on whether Iran’s banks can provide current, complete and transparent Customer Due Diligence (CDD) about legal entities, owners, controllers and associated source of funds and wealth information.   

The Central Bank of Iran and Iran banks have indicated their intention to develop and apply AML standards which will meet the Financial Action Task Force (FATF) requirements.  Hamid Tehranfar, Vice Governor, Banking Supervision Affairs, Central Bank of the Islamic Republic of Iran indicated that steps had also been taken to introduce counter terrorism financing legislation approximately three months ago. In addition, Iran had undertaken discussions at an international level with the International Monetary Fund (IMF), with a view to arranging a future assessment of the country’s anti-financial crime (AFC) framework.  It is understood that this could take place at the earliest in 2018.

Questions and requests for clarification have been received by the U.S. Treasury’s Office of Foreign Asset Control (OFAC) about the general licence requirements under which certain activities with Iran are permitted. Similar guidance has also been issued in the UK by HM Treasury. Both regulators continue to respond to questions from banks and other financial institutions, to ensure that compliance with the remaining sanction restrictions is maintained.

Recently it has been suggested in an article in the Wall Street Journal that businesses are having to turn to smaller European banks in order to obtain requisite correspondent banking services to do business with Iran. This is because these banks are smaller and less likely to have associations, with US banking activity.  These banks are therefore perceived to pose less of a risk of running afoul of US sanctions restrictions. The difficulties could also drive companies wanting to do business with Iran to use less transparent transaction methods – such as the Hawala system.  

It has also been reported that some European companies are setting up complex bartering arrangements to buy Iranian petrochemicals and bypassing banks altogether. This could hamper efforts to encourage Iranian banks to adopt AFC compliance frameworks that provide the same level of transparency expected by both supranational and national anti-financial crime regulatory and standard setting bodies.

During his presentation at the ACAMS Europe Conference, Davin Blackborow, Assistant Director of Licensing at OFAC noted that it had been suggested that OFAC has not provided sufficient clarify around due diligence for Iran because of lack of transparency concerning the extent of the IRGC and its members ownership interests. However, as Mr Blackborow clearly explained, OFAC is not responsible for setting the standards based upon which CDD should be undertaken on an Iran bank or other business. If clarity is required, Mr Blackborow suggested that this should be sought from local authorities responsible for oversight of local AML requirements. Mr Blackborow further noted that many US companies have explained their concerns are more around Iran’s CDD standards, poor corporate governance and blacklisting, but that these can only be resolved by Iran taking action to address these matters. 

From an AML perspective, questions have been raised about regulators’ potential response should European businesses establish business relationships with Iran. However, as with any other new business relationship, the question appears to be straightforward: can the business satisfy its CDD regulatory requirements so that it has sufficient transparency to ensure that appropriate and effective controls, including senior management sign-off, enhanced due diligence, screening and monitoring, are undertaken at a level commensurate with the risk level potentially posed by that relationship.  

The rolling back of sanctions takes a long time, regardless of the country and time is needed to put back in place controls or measures which have not been required for years.  The complexity of moving from an absolute prohibition control to one of partial prohibition, from both a sanctions and AML CDD and monitoring perspective, is likely to be both resource and time-intensive. This and the continued inclusion of Iran on the “blacklist” maintained by the FATF of non-cooperative countries, factor into the risk appetite of some banks in deciding whether to engage with Iran at this moment in time.

Currently Iran has legislation in relation to anti-money laundering and terrorist financing. This is supplemented by approximately 14 sub-laws related to AML. The next steps for Iran will need to be the establishment of standards and procedures which evidence that information, particularly in relation to beneficial owners and controllers, can be provided at the equivalent level currently expected by European regulatory bodies.  In addition, Iranian regulatory authorities will need to upgrade their regulatory approach to that of other European regulators, in order to provide evidence that Iranian financial institutions will be supervised and assessed to an equivalent standard as their European counterparts.   Training and awareness will form a crucial part of these activities, for businesses, regulators and local law enforcement.

Further expansion of Iran’s financial crime legislative framework will also need to incorporate bribery, corruption and tax evasion. Accompanying such expansion will be the corresponding need for information exchange and cooperation with other financial enforcement agencies in other countries.

There are a number of factors that European financial businesses are taking into account when deciding whether to engage in business with Iran at this juncture.  Both HM Treasury’s Office of Foreign Sanctions Implementation (OFSI) and OFAC are prepared to engage with industry with a view to ensuring the existing sanctions restrictions and licensing requirements are understood.  Over the next 12 months it will be interesting to see how Iran’s AML and CFT regulatory framework evolves and, in turn, how European businesses respond to those developments.