Tightening the Financial Squeeze against Iran

By Michael Jacobson

On October 12, the Financial Action Task Force (FATF), a relatively obscure Paris-based organization, took a significant step in ratcheting up the international financial pressure against Iran. The FATF, launched by the G7 in 1989, seeks to set global standards on combating money laundering and terrorist financing. 34 countries are now members of FATF, including the US and the European Commission.

For the first time, FATF specifically addressed the dangers that Iran poses to the integrity of the international financial system. In a statement, FATF concluded that “Iran's lack of a comprehensive anti-money laundering/combating the financing of terrorism regime represents a significant vulnerability within the international financial system.” According to the press release, FATF members would be advising their financial institutions to use enhanced due diligence in evaluating the risk of transactions with Iran. Treasury Secretary Paulson applauded the move by FATF, calling it a “dramatic step in highlighting the significant threat Iran poses to the international financial system.”

Assuming that the FATF members follow through and issue alerts to their financial sector about the risks of doing business with Iran, this could have a significant impact on the Iranian economy. Until this point, the US Treasury Department has been the lone voice decrying the risk that Iran's deceptive practices pose to the global financial system. While the US warnings carry serious weight, there are companies and financial institutions which do not do business in the US and are less concerned about invoking the wrath of the US government. These companies will be far less inclined to ignore the proclamations of their supervisory regulatory agencies.

In evaluating the significance of the FATF action, it is important to look at the composition of this international body. China and Russia - the two permanent members of the UN Security Council which have been most reluctant to move forward on UN sanctions against Iran -- are both members, as is the Gulf Cooperation Council. As FATF is an organization that works by consensus, the fact that this statement was issued indicates that none of the 34 members opposed. This should send an important message to Tehran that international concern about their activities is growing. It may also bode well for a possible third round of sanctions at the UN later this year.

While FATF said that it would work with Iran to address its deficiencies, the Islamic Republic is unlikely to make the necessary systemic changes. Iran's efforts to address terrorist financing are non-existent -- hardly surprising in a country that US government officials have described as the "central banker of terror," and where support for terrorist groups is official government policy.

In fact, Iranian state-owned financial institutions have played a role in furthering the government's illicit activity. For example, Bank Saderat has been involved in transferring funds to terrorist groups and Bank Sepah has provided financial services to support Iran's ballistic missile program.

To read my previous op-ed, which called upon the FATF to blacklist Iran, click here.

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