On February 12, 2020, US Secretary of State Michael R. Pompeo issued a press statement1 calling on Iran to fulfill its commitments to the Financial Action Task Force ("FATF")—an inter-governmental standard-setting body composed of over 30 full member jurisdictions and regional organizations—and adhere to the FATF's standards for anti-money laundering and combating the financing of terrorism (collectively "AML/CFT").2 Secretary Pompeo warned Iran that the FATF's members will re-impose AML/CFT-related countermeasures if Iran does not fulfill these commitments. This Legal Update discusses how the full re-imposition of countermeasures would materially increase pressure on non-US financial institutions with connections to Iran.
1. US Ratchets Up Pressure by Focusing on the FATF's Action Plan
The Trump administration has been rolling out a wave of enhanced economic sanctions against Iran, including new January 10, 2020, secondary sanctions aimed at non-US financial institutions that engage in significant financial transactions within certain sectors of the Iranian economy. (See our Legal Update.) On the other hand, Europe is trying to salvage the tattered remains of the non-proliferation agreement through economic engagement, though EU member states have struggled to make meaningful concessions to Iran in the face of US opposition.
Now the United States has focused on a new lever to push the Europeans toward ramping up pressure on Iran: the FATF's June 2016 Action Plan ("Action Plan"), which calls upon Iran to undertake significant new measures to prevent money laundering and combat terrorist financing. The FATF has already warned Iran that it needs to implement the Action Plan by February 2020, or else the FATF would urge its myriad member states to impose new countermeasures (discussed further below) against Iran. With the arrival of the FATF's deadline, the Trump administration took the occasion to issue the press statement—a direct message to Iran and what appears to be an indirect prompt to FATF members—urging Iran to meet the FATF's objectives and, if Iran does not, warning that other non-US FATF members may be next to impose countermeasures.
2. The FATF's Action Plan – A High Hurdle for Iran
It likely will be difficult for Iran (still labelled by the United States as a "State Sponsor of Terrorism") to meet the FATF's goals as set forth in the Action Plan, which include adequately criminalizing terrorist financing. On top of which, Iran also must commit to identifying and freezing terrorist assets in line with the relevant UN Security Council resolutions; establishing an adequate and enforceable customer due diligence regime; and ratifying and implementing the UN Palermo Convention3 and the Terrorist Financing Convention,4 among other measures.5 The FATF Plenary in Paris this week will include a discussion of Iran's progress toward these objectives, which may well end with the FATF calling on its members to apply countermeasures against the country.
3. Pressure on Iran Can Mean Pressure on Those Who Engage in Business with Iran
In the Press Statement, Secretary Pompeo criticizes Iran for failing to fulfill the AML/CFT commitments it made to the FATF as part of the Action Plan, including enacting the UN Palermo and Terrorist Financing Conventions. Secretary Pompeo states that "it is past time for Iran to complete the action plan it agreed to in June 2016" and warns that the FATF's members may soon begin applying countermeasures against the country.6
The countermeasures that FATF endorses can have a material impact on non-US financial institutions and others that engage in business with Iran. The FATF offers nations a menu of countermeasures, including ordering home country banks to shutter their Iranian branches and rep offices; limiting business relationships or financial transactions with the Government of Iran and Iranian persons; prohibiting home country banks from relying on third parties located in Iran to conduct customer due diligence; and requiring home country banks to review and amend, and potentially terminate, correspondent relationships with Iranian banks.7 If implemented, these countermeasures could place additional compliance costs on, and increase corresponding risks for, non-US financial institutions that continue to do business with Iran.
4. Consider Talking to Your Home Country Regulators
The application of countermeasures such as those described above could drastically restrict access to Iranian financial markets by non-US financial institutions that maintain a presence in Iran, or otherwise provide financial services in Iran, and more generally serve to further isolate Iran's financial sector. To avoid any unwelcome surprises, non-US financial institutions engaged in lawful commerce in and with Iran may wish to consider engaging with their home country governments sooner rather than later to understand how those governments are reacting to the US announcement and the potential for a new FATF recommendation that tilts the balance toward countermeasures. This advance knowledge can be crucial to appropriate planning. Moreover, to the extent that non-US financial institutions have views about appropriate responses, including on the issue of whether continued economic engagement with Iran may be an appropriate path toward achieving anti-terrorism and AML policy objectives, they may see value in sharing those views now.
1 Press Statement, Iran's Commitments to the Financial Action Task Force, Secretary of State Michael R. Pompeo (February 12, 2020) [hereinafter "Press Statement"], available at https://www.state.gov/irans-commitments-to-the-financial-action-task-force/. While attributed to Secretary Pompeo, the Press Statement was published by the US Department of State's Bureau of Economic and Business Affairs, Division of Counter Threat Finance and Sanctions ("TFS"), which oversees the State Department's international engagement on AML/CFT issues, including through the Financial Action Task Force. TFS is also responsible for developing and implementing sanctions to counter national security threats and providing foreign policy guidance to the US Department of the Treasury and the US Department of Commerce.
2 The FATF's AML/CFT standards, which are set forth in its International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (known as the "FATF Recommendations"), are designed to protect the international financial system from money laundering and the financing of terrorism and proliferation activities.
3 The United Nations Convention against Transnational Organized Crime, also known as the UN Palermo Convention, is a UN-sponsored multilateral treaty against transnational organized crime. It is supported by three protocols, which target specific areas of organized crime. See United Nations Convention against Transnational Organized Crime and the Protocols Thereto, United Nationals Office on Drugs and Crime, available at https://www.unodc.org/unodc/en/organized-crime/intro/UNTOC.html.
4 The International Convention for the Suppression of the Financing of Terrorism, also known as the Terrorist Financing Convention, is a UN-sponsored multilateral treaty prohibiting the financing of acts of terrorism. It also seeks to foster between parties the prevention and investigation of such acts. See International Convention for the Suppression of the Financing of Terrorism (Adopted by the General Assembly of the United Nations in resolution 54/109 of December 9, 1999), available at https://www.un.org/law/cod/finterr.htm.
5 Public Statement - October 2019, the Financial Action Task Force (October 2019), available at https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/public-statement-october-2019.html.
7 Interpretive Note to FATF Recommendation 19, available at https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf.
February 19 2020
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