ALACO DISPATCHES: Europe’s bid to salvage Iran nuclear deal under threat

ALACO DISPATCHES: Europe’s bid to salvage Iran nuclear deal under threat
A parade of Hezbollah fighters. Iranian hardliners see the FATF standards as a Western attempt to restrain their financial support for Hezbollah and other Middle East allies designated terrorist organisations by the US. / khamenei.ir
By Yigal Chazan of Alaco Dispatches March 8, 2019

Europe’s attempts to enable European companies to continue trading with Iran following the reimposition of US sanctions are being jeopardised by Iranian hardliners’ opposition to the implementation of global financial transparency standards.

Iran has so far approved two out of four bills incorporating the standards, set by the Paris-based watchdog the Financial Action Task Force (FATF) and aimed at curbing money laundering and the financing of terrorism. Countries that fail to comply with the FATF’s requirements face so-called countermeasures–effectively sanctions–that can restrict, and even sever, their ties with international banks. 

Europe’s new Instex (Instrument in Support of Trading Exchanges) trading channel with Iran–a joint British, French and German attempt to salvage the multilateral nuclear agreement, the JCPOA (Joint Comprehensive Plan of Action, or “nuclear deal”), from which the US unilaterally withdrew in May last year–could be undermined, or possibly rendered unworkable, by an Iranian failure to cooperate with the FATF as European banks insist on compliance with its provisions.

Bitter war of words
A bitter war of words is being waged in Tehran over the adoption of the FATF standards. Iranian hardliners dismiss them as Western meddling in the country’s affairs and an attempt to restrain their financial support for allies around the Middle East, such as Hamas and Hezbollah, designated terrorist organisations by the US. Moderates advocate adherence to the measures which they see as critical to Iran’s efforts to conduct international trade and attract investment already hamstrung by the reintroduction of American sanctions.  

Of the four bills Iran’s parliament has passed to align the country with FATF regulations on combatting money laundering and terrorism finance, two have been rejected by the conservative Guardian Council, which determines whether new legislation accords with the constitution and Sharia law before it can come into force. The outstanding bills are now sitting with the equally conservative Expediency Council, an arbitration body, which mediates between parliament and the Guardian Council when they cannot agree. The FATF has set a deadline of June 2019 for the adoption of its regulations.   

Moderates supporting compliance with FATF standards have been locked in a fiery debate with rejectionist hardliners. Tensions escalated late last year when Foreign Minister Mohammad Javad Zarif, an important ally of reformist President Hassan Rouhani, insisted that money laundering was a reality in Iran and that groups benefiting from it were behind efforts to frustrate the passage of the FATF bills.

Claim clearly aimed at hardliners
The claim was clearly aimed at hardliners, who vainly tried to impeach him. But last week their attempts to undermine him appeared to have taken their toll when he resigned. However, Rouhani rejected his resignation and many Zarif supporters, including those in parliament, rallied behind him, prompting speculation that the move was a ruse to reassert himself at a critical time for the country.  

Following the reimposition of US sanctions, the full force of the measures has yet to be felt because of temporary trade exemptions granted to a number of Iran’s biggest oil customers as they seek to secure alternative suppliers. But some of those waivers may end this summer at which point Iran will be hoping that Instex will be up and running. It will initially provide a channel for humanitarian aid, in time enabling European companies to continue trading with Iranian counterparts, although those with exposure in America may be reluctant to use it.

The Trump administration says it wants to impose “maximum pressure” on Iran as a means of persuading her to renegotiate the international nuclear deal, from which the US withdrew over Iran’s continued ballistic missile testing and “malign” influence in the Middle East. Washington sees Instex as an attempt to circumvent Iranian sanctions and in so doing undermine its leverage over Tehran. The US Vice-President Mike Pence recently criticised France, Germany and the UK for setting up the mechanism, saying it was an “ill-advised step that will only strengthen Iran”.  

Closely monitoring debates on compliance
Washington and Brussels will be closely monitoring Iranian debates over FATF compliance as the June deadline approaches.  If the watchdog’s standards are still only partially adopted, it is hard to see how Instex could function.  For although its backers do not explicitly say that full FATF adherence is required for the mechanism to work, its effectiveness seemingly depends on it, as European banks may not facilitate transactions otherwise. The German ambassador to Tehran, Michael Klor-Berchtold, interviewed recently by Iran’s Tasnim news agency, said: “The fact of the matter is that contractual partner banks of the European companies Iran intends to cooperate with are committed to FATF recommendations in the fight against money laundering and the financing of terrorism.”

The FATF’s June deadline was set after a February one passed without the required level of compliance.  If Iranian hardliners continue to drag their heels, the watchdog says it will call on its member countries to put Iranian banks under greater scrutiny. Marshall Billingslea, the US Assistant Treasury Secretary for terrorist financing, who chaired the latest FATF meeting at which the new deadline was decided, said the watchdog’s explicit warning was a “significant indication…that time has expired”.  The countermeasures would not only call into question the viability of Instex, but could make it harder for Iran to conduct international financial transactions in general.

Rouhani’s frustration with hardline opposition to the FATF bills was evident when he spelt out the consequences of non-compliance, saying: “How can we sell oil without being financially in contact with the world. If our connection with the FATF is stopped, our banking transactions with the world would be ceased.”

The disabling or collapse of the European trade channel would strengthen the hands of the hardliners. They either underestimate the harm FATF financial restrictions could have or would rather endure them than make concessions to the West, preferring what they describe as a “resistance economy”, essentially economic self-reliance in the face of international pressure. Were they to pursue this course, European concerns over Iran withdrawing from the JCPOA would begin to mount.

Yigal Chazan is head of content at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region. 

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