FATF Blacklists Iran: Bad Economic Situation Likely to Worsen

Fayaz Mahessar

The global anti-money laundering and terror financing watchdog the Financial Action Task Force (FATF) has blacklisted Iran for its failure to comply with the international anti-terrorism financing rules. The FATF blacklisting will worsen Tehran’s isolation from the international financial markets while it is already reeling from sanctions. The designation is also likely to cause further social unrest in the country already suffering from the US-Western trade and economic strangulation.

What Does it Mean to be on the FATF Blacklist?

The word blacklist is used by media agencies as an alternative for “High-Risk Jurisdictions”. The FATF defines these jurisdictions as countries with “significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation.”

The FATF advises all of its members to exercise enhanced due diligence to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation financing (ML/TF/PF) risks emanating from the high-risk countries.

Why Was Iran Blacklisted?

Iran has failed to follow through on the action plan proposed by the FATF. Iran officially committed to address its strategic deficiencies. Subsequently, it was asked to implement an action plan with a deadline in January, 2018. The watchdog has reported that Tehran has failed on multiple fronts including the need for increasing supervisory examination of the country’s financial institutions including its branches and subsidiaries.

The watchdog further said that Iran has also failed at introducing enhanced relevant reporting mechanisms or systematic reporting of financial transactions. But Iran’s failure to ensure checks on the financial system has become increasingly difficult amid the ongoing sanctions as it skirts away from traditional markets through illegal trade to sell crude in Afghanistan, Syria and Central Asian markets.

Iran also failed to increase external audit requirements for the financial groups operating within its territory especially with respect to their subsidiaries.

What does it mean for Iran’s economy?

Iran’s economy has already suffered heavily due to sanctions imposed by the international community over its nuclear program. The country’s growth rate fell to negative nine per cent in 2019.

During the brief period that followed the signing of Joint Comprehensive Plan of Action (JCPoA) between China, Europe, Russia and the United States and Iran helped push up oil production to two million barbells per day. But that fell to 300,000-500,000 barrels per day after US President Donald Trump pulled out of the plan re-imposing sanctions on country’s energy, shipping and financial sectors drying up foreign investment and hitting oil exports. The sanctions hit the Iranian economy hard, causing social unrest among some sectors.

With the absence of exports, Iran has powered domestic growth with local consumption. The manufacturing sector especially automobiles, metals and plastics sectors accounts for nearly one-fifth of the country’s total employment. Given its long experience with sanctions, Iran has found novel ways to skirt past international blockades.

But blacklisting will further increase pressures on the foreign banks and businesses dealing with Tehran resulting in tougher scrutiny of transactions. The blacklisting will translate in to higher costs of borrowing for Tehran and subsequently isolate the country from international financial system.

How has Iran Reacted?

Iran’s Central Bank Head Abdolnasser Hemmati said the blacklisting will have no impact on the country’s foreign trade. “The decision is politically motivated and not a technical decision … I can assure our nation that it will have no impact on Iran’s foreign trade and the stability of our exchange rate,” he said.

But the country’s residents are protesting regularly over the rising inflation, high unemployment and declining economic output. Iran has responded to sanctions by discontinuing subsidies on energy prices.The result was a series of country-wide uprising against government policies seeking to overthrow the government. The social unrest has become a regular feature in the country as similar wave of protests were seen during the 2018-19.

If another episode similar to the ones in the past follows after this FATF blacklisting, it could spell trouble for the winners of Friday’s Iranian parliamentary elections.