Iran and the International Financial System: 'One Step Forward, Two Steps Back'

Reactions from political and economic circles of the Islamic Republic to the news of sanctions against the Khatam al-Anbia headquarters by Bank Mellat and Bank Sepah continue. This event indicates that the struggle among rival factions of the Islamic Republic over the 'normalization' of Iran's position in the international economic and financial network has reached a very sensitive stage. This struggle, beyond its economic dimensions, stems from key issues in the relations among various power centers in the Islamic Republic, as well as from disagreements among them over fundamental choices in various domestic and foreign policy arenas, and resolving it is not easily achievable. Since the early months of the establishment of the Islamic Republic, Iran's 'normal' relations with the international economic community have been disrupted, especially under the influence of rising tensions in relations between Tehran and Washington and the stringent laws imposed by the United States in the fields of trade, investment, and finance against the Islamic Republic. For a relatively long period, Iran was able to exploit existing gaps within the 'global arrogance' front, allowing it a somewhat suitable maneuvering space in the international arena, and to counter the constraints resulting from U.S. policy, it relied on both open and covert cooperation with Europe and Japan. The crisis stemming from Iran's nuclear file eliminated the Islamic Republic's maneuvering space, and a united front formed around comprehensive sanctions against the country inflicted devastating blows on its economy, paving the way for a significant shift in Tehran's foreign policy that led to the signing of the 'Joint Comprehensive Plan of Action' (JCPOA) in July 2014. Contrary to what its opponents shout, the JCPOA pulled Iran's economy back from the brink and prevented it from becoming 'Venezuelanized.' The most significant achievement of this agreement is seen in the field of oil production and exports, which has more or less returned to pre-sanction levels. In contrast, in some other areas, the capacities of the JCPOA have remained untapped, simply because they face obstacles outside the legal framework of this agreement. It should be noted that the JCPOA ends the sanctions related to Iran's nuclear file, but it cannot affect other sanctions unilaterally imposed by major economic powers (mainly the U.S.) concerning other issues (including terrorism, money laundering, and human rights). Furthermore, the lack of alignment of the Islamic Republic's banking and financial system with the latest international developments prevents Iran from becoming a normal member of the international economic community, despite having signed the JCPOA and its achievements in ending sanctions related to the nuclear file. The Iranian banking system suffers the most from the continued isolation on the global stage, and Iranian traders, industrialists, and citizens clearly see that more than two years have passed since the signing of the JCPOA, yet they are still deprived of many ordinary banking and financial services at the international level. The important point is that for about seven months now, the renewed connection between Iranian banks and the international SWIFT network (the global interbank financial telecommunications association) has officially been established, which, technically, is a fundamental step towards rebuilding the bridges of communication between Iran's banking system and the global banking network. However, this action alone could not resolve the problems, especially those arising from Iran's separation from international financial and banking relations imposed during recent sanctions. In fact, in recent years, strict regulations have been established internationally concerning tax evasion, money laundering, and the financing of terrorism, which have been accepted by various countries. Due to its separation from the international arena, Iran has been unable to align its financial and banking system with recent developments. This lack of alignment has created a significant barrier to Iran's exit from isolation through the expansion of trade and attracting foreign investments. If Iran's financial and banking system cannot provide the necessary services to domestic and foreign economic actors or utilize the existing opportunities at bilateral and multilateral international levels, the efforts of the Islamic Republic's government to rebuild bridges with the international economic community in various fields will remain unsuccessful. In this context, decision-making centers in the Islamic Republic face a very sensitive choice between two options: either to rebuild Iran's financial and banking system in line with international laws to facilitate the 'normalization' of the country's position in the world, or to maintain the status quo and accept the barriers in Iran's international economic relations to remain loyal to what is referred to as 'values' and 'principles' of the revolution in the Islamic Republic. This choice is the source of the conflict we are witnessing these days in the Islamic Republic. It is clear that President Hassan Rouhani's government, by opting for the first choice, aims to alleviate some of the existing difficulties in implementing the JCPOA, while the factions known as principlists (or at least a significant part of them) fiercely support the second choice to preserve their economic positions and political orientations. To better understand the recent conflicts between supporters of these two choices, recalling a few events will not be unnecessary: 1) In June, the Financial Action Task Force (FATF) changed its tone regarding Iran and suspended its previous recommendation for 'countermeasures' against the country. This powerful international body was established at the 1989 summit of the G7 countries to combat money laundering (the conversion of proceeds from illegal and criminal operations into seemingly ordinary and legitimate assets) and later added combating the financing of terrorism to its duties. The FATF, which has 37 members, classifies countries that are considered high-risk and non-cooperative regarding money laundering and the financing of terrorism. Iran, along with North Korea, has been classified as the most dangerous country in this regard, and in February of this year, the FATF asked its members and all 'cooperating countries' (the vast majority of the international community) to take 'countermeasures' (especially non-cooperation) against Tehran and Pyongyang. However, in June, as mentioned, the FATF adopted a more flexible policy towards the Islamic Republic, creating hope that Iran could be removed from the blacklist of the most dangerous countries in the field of money laundering and the financing of terrorism. 2) Legally, Iran has laws in both money laundering and the financing of terrorism. The Anti-Money Laundering Law was approved in February 2007, and the Anti-Terrorism Financing Law was passed in February 2016 by the Islamic Consultative Assembly. However, there is a significant gap between the legal text and what happens in practice, and Iran is under heavy accusations in both areas. Nevertheless, in the post-JCPOA atmosphere, the approval of the Anti-Terrorism Financing Law by the Islamic Republic was one of the most important factors leading to flexibility in the FATF's policy towards Iran. Of course, this flexibility is conditional. Iran's name has not been removed from the blacklist, but the call for 'countermeasures' against this country has been suspended for twelve months so that if the Islamic Republic takes steps to address the shortcomings during this period, the FATF will also accept more flexibility regarding Iran. 3) Immediately after the announcement of the FATF's new positions, the principlist factions of the Islamic Republic attributed this flexibility to hidden negotiations between the FATF and Hassan Rouhani's government, accusing the president and his colleagues of committing to make changes in the domestic banking system in line with the demands of the 'global arrogance' to ultimately remove Iran's name from the blacklist, and even to reconsider its relations with the Islamic Republic's allied groups in the Middle East. Ahmad Tavakoli, a former member of parliament, warned that based on the agreements reached between the government and the FATF, this body 'controls all our accounts and does not allow our money to move.' Furthermore, Hassan Shariatmadari, the managing director of the 'Kayhan' newspaper, warned that given the agreements reached between the FATF and Hassan Rouhani's government, there is a risk that 'ISIS will enter Iran.' To explain the complex relationship between these two events, Mr. Shariatmadari explains that by accepting international laws related to the financing of terrorism, Iran will be forced to question 'support for Hezbollah, resistance forces, and the Quds Force,' and since these forces are fighting ISIS in Syria, weakening support for them could 'open the door for ISIS into Iran.' 4) Following these accusations, Valiollah Seif announced in mid-July that 'the Central Bank will not provide customer and bank account information to the FATF. Our negotiations with this body are about combating money laundering and the financing of terrorism, and Iran will determine the definitions of terrorism itself.' 5) Despite these 'reassuring' statements, the concerns of the principlist factions continued, and scattered reports over the past few days about the banking sanctions against the Khatam al-Anbia headquarters by Bank Mellat and Bank Sepah naturally fueled these concerns, especially since this initiative was seen as the first step towards the 'normalization' of Iran's banking system and provoked loud reactions among critics and opponents of Hassan Rouhani in the Islamic Republic. In this context, Ali Akbar Velayati, head of the Strategic Research Center of the Expediency Discernment Council and a very close figure to the Supreme Leader of the Islamic Republic, warned that 'officials should not follow the plans of the enemies.' 6) In response to this pressure, the Central Bank of the Islamic Republic prohibited the sanctioning of 'domestic companies' (referring to the Khatam al-Anbia headquarters) by banks. In a letter to the CEOs of banks and credit institutions published on Monday, September 6, Valiollah Seif wrote: 'Any action to limit or cut services to Iranian individuals and entities based on the sanctions of the United States, the European Union, or other countries and international bodies has no basis in the JCPOA and other international commitments of the Islamic Republic of Iran, and banks can only provide banking services to all customers based on the current laws of the country according to their banking and commercial regulations.' As always, the situation remains unclear. The economic policy of Rouhani's government, especially its economic diplomacy, particularly in such a sensitive area as international financial and banking relations, is, as in the past few decades, contingent upon factional warfare. Economic reforms in Iran continue to revolve around the policy of 'one step forward, two steps back,' and with this trend, achieving the 'normalization' of Iran's position in the international economic system requires the patience of Job.