Iran’s First Anti-Money Laundering Law:  Will it be Effective at Opening Doors to the West?

By Ed Magarian and Jonathan Wilson, Dorsey & Whitney, LLP

Does the new law show progress in the war on terror, or is it mere window dressing?  On January 22, 2008, amidst mounting pressure from the United States and other countries belonging to the Financial Action Task Force (FATF), the Iranian Parliament passed the country’s first anti-money laundering (AML) law.  Speculation has arisen regarding the potential implications of Iran’s new law.  Specifically, will the United States now alter its position with regard to Iran’s financial institutions and will Iran’s AML measures reduce terrorist financing in the Middle East?  The short answer to both questions is no.  As examined below, whether or not Iran’s AML proves effective in suppressing the practice of money laundering throughout the country’s financial institutions, the reality is that it is unlikely to have any impact on the United States’ policy, or terrorist financing in the Middle East. 

U.S. and International Pressure on Iran
Prior to the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, the United States did not devote significant resources to stopping the trail of money to terrorist organizations.  In fact, not a single FBI unit focused on the financing of terrorist organizations.  Indeed, the United States Department of Justice lacked an identifiable national terrorist financing investigation program.  The prevailing opinion prior to September 11, 2001 was that terrorism did not require much money.  As a result, it was believed that counter terrorist resources should be more appropriately focused on non-financial areas. 

The attacks on September 11 led to the passage of the Patriot Act of 2001, Executive Orders 13382 and 13224, and various other governmental measures designed to identify specific terrorist financing concerns.   Collectively, the new measures sought to insulate the United States’ financial system from abuse and corruption by targeting specific individuals and entities involved with financing terrorism.  Under the new regulations, all United States financial institutions were forced to terminate correspondent relationships with any entity designated as having a potential link to terrorist financing. 
In implementing the new measures, attention quickly focused on Iran.  The United States viewed Iran as posing a significant threat because of (i) its continued pursuit of nuclear capabilities, and (ii) its willingness to provide financial and material support to terrorist groups such as the Taliban, Qods Force, Hamas and Hezbollah, as well as Shia militant groups in Iraq.  In advancing these ends, Iran utilized an array of deceptive financial conduct specifically designed to avoid suspicion and evade detection by regulators and law-abiding financial institutions.  Iran’s conduct, which included the use of front companies, involvement of state-owned banks in Iran’s nuclear program and terrorist financing operations, and frequent requests by these same banks to remove their names from financial transactions, was particularly troubling to the United States given Iran’s ties to the international financial system.   

Accordingly, the United States blacklisted more than 15 Iranian entities, including four of Iran’s largest banks: Bank Saderat, Bank Sepah, Bank Melli and Bank Mellat.  The United Nations Security Council, through Resolution 1747, followed suit by designating Bank Sepah as a financial institution with potential ties to proliferation sensitive activities and the development of nuclear weapon technology.  Finally, the FATF issued a statement on October 11, 2007, recognizing Iran as a significant vulnerability to the integrity of the entire international financial system because of its lack of a comprehensive anti-money laundering or counter-terrorist financing regime. 

Pressure Results in Passage of Iran’s AML Law
Iran’s new AML law purports to be a concerted effort to stop money laundering, and therefore terrorist financing.  Iran’s AML law defines money laundering as obtaining, possessing, keeping and using the benefits resulting from illegal activities with knowledge that the funds came, directly or indirectly, from the commission of money laundering. 

Iran’s AML law created the “High Council for Combating Money Laundering,” composed of Iran’s economic minister, the head of Iran’s central bank, and various ministers of commerce, intelligence and interior and granted it the authority to approve and enforce necessary money laundering regulations.  The law requires all legal entities (including Iran’s central bank, commercial banks, credit and financial institutions, insurance companies, foundations, charities and municipalities) to adhere to higher standards of record keeping, client identification and reporting of  suspicious transactions.  The AML law was favored by Ali Kaveh-Firouz, a judiciary official at Bank Markazi (the Iranian central bank), who had previously opined that money laundering was a significant problem with “numerous negative consequences” for Iran’s economy.

AML Law Will Not, Standing Alone, Warm Relations with the West
As much as the law, at face value, appears designed to preclude money laundering within Iran’s financial system, the prevailing view is that the new law was instead largely designed to appease the United States, the United Nations and the FATF and thereby insulate Iranian banks from additional international scrutiny.  While it is still too early to determine whether the law will be effective in eliminating money laundering within Iran’s financial system, it is clear that the law has not had the international impact for which Iran had hoped. 

First, the FATF has not changed its position regarding Iran.  On February 28, 2008, the FATF’s executive secretary, Rick McDonnell, was quoted as saying “Iran has, to our knowledge, no law in place at the moment dealing with terrorist financing.  It has one in relation to money laundering, very recently, but that’s deficient.”  On that same day, the FATF issued a second formal statement, welcoming Iran’s pledge to boost safeguards, but urging the FATF’s 34 members to warn the financial institutions within their borders of the risks associated with Iran and its financial entities.  This statement was highly significant because it technically compelled both the Chinese and Russians—two powers that were, historically, the most ambivalent about Iran’s enrichment of uranium for nuclear fuel—to warn their banks of the risks associated with doing business with Iranian financial institutions. 

Second, like the FATF, the United Nations has refused to soften its stance on Iran.  On March 3, 2008, the United Nations Security Council adopted Resolution 1803, which specifically identified Bank Melli and Bank Saderat, as high-risk financial institutions due to their connections with sensitive activities and the development of nuclear weapon delivery systems.  Despite Iran’s passage of its first AML law, UN Resolution 1803 implored UN states to scrutinize the activities of financial institutions within their territories with all banks domiciled in Iran, as well as their branches and subsidiaries abroad. 

Finally, the United States has remained steadfast in its campaign against Iran’s financial institutions.  On March 20, 2008, in response to UN Resolution 1803, the Bush administration issued a new warning to U.S. banks about the risks of conducting business with Iran and its financial institutions.  The Bush administration noted that Iran’s AML law had several weaknesses that were exacerbated by Tehran’s continuing attempts to conduct prohibited weapons proliferation activity and terrorist financing.  Shortly thereafter, U.S. Deputy Treasury Secretary Robert Kimmitt stated that the new AML law appeared to have little impact on the illegal efforts of Iranian banks, including Bank Markazi (Iran’s central bank), to conduct international transactions anonymously.  Consequently, on April 1, 2008, Stuart Levy, the Under Secretary for Terrorism and Financial Intelligence, informed a U.S. Senate Committee on Finance that the United States was “not yet where [it] need[ed] to be with respect to State Sponsors of Terrorism, particularly Iran.”  This sentiment is reflected in Levey’s recent efforts to recruit additional institutions in the United Arab Emirates and Bahrain to raise international pressure on Iran and combat terrorist financing.

It is not difficult to understand why Iran’s passage of the AML law did not improve its relationship with the United States, the United Nations or the FATF.  Indeed, even if the new law effectively eliminates all money laundering within Iran, it has absolutely no impact on what the United States views as the real problems: the Iranian government’s pursuit of nuclear activities and its open financial support of terrorist organizations. 

Legislation Restricting Money Laundering does not Necessarily Curtail Terrorist Financing
Prevention, or even elimination, of money laundering simply will not stop terrorist financing out of the Middle East because money laundering and terrorist financing are not the same.  There are similarities: both make use of similar methods to hide and move money, they depend on a lack of transparency and monitoring, and they make use of the same financial systems—such as wire transfers, alternative remittance systems, bulk currency shipments, money transmitters, money changers and commodity-based trade.  But there are far more differences than there are similarities.  For example, the methodologies involved differ.  Money laundering takes dirty money and tries to make it clean, whereas terrorist finance uses clean money for illicit purposes. 

The volume of money involved in each type of activity also differs.  It is estimated that more than U.S.$600 billion is laundered globally each year.  By contrast, although the amount of money flowing to terrorists annually is unknown, studies on the IRA and other organizations reveal that the amounts involved in terrorism financing are far smaller than those involved in money laundering activities.  This reflects yet another underlying difference: money launderers are primarily motivated by profit, whereas terrorist organizations are more interested in non-financial goals. 

Differences between the activities abound, and Iran’s implementation of a law specifically designed to curb money laundering will do nothing to stifle the independent problem of terrorist financing. 
Even if Iran’s new law were designed to identify and eliminate terrorist financing, it is doubtful that it would be effective.  Implementation of a comprehensive scheme involves participation from outside nations and proactive support from the private sector.  Neither of these are bound to occur.  Iran is not likely to allow other countries to participate in policy making, and it is highly improbable that corrupt Iranian banks will institute effective independent testing programs to assess the quality of the country’s AML law (after all, these banks are on the United States’ blacklist because they have exhibited a willingness to provide financial support to terrorist organizations and Iran’s nuclear program). 

For Iran’s AML law to prove effective, the country’s leadership must institute perpetual audit programs to ensure that the law is valid, robust and fully aligned with its underlying objectives.  Individuals engaging in terrorist financing are creative.  They receive financing through private donors, criminal proceeds and state sponsorship and they adapt to increased financial restrictions by moving funds through cash couriers, wire transfers, charities, trade systems or alternative remittance systems such as Hawala.  Authorities must, therefore, be willing to develop new and creative countermeasures.  Iran’s ability to do this is questionable given the fact that its Minister of Economic Affairs and Finance, Davoud Danesh-Jafari, recently stated that the country would not implement additional regulations or bylaws in connection with the enforcement of the AML law.  It is this sort of static philosophy that will prevent Iranian officials from proactively managing deficiencies in the system.  The ultimate result will be an ineffective AML law that will do nothing to deter terrorist financing in the Middle East and will result in the further isolation of Iran. 

Any doubt was laid to rest on April 17, 2008, at a meeting between President George Bush and British Prime Minister Gordon Brown in Washington, D.C..  The Prime Minister held out the prospect of extended European sanctions to block outside investment in Tehran, voicing frustration over Iran’s nuclear ambitions.

Ed Magarian is Co-Chair of Dorsey & Whitney LLP's White Collar Crime and Civil Fraud practice group. His areas of practice include complex commercial litigation, white collar criminal defense, antitrust, assisting clients in government investigations, civil fraud, employment litigation, and general business litigation. Contact Details: Tel: + 1 (612) 340 7873 Email: magarian.edward@dorsey.com

Jonathan Wilson is an associate in Dorsey & Whitney LLP's litigation department. His areas of practice include white collar criminal defense, civil fraud, assisting clients with government investigations, complex commercial, business tort and construction litigation. Contact Details: Tel: + 1 (612) 492 6651 Email: wilson.jonathan@dorsey.com