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What about the integrity of Iran’s financial system?

At a press conference in Vienna this week, Yukiya Amano, director general of the International Atomic Energy Agency, delivered the agency’s final assessment on Iran’s nuclear program. The result of a 12-year investigation, the report concludes that Iran undertook a range of activities prior to the end of 2003 relevant to the development of nuclear weapons and some activities after 2003. The agency also concludes that there are no “credible indications of activities in Iran relevant to the development of a Nuclear explosive device after 2009.” This is hardly unexpected news, especially considering the U.S. intelligence community came to the same conclusion in its 2010 National Intelligence Estimate on Iran. Probably more important than the findings, however, is that the conclusion of the IAEA’s investigation is an important first step to Iran re-establishing financial relations with the rest of the world.

During tense negotiations this past year, Iran’s leadership emphasized that a deal to limit its nuclear program was only possible in exchange for sanctions relief. By next year, the United States, United Nations, and European Union will begin unwinding economic and financial sanctions, as Iran’s implements its commitments under the new agreement. But, does allowing Iran to re-join the international financial system without first addressing its own banking problems undermine American credibility in protecting the integrity of the global financial system? Does this send the wrong message at a time when vigilance over the financial sector is needed to monitor against proliferation-related transactions or to protect against terrorist financing?

{mosads}Washington’s success in bringing Tehran to the negotiating table was due, in part, to a strategy that isolated Iran’s banks from the global financial system. The strategy, which former Treasury official Juan Zarate dubbed “financial warfare,” relied heavily on forming an international consensus over the threat Iran posed to integrity of the global banking system. Financial warfare also relied on banks’ commercial interests to monitor and stop illicit transactions possibly related to Iran’s nuclear and ballistic missile activities. These efforts peaked in November 2011 when the U.S. Treasury, in concert with the State Department, designated Iran’s entire financial system as a jurisdiction of “primary money laundering concern,” specifically citing Iran’s lack of adequate laws to combat terrorist financing and money laundering. The United Kingdom and Canada fell in line with similar measures to limit Iran’s access to their financial sectors. The message to global banking was clear: financial transactions with Iran are risky and should be scrutinized for illicit activity.

In front of the Senate Committee on Foreign Relations in December 2011, former Treasury official David Cohen described U.S. efforts to exclude Iran from global banking as necessary to disrupt Iran’s illicit activity and “protect the international financial system from Iran’s abuse.” Then Treasury Under Secretary for Terrorism and Financial Intelligence, Stuart Levey described the efforts as, “…an innovative strategy to highlight the reckless and dangerous conduct of the Iranian regime, deter Tehran’s dangerous activities through the use of financial measures, and prevent the regime’s abuse and manipulation of the international financial system.” The expectation, then, was for global banks to close business ties with Iran. Before long, major financial hubs around the world considered Iran’s banks to be radioactive. The tactics worked, and Iran was the new international financial pariah.

Over the past four years, however, Iran has failed to make any meaningful progress towards updating its anti-money laundering and terrorist financing laws. The U.S., along with the Financial Action Task Force, which is an inter-governmental body responsible for setting international anti-money laundering and terrorist financing standards, still consider Iran’s to be a ‘high-risk’ jurisdiction for illicit financial activity. The U.S. will still bar American banks from conducting business with Iran, and it is doubtful that foreign banks will want to risk reputational damage. Alternatively, however, this may create enough domestic pressure for Iran’s political leaders to address its corrupt financial sector.

In the meantime, allowing Iran to re-join the international financial system creates a double standard. That is, America’s leadership in policing the financial system comes at the cost of geo-politics. This is not the first time the U.S. has found itself in this position. In 2007, banking officials criticized the Bush administration over a similar strategy involving a small Macau-based bank, known as Banco Delta Asia, which was facilitating North Korea’s illicit financial activity. At the time, Treasury’s ruling against Banco Delta Asia was hailed as significant step towards protecting the integrity of the global financial system. Treasury official Stuart Levey noted that “Banco Delta Asia’s grossly inadequate due diligence and systematic facilitation of deceptive financial practices have run too deep…” But, as Treasury lifted the sanctions and returned frozen assets to the North Korea in exchange for re-joining the six-party talks, many felt that the U.S. was using international banks as pawns to achieve political concessions under the auspices of protecting the integrity of the financial system.

Financial warfare is a powerful weapon and an attractive go-to option for policymakers. But, its politicization comes at a price. Banks are already contending with soaring costs of regulatory compliance, and in many cases opting to shut-down entire lines of business rather than expend time and energy on monitoring for illegal transactions. Using banks as pawns in geo-politics will undermine the trust that the U.S. needs to maintain its stature in the global financial system, jeopardize its ability to impose financial-based sanctions in the future, and decrease overall transparency. The solution? Leadership in policing the financial system cannot come at the cost of politics, and must have a clear end-game in mind. Financial exclusion, then, must come with a broad consensus of agreed upon protocols to re-join the global financial community, rather than loosely articulated political concessions.

Arnold is an assistant professor at Curry College, and an associate with the Project on Managing the Atom at Harvard’s Kennedy School of Government.


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