A Stalled War On Terror Finance

FATF's principal contribution has been its often-updated "International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation," also known as the "40 Recommendations." Typically called "the international standard" for AML/CFT efforts, these recommendations were issued to serve as a comprehensive framework for preventing the movement of illicit money. The standard rests on three principles. First, countries must improve their national infrastructure to combat money laundering and terrorism financing. Next, each country's banking and other institutions must set up procedures to identify clients, detect suspicious transactions and develop secure and modern transaction protocols. Finally, countries must strive to improve international cooperation by collecting, analyzing and sharing AML/CFT information at the administrative and judicial levels. This includes sharing information on international currency flows and developing mutual judicial-assistance programs in order to investigate, freeze and confiscate illicit funds.

FATF's official policy is to blacklist countries that fail to comply with the international standard or refuse to have their financial system evaluated. This blacklist is published on the organization's website, and FATF urges member states to send the list to their financial institutions and law enforcement agencies so they can take appropriate action. Although there is no enforcement mechanism for the blacklist, it has been remarkably effective in changing the behavior of designated countries. For example, many financial institutions and other good corporate citizens are reluctant to do business with or in countries that are shunned by FATF. Moreover, blacklisted countries that refuse to take remedial action have at times lost significant international investment as a result. In fact, the International Monetary Fund and World Bank have sometimes chosen to downgrade a blacklisted country's credit rating—a significant punishment in today's interconnected financial world.

For its part, the United States has done a relatively good job on the AML/CFT front—but not perfect by any means. The U.S. was one of the first countries to criminalize money laundering and terrorism financing, and it has lodged a high number of prosecutions and successful convictions. In addition, it has taken steps to inform the private sector about designated terrorist organizations and rogue regimes. Persons found to be doing business with such entities face heavy fines and jail time.

The United States does lead the pack when it comes to its sanctions regime. It has the most robust targeted economic sanctions programs in the world. Since shortly after the September 11 attacks, the Treasury Department has maintained a blacklist of suspected terrorism financiers. As of January 2009, the U.S. government had used Executive Order 13224 to designate 518 individuals and entities for activities related to terrorism and terror financing. The designees include members of al-Qaeda, the Taliban, Hezbollah, and other terrorist organizations.

Still, inaction by some on remedial steps—from criminalizing money laundering to instituting controls in their formal and informal financial sectors—continues to threaten the security of all nations. Perhaps even more pernicious, however, is the fact that, all too often, politics has the effect of driving policy. The war on terror finance is no exception, and over time political priorities have diluted the effectiveness of America's effort to drain the financial "swamp" in which terrorists operated. Here, changing Western policy toward Iran is perhaps the clearest case in point.

Ceding the advantage with Iran

Iran has consistently failed to declare sensitive uranium enrichment and reprocessing activities to the International Atomic Energy Agency (IAEA). Until Iran and the United States began direct diplomatic negotiations in November 2013, policymakers on both sides of the Atlantic viewed sanctions as the last peaceful means by which to bring the Iranian government's nuclear effort into conformance with international demands.

According to the White House briefing on the agreement reached that month, Iran will be offered about $7 billion in sanctions relief, including access to $4.2 billion in frozen oil revenue.[5] But while most policymakers have focused on the relatively small amount of money this supposedly represents, it is actually the renewed banking and business infrastructure that requires attention. It took years to implement an effective sanctions regime against the Islamic Republic—and that effort is now eroding quickly, despite U.S. claims to the contrary.[6] Should Iran decide to drag out the negotiations or leave them altogether, reinstituting sanctions would be extremely challenging.

That Iran came to the nuclear negotiating table at all is a testament to the success of multilateral sanctions. Over the course of the last decade, an increasingly robust international sanctions regime has targeted the Islamic Republic's oil exports and banking operations. All told, over 80 financial institutions around the world, including major international banks, cut off ties or significantly reduced their relationship with it, which greatly curtailed Iran's ability to transact global business. This ultimately led to a devalued rial, major disruptions in foreign trade and deepening inflation within the Islamic Republic. Just as significantly, sanctions applied by the U.S. and its allies forced Iran into deepening international isolation, both economically and diplomatically. Many attribute the ascendency of current Iranian President Hassan Rouhani, who campaigned on a platform that promised improved economic conditions, to these efforts.

This effectiveness was the result, in large measure, of extensive targeting of Iran's banking system by Western nations—chief among them the United States. On September 8, 2006, the U.S. Department of the Treasury designated Bank Saderat, one of the largest Iranian-owned banks, for "facilitating Iran's transfer of hundreds of millions of dollars to Hizballah and other terrorist organizations each year."[7] The Treasury alleged that from 2001 to 2006, Saderat transferred $50 million to Hezbollah alone, which was then funneled to other terrorist organizations throughout the region.[8]

Beginning on December 23, 2006, with the adoption of United Nations Security Council Resolution 1737, which imposed sanctions on Iran, the UN ordered member states to cease all business dealings with a major state-owned Iranian institution, Bank Sepah, and its affiliates. It also urged governments to "exercise vigilance" in relation to two other Iranian financial institutions, Bank Melli and Bank Saderat. All three financial institutions have now been formally designated by the U.S. government, which prohibits U.S. banks from doing business with them.

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