5th World Congress & Expo on Oil, Gas & Petroleum Engineering
Milan, March 28-29, 2019
In a country presentation held at “Fiera di Roma” two years ago, Iran was described by Massoud Soltanifar, Vice-President of the Islamic Republic, as “the land of a thousand opportunities”, and I quote: “Iran is known as the ‘four season country”, its millenary history and culture ever so fascinating and genuine.”
The rich and ancient testimonies of Iran’s culture and civilization, a variety of landscapes and climates, the numerous historic-archaeological sites, the diverse ethnic groups living together in this land for centuries, a territory rich in history and culture and not only for the beauty of Pasargade, Persepolis, Chogha Zanbil, of the Naqsh-e Jahan square, for the ancient remains of Yazd and Shiraz; or of those preserved in Khuzenstan and in the art city of Isfahan, recognized as UNESCO Human Heritage site.
This beautiful pictures appears extremely appealing from a human, cultural and intellectual perspective, which has undisputable economic value. But I believe that a general assessment about the economic and political direction the country has taken since the beginning of the Islamic revolution in 1979 and especially in the last few years, requires a proper analysis about political, security and economic risk.
• ECONOMIC OVERLOOK
From the economic point of view GDP rates confirm the regional and global relevance of the country. Iran had an estimated Gross Domestic Product (GDP) in 2017 of US$447.7 billion. The economy is characterized by the hydrocarbon sector, agriculture and services, and a noticeable state presence in manufacturing and financial services.
Iran ranks second in the world’s natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still depend to a large extent on oil revenues and therefore remain volatile. Iran’s economy is marked by statist policies, inefficiencies, and reliance mainly on oil and gas exports, with also some strength on service sectors.
The Iranian government directly owns and operates hundreds of state-owned enterprises and indirectly controls many companies affiliated with the country’s security forces (namely the Islamic Revolutionary Guard Corps – IRGC). Distortions – including corruption, price controls, subsidies, and a banking system holding billions of dollars of non-performing loans – weigh down the economy, undermining the potential for private-sector-led growth. Corruption is widespread.
Iranian authorities have adopted a comprehensive strategy of market-based reforms with a 20-year vision document and the five-year development plan. All that has largely remarked in the books, due to international and domestic developments that I will mention.
In 2017/18 the Iran’s GDP dropped because the surge in oil revenues of the previous year dissipated. The growth came instead from the non-oil sectors, more than services.
Over the past two years, there has not been a strong bounce in other key sectors such as construction and trade as it was expected. Oil and gas industries have been sliding back over the last 12-18 months.
To summarize the greatest assets of the Iran’s economy are its Oil and Gas resources:
• Crude oil – potential production 4.469 million bbl/day (2017 est.)
• Crude oil – proved reserves 157.2 billion bbl (1 January 2018 est.)
• Natural gas – production 214.5 billion cu m (2017 est.)
• Natural gas – proved reserves 33.72 trillion cu m (1 January 2018 est.)
On the wider economic picture, the unemployment rate remains high, at 12.1 percent as of Apr-Jun 2018, is based on official figures. Youth unemployment is about 30% and remains quite more than regional average.
The lifting of most nuclear-related sanctions under the Joint Comprehensive Plan of Action (JCPOA) in January 2016 sparked a temporary restoration of Iran’s oil production and revenue that drove GDP growth, but that declined again in 2017 and 2018 as oil production plateaued. The economy continues to suffer from low levels of investment and productivity since before the JCPOA, and from high levels of unemployment, especially among women and college-educated Iranian youth.
In May 2017, the re-election of President Hassan Rouhani generated expectations that the economic benefits of the JCPOA would expand and reach all levels of society. But Rouhani did need to implement structural reforms to strengthen the banking sector, improve Iran’s business climate, attract foreign investment, encourage the growth of the private sector. Those reforms remain unaccomplished.
Sanctions against Iran have succeeded in bringing its leaders to the negotiating table for a nuclear deal. For example, U.S. Treasury Secretary Lew credited, in 2014, “the most sweeping, most powerful, most innovative, and most comprehensive sanctions regime in history…” for bringing Iran to the negotiating table. Moreover, former U.S. Secretary of State John Kerry stated that “outreach alone is not a strategy. If diplomacy is to work, it must be backed by the prospect of tough, escalating multilateral sanctions strong enough to actually change behavior.” Rouhani himself said that in service of Iran’s economy, quick negotiations were needed regarding its nuclear program.
Unfortunately, sanctions relief has provided ample space to the regime and enabled Rouhani time to backtrack on his international and domestic commitments to reach such a deal.
According to Saeed Laylaz, an economist and informal advisor to President Rouhani, “less than 10 per cent of our economic difficulties are due to sanctions” as “the first signs of economic crisis appeared in 2007, five years before the sanctions.” Iran’s recession “started in the summer of 2011, exactly one year before the sanctions hit.”
After the JCPOA, Iranian authorities have utilized the proceeds of sanctions relief for the benefit of Ayatollah Khamenei’s massive business empire, rather than the Iranian people.
What’s Wrong with the Iran Nuclear Deal? Among the key failings, the deal has emboldened and enriched the Iran’s expansionist and destabilizing activities towards the whole region:
• The windfall of sanctions relief has freed up tens of billions of dollars to finance Tehran’s destabilizing regional and global activities. Iran increased its military budget by 145%.
• It continues to be the world’s leading state sponsor of terrorism, backing terrorist organizations Hezbollah and Hamas, both of which have been responsible for the deaths of American and European citizens.
• It has escalated its support to Syria’s Assad dictatorship, which has killed hundreds of thousands. The head of Iran’s Islamic Revolutionary Guards Corps said that the organization tasked with protecting the regime at all costs, had “organized around 100,000 popular forces” in Syria and Iraq, adding that this and Hezbollah’s “missile capabilities” were just some of the “unrivalled success of the Islamic Revolution”.
• It sponsors the violent extremist groups destabilizing Iraq, Lebanon, Yemen, and Bahrain.
• It continues to take Americans and other Westerners hostage, detaining at least five Americans and six other Westerners since the nuclear deal was reached.
• The Iranian regime brutally represses its own people and violates the human rights of ethnic, national, and religious minorities with impunity.
• US WITHDRAWAL FROM THE JCPOA and Oil&Gas implications
The U.S. withdrawal from the JCPOA on November 5, 2018 and the re-imposition of sweeping sanctions on virtually every sector of the Iranian economy, it should be the reasons for reconsidering economic and trade relations with Iran. There is a plethora of commercial, financial, legal, and reputational risk associated with doing business there. The persistent plotting aptitude is part of the real nature of the Islamic Republic throughout its history, especially with the aim to silence the critical voices against the regime, even far from Iran.
Iranian agencies have carried on recently terrorist and assassination attempts, even on European soil. Iran’s sanction-designated Ministry of Intelligence and Security (“MOIS”) is responsible for orchestrating the killings of two Iranian-origin Dutch nationals in 2015 and 2017, in the Netherlands. In a letter published by the government of the Netherlands, “hostile acts of this kind flagrantly violate the sovereignty of the Netherlands and are unacceptable.” In June 2018, Iran also attempted to bomb a rally in Paris held by the Mujahideen e-Khalq (“M.E.K.”).
The mass-slaughter would have involved hundreds of politicians, local administrators and members of civil societies – from dozens of countries – participating at the event. In November 2018, Denmark thwarted yet another Iranian assassination attempt against the head of the Arab Struggle Movement inside Denmark. An Iranian-origin Norwegian national was arrested. As a result, on January 8, 2019, the European Union imposed new sanctions against the MOIS.
During his recent visit in Israel, Secretary of State Mike Pompeo said that the United States would step up financial and political pressure on Iran’s theocratic regime as it seeks to “extend its reach” across the Middle East. I quote “You’ve seen us now designate [Iran-backed] militias inside of Iraq [as terror groups],” Pompeo told “Fox News”. “You’ve seen us designate senior leaders inside the [Islamic Revolutionary Guard Corps]. You’ve seen us designate financial institutions, financial agents engaged in moving illicit money in support of the Houthis [in Yemen], in support of Hamas, in support of Hezbollah. This administration has taken serious efforts across … a broad range of efforts [by] Iran to extend its reach.”
The re-imposition of U.S. sanctions and recent action by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to disconnect Iranian banks from its financial messaging system are increasing the pressure on the regime. However, more must to be done to change Iran’s behavior through a “maximum pressure” campaign.
Today, no reputable company will risk international sanctions and contravene the best practices of Due Diligence (DD) and Know-Your-Customer (KYC). However, a broader conceptual shift in how the business community thinks about Iran is needed, one that deploys at a minimum Enhanced Due Diligence (EDD) and Know-Your-Customer’s-Customer (KYCC) practices. Existing KYC standards are currently used to protect businesses from engaging directly with sanctioned individuals and entities. But ties to Iranian sanctioned entities may still occur indirectly. In particular, customers’ may be engaging in questionable or unlawful behavior, including money laundering, terror financing and sanctions evasion.
It was said by UANI Chairman Sen. Joseph Lieberman, “Right now, a U.S. company can conduct business with any company in the world as long as it’s not sanctioned. However, sometimes European and Asian firms have partners or suppliers who have done business with Iran. Applying a higher standard of due diligence known as Know-Your-Customer’s-Customer would reduce the number of companies undermining U.S. sanctions and provide greater protection from materials or money ending up in Iranian hands.”
At this regard I would like to mention an aspect relevant for this Conference. Last February, Amb. Mark Wallace CEO of UANI has addressed a Letter to the management of “Scientific Federation”, which has organized this very important event, expressing a deep concern noting the presence, among the keynote speakers, of Abdollah Esmaeili, from the Iranian firm, National Iranian South Oil Company “NISOC”. The attention was pointed to the fact that NISOC is a subsidiary of the National Iranian Oil Company (“NIOC”), which is a sanction-designated entity designated last 5th November by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Notably, NIOC is specifically subject to “secondary” sanctions, which target not only the sanctioned entity itself but any third-party actors doing business with the sanctioned entity. Therefore, if the Scientific Federation had allowed the Iranian representative to attend, the Scientific Federation could have been subject to OFAC scrutiny and possible sanctions. In fact, the U.S. sanctioned an Iranian conference organizer just last month because it was helping Iran spy on and recruit conference participants! I would like to commend organizer for their positive reply by removing NISOC from this conference.
“Oil, Gas & Petroleum” is clearly a field considered by the new wave of sanctions decided by the U.S. government last November. As President Trump said “Our objective is to force the regime into a clear choice: either abandon its destructive behavior or continue down the path toward economic disaster”. In addition, Secretary of State Mike Pompeo said the sanctions are “aimed at fundamentally altering the behavior of the Islamic Republic of Iran.” He has issued a list of 12 demands that Iran must meet to get the sanctions lifted that include an end to its support for terrorism and military engagement in Syria and a halt to nuclear and ballistic missile development.
As we all know, eight countries have received a six-months waiver – China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea – because the efforts to eliminate imports of petroleum
products but unable to complete the task before 4th November. During this period the importing country can buy Iranian oil but must deposit Iran’s revenue in an escrow account. Iran can spend the money but only on a narrow range of humanitarian items. Pompeo defended the oil waivers and noted that since May, when the U.S. began to press countries to stop buying Iranian oil, Iran’s exports had dropped by more than 1 million barrels per day. In addition, 700 more Iranian companies and people had been added to the sanctions rolls, of which more than 300 that had not been included under previous sanctions.
Last Friday the US Treasury has imposed sanctions on dozens of Iranian individuals and entities, in the latest effort by the Trump administration to ratchet up pressure on Tehran following the US withdrawal from the Iran nuclear deal. These are 31 people and entities connected with the Organization of Defensive Innovation and Research (SPND), an Iranian group that US officials said employed “key personnel [who] played a central role in the Iranian regime’s past nuclear weapons effort”.
Iran has lost $10 billion in revenue since U.S. sanctions in November have removed about 1.5 million barrels per day (bpd) of Iranian crude from global markets. Brian Hook, the State Department’s special representative on Iran, said in remarks at the CERAWeek energy conference that due to a global oil surplus – in part due to record U.S. production – the United States is accelerating its plan of bringing Iranian crude exports to zero.
U.S. sanctions on Iran and Venezuela, two of the largest oil producers in the Organization of the Petroleum Exporting Countries, and production cuts by OPEC and Russia have boosted global oil prices to near four-month highs. The U.S. Energy Information Administration (EIA) has projected that world supply will exceed demand in 2019 by 440,000 bpd, Hook said. But Iran’s oil exports have dropped in March to their lowest daily level this year, even before Washington formally required importing countries to reduce purchases to avoid infringing U.S. sanctions.
In this context, Oil prices are expected to rise by at least $5 per barrel, without Iran sanction waivers granted in the past to eight countries following the reimposition of sanctions on the Islamic Republic late last year. The comments come as international benchmark Brent trades above $67 per barrel on the back of output cuts by Opec and non-Opec members as well as disruption in supplies in Venezuela and Iran following sanctions by the US government. Al Taie also said US president Donald Trump would like to see oil trend around $60 per barrel, as both shale producers as well as US consumers would be happy about the price range.
U.S. goal remains to reduce Iranian crude exports to zero. However, exemptions for the 8 jurisdictions are expected to be renewed on May 8. It seems that U.S. will likely renew waivers to sanctions for most countries buying Iranian crude, including the biggest buyers China and India, in exchange for pledges to cut combined imports to below 1 million bpd. That would be around 250,000 bpd below Iran’s current exports of 1.25 million bpd.
Korean and Indian imports of Iranian crude are down significantly from this time last year, although Korea increased its imports in Feb. U.S. oil exports to Korea are up sharply.
• S. Korean imports of Iranian crude down 76% in Jan 2019 compared with Jan 2018, and 12.5% in February 2019.
• S. Korea imports of U.S. crude increased 7 times in Feb 2019 compared with Feb 2018.
• Indian imports of Iranian crude oil was down 60% in Feb 2019 compared with Feb 2018.
• Indian imports of Iranian crude oil dropped to 260,000 barrels per day (bdp) in Feb 2019.
• Sanctions waivers permits India 300,000 bpd from Iran.
• U.S. will decide on May 8 on further waivers for India and the 7 other Sanctions Reductions Exemptions jurisditions but the objective remain “zero” Iranian oil exports.
Another point I would like to highlight is the recent decision by France to join a growing number of governments in blocking flights by Iranian carrier Mahan Air (listed in the U.S. since 2011). France’s decision will take effect on 1 April, follows a similar move by Germany to protect Berlin’s “foreign and security policy interests” according to German Ministry of Foreign Affairs. On that occasion, Secretary of State Michael Pompeo sent a tweet encouraging other allies to follow suit, saying Mahan “transports weapons and fighters across the Middle East, supporting the Iranian regime’s destructive ambitions around the region”.
France told Iran that European efforts to keep a nuclear deal alive did not mean Tehran had a blank check to violate the human rights of its citizens, after lawyer Nasrin Sotoudeh received a long prison sentence. “There has been global indignation over the case of Mrs Sotoudeh and this government shares this indignation fully,” French Foreign Minister Jean-Yves le Drian said. Ultimately, prudent companies should conclude that business opportunities in and with Iran still are not worth the risk.
In conclusion, there are serious legal, political, financial, and reputational threats associated with doing business in Iran, that consistently ranks at or near the bottom of key measurements produced by leading think tanks, NGOs and UN agencies on business environment.
In light of this, UANI has elaborated a matrix setting at least 10 categories of risks that should clarify to all responsible companies that Iran is not genuinely “open for business”:
• IRGC Front Company Risk – Doing business in Iran means doing business with the Islamic Revolutionary Guard Corps (IRGC), a terrorist organization sanctioned by the U.S. and international community. It is flatly illegal for American and international companies to do business with the IRGC, but corporate compliance officers and country managers will be unable to discern if their companies are doing business with a reputable Iranian company or one that is secretly operated, managed, and even owned by the IRGC.
The semi-official ILNA news agency wrote Rouhani’s cabinet, last year, has significantly increased the IRGC’s suggested budget by 42%, parallel to a 33% elevation of the defense budget. All the while the country’s construction budget will witness a nosedive. The IRGC will receive $8 billion from Iran’s fiscal budget. This is equal to cash handouts for 49 million people a year. If Rouhani had not increased the IRGC’s budget by 42%, at least 21 million people would be receiving subsidies.
• Violations of Int’l Laws/Treaties & Revocation of JCPOA Risk – No business can be assured that a regime intent on acquiring nuclear weapons through cheating, subterfuge, and guile will not violate the JCPOA and cause the “snap back” of economic sanctions by the U.S. and the international community. The mechanism for snapping back sanctions was specifically designed to respond quickly to Iranian violations of the JCPOA. Accordingly, foreign businesses operating in Iran will experience an uncertain and rapidly changing legal footing of their Iranian operations unless and until Iran demonstrates long-term sustained compliance with its JCPOA obligations and universally accepted legal principles. Iran’s long record of cheating on its international nuclear obligations suggests that Iranian JCPOA compliance is a dim prospect.
• Kidnap and Arrest Risk – A company that does business in Iran exposes its officers, employees, and contractors to a high risk of harassment, arrest, prosecution, and incarceration without due process of law, without the right to legal counsel, and without an effective and independent judicial system to protect basic legal rights. Foreign citizens are simply not safe from arbitrary arrest and incarceration, and individuals born in Iran or who are (or were) Iranian citizens are particularly at risk of arrest, prosecution, imprisonment, torture, and even capital execution without due process of law. It is therefore not surprising that Iranian expatriates are understandably reticent to return to their home country – despite lucrative executive job offers from Western firms.
• Hacking & Cybersecurity Risk – Doing business in Iran will inevitably lead to the hacking and theft by Iranian operatives and security agents of proprietary information, trade secrets, confidential employee and corporate information, personal information, and customer information. Hacking and cyber warfare actions are grave risks for corporations which have a notable presence in the U.S. when the Iranian Supreme Leader is warning of Western “infiltration” and giving a green light to the IRGC to take aggressive action against representatives deemed to be agents of Western cultural and economic influence.
On this issue, last December Italy’s oil services group Saipem has said that the cyber attack that hit its servers in the Middle East and causing the cancellation of data and infrastructures, is a variant of the notorious Shamoon malware that was used in a crippling attack on Saudi “Aramco” in 2012, which raises questions over whether the attack on Saipem was an indirect cyber breach targeting the Saudi oil giant—Saipem’s biggest customer.
Adam Meyers, vice president at U.S. cybersecurity firm CrowdStrike, told Reuters, however, that he believed Iran was responsible for the attack because early technical scrutiny showed that the new Shamoon malware variant had similarities to the 2012 attack, which security experts widely believe was perpetrated by people working for the Iranian government.
• “Blood on Hands” / Terror Risk – The regime’s repression would not be possible without technology and equipment provided by Western and Asian firms. Whether it is telecommunications technology misused to restrict and monitor internet and cellphone communication, motorbikes ridden by the Basij to terrorize civilians, or construction cranes used to hang dissidents, foreign firms providing such equipment have become willing partners in the regime’s ruthless human rights abuses.
• Reputational Risk – A company that seeks to monetize opportunities in a country notorious for sponsoring terrorism and violating fundamental human rights, including state sponsored killings and torture of its own citizens, will inevitably corrode its reputation with consumers, trading partners, and the general public. The Iranian regime remains an international outlaw and force for instability. Iran is the world’s leading state sponsor of terrorism, aiding terrorist groups such as Hezbollah and Hamas. Tehran and its proxies continue to spread instability in the Middle East from Iraq to Lebanon to Yemen and to Syria, where Iran remains a staunch supporter of the brutal Assad regime. And the Iranian regime continues to violate the human rights of its own people. Companies blinded by the chance to turn a quick profit in Iran risk collateral damage to their brand, public standing, and corporate reputation.
• Insurance Risk – Companies will find that their business operations and assets in Iran are either uninsurable or subject to inadequate coverage and/or extraordinary insurance premiums because of the highly unstable and risk-laden political, legal, and business environment. According to the Financial Times, “the insurance market remains averse to new Iranian business given that facilitating trade with Iran remains illegal for US citizens and entities, thereby constraining trade further.” Research from the law firm Clyde & Co shows that “85 per cent of respondents at London-based insurance companies said US sanctions ‘negatively impact their risk appetite for Iran-related business.. Even those London based insurers with no US operations are very concerned about the remaining US sanctions,’ said Chris Hill, partner at Clyde & Co. Those sanctions are proving a strong disincentive to such insurers providing cover for permitted EU-Iran trade.”
• Sanctions Risk – The adoption of the JCPOA does not end all sanctions imposed against Iran, its agents, and nearly all of its state-owned businesses. The relaxation of U.S. sanctions against Iran is, with a few exceptions, limited to non-U.S. persons. U.S. persons and companies remain largely prohibited from doing business in or with Iran because the bulk of the U.S. trade embargo of Iran remains in place for U.S. persons and companies. Broad sanctions relating to Iran’s sponsorship of international terrorism and human rights violations remain in effect and are unaffected by Iran’s stated decision to curtail its nuclear activities.
According to the U.S. Treasury Department, “more than 900 Iran-linked companies and individuals will remain designated by the United States and subject to direct U.S. and secondary sanctions [outside of U.S. jurisdiction].” The penalties imposed for violating sanctions are significant, including asset freezes, prohibitions on transactions with the U.S. financial system, and bans on importation of U.S.-origin goods.
Civil or criminal penalties may also be assessed under the U.S. Anti-Terrorism Act and the Iranian Transactions and Sanctions Regulations, which authorize sanctions on any persons, including U.S.-based companies, who provide financial, material or technological support to or on behalf of foreign persons designated for involvement in acts of terrorism that threaten U.S. national security.
• Country & Corruption Risk – Iran cannot be trusted to provide a secure political and economic environment for businesses to operate. Iran has high country risk including high transfer risk, exchange rate risk, sovereign risk, and political risk:
• Transfer risk: Foreign businesses in Iran risk capital being locked up or frozen due to arbitrary, anti-Western government actions or renewal of sanctions
• Exchange rate risk: The Iranian rial is considered one of the least valuable currencies in the world
• Sovereign (credit rating) risk: Iran lacks S&P and Moody’s credit ratings
• Political risk: Regime stability and peaceful conditions in Iran are not guaranteed due to the regime’s systematic corruption and oppression at home as well as military belligerence in the region.
Just few days ago a conservative politician in Iran, who was minister of culture in the first administration of Mahmoud Ahmadinejad, has proposed to eliminate the presidency in the Islamic Republic. Speaking in a television program on March 17, Mohammad Saffar Harandi who is now a member of Iran’s Expediency Council proposed to replace the president with a prime minister. Harandi is also affiliated with the Islamic Revolution Guards Corps, IRGC. Iran’s Supreme Leader Ali Khamenei has also made the same proposal in the past, but he was rebuffed by strong criticism and the opposition of then influential politician Ayatollah Hashemi Rafsanjani. Critiques say eliminating the presidency and replacing it with a prime minister elected by parliament will reduce the impact of people’s votes. Presidents in Iran are directly elected by popular vote.
About the endemic corruption within the Iranian administration, it is noteworthy to highlight that Iran ten years ago, the 20th April 2009, has ratified the United Nations Convention Against Corruption (UNCAC). State parties of UNCAC are committed to “promote and strengthen measures to prevent and combat corruption more efficiently and effectively; to promote, facilitate and support international cooperation and technical assistance in the prevention of and fight against corruption; to promote integrity, accountability and proper management of public affairs and public property.”
Transparency International’s Corruption Perception Index has consistently placed Iran as one of the most corrupt countries in the world, dropping from 88th in the rankings in 2005 to 138th/180 in 2018, with a score of 28/100. High-ranking members of Iran’s government have also been publicly linked to cases of financial corruption as well as drug and prostitution rings.
• Banking & Money Laundering Risk – Iranian financial institutions remain locked out of the U.S. financia system, and therefore cut off from much of the global financial system. International banks have been hit with $14 billion in fines since 2009 for violating U.S. sanctions on Iran. The U.S. continues to designate the entire Iranian financial sector as a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act and the 2012 National Defense Authorization Act. With the serious money laundering issues in Iran, the risks associated with bankin in Iran, and therefore business broadly, continue to be significant, as strong penalties remain for those institutions that directly or indirectly facilitate prohibited transactions.
In February 2019, the Financial Action Task Force (FATF/GAFI) noted that there are still items not completed and Iran should fully address: (1) adequately criminalizing terrorist financing, including by removing the exemption for designated groups “attempting to end foreign occupation, colonialism and racism”; (2) identifying and freezing terrorist assets in line with the relevant United Nations Security Council resolutions; (3) ensuring an adequate and enforceable customer due diligence regime; (4) ensuring the full operational independence of the Financial Intelligence Unit and clarifying that the submission of STRs for attempted TF-related transactions are covered under Iran’s legal framework; (5) demonstrating how authorities are identifying and sanctioning unlicensed money/value transfer service providers; (6) ratifying and implementing the Palermo and TF Conventions and clarifying the capability to provide mutual legal assistance; and (7) ensuring that financial institutions verify that wire transfers contain complete originator and beneficiary information.
If by June 2019, Iran does not enact the remaining legislation in line with FATF provisos – AML (anti-money laundering), the amendment to join CFT (Counter Financing for Terrorism), and Convention against Transnational Organized Crime – then the FATF will require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran.
The FATF also expects Iran to continue to progress with enabling regulations and other amendments. Iran has made no significant progress since the implementation of the nuclear agreement on commitments and compliance with the Paris-based FATF Group. On one hand, the ratification of FATF, will leave no room for the regime to have secret relations and cover-up networks for funding the activities of the Iranian Revolutionary Guard Corps (IRGC) and its foreign arm, Al-Quds Force as well as its terrorist proxy groups in the region, and on the other hand, rejecting the FATF provisos/provisions will lead to more hurdles regarding regime’s foreign financial and commercial relations, particularly the EU’s backing of the regime against the US sanctions.
For those reasons, the approval stumbled at the Guardian Council, which oversees parliament’s legislation: since the last two years, the disputes in both Majlis (the Parliament) and the Expediency Council over this issue were without achieving any results. Even Khamenei, the Supreme Leader of the regime, has been unable to promulgate a decree on the FATF.
If the regime does not agree with the two remained bills of the FATF, the regime’s Banking transactions will become under surveillance, and the regime will be blacklisted automatically. In this regard, Keyhan Newspaper, Khamenei’s mouthpiece, stated: “The four-month deadline for Iran is admitting to defeat.”
The UK government’s decision to blacklist Lebanese Hezbollah—widely seen as Iran’s linchpin proxy in the Middle East—in its entirety will likely complicate efforts by the Rouhani government and its allies in the so called “Expediency Discernment Council of the System” to pass FATF rules into law. Members of the Expediency Council — which enjoys legislative powers and is tasked to resolve deadlocks and disputes between parliament and the Guardian Council — are appointed by Supreme Leader Ayatollah Ali Khamenei.
Of the four FATF bills proposed by the government, two regarding the United Nations Convention against Transnational Organized Crime (also called the Palermo Convention) and Countering the Financing of Terrorism (CFT) have long been stuck in the Expediency Council, with hard-line members arguing that their passage will stymie Iran’s sanctions evasion schemes and its financial support for militant groups such as Hamas in the Gaza Strip and Hezbollah.
Starting from these considerations, attention must now shift towards the indissoluble tie between the Islamic Republic and Hezbollah. Hezbollah, the Shia political party and militant group based in Lebanon, acts as a proxy for Iranian terror and crime internationally, recognizing Iran’s Shia clerical leadership as its religious and political authority. Hezbollah’s 1985 manifesto declares allegiance to Iran’s Supreme Leader, pledging to “obey the orders of one leader, wise and just, that of our tutor and faqih (jurist) who fulfills all the necessary conditions: Ruhollah Musawi Khomeini. God save him!”
Through Hezbollah, Iran has furthered its terrorism against the West, criminal activities, and regional ambitions. Hezbollah leader Hassan Nasrallah openly proclaimed in June 2016, “We are open about the fact that Hezbollah’s budget, its income, its expenses, everything it eats and drinks, its weapons and rockets, are from the Islamic Republic of Iran,” highlighting the inseparable bond between the Iranian regime and the terrorist organization.
UN Secretary-General Antonio Guterres has recently expressed “grave concern” that Hezbollah’s weapons would “endanger the stability of Lebanon and the region.” Moreover, in an implicit reference to Iran, Mr. Guterres called on member states to “carry out their duties” in terms of not supplying arms and military equipment to entities and individuals in Lebanon. He also urged the Lebanese government to take “all necessary measures” to disarm the militias in accordance with the Taif Agreement of 1989 and international resolutions.
Some stats from the U.S. Special Representative for Iran and Senior Policy Advisor to the Secretary of State, Brian Hook, make the connection more clear:
• Iran provides Lebanese Hizballah 700 million dollars each year.
• Iran has spent at least 16 billion dollars on supporting its proxies in Syria, Iraq, and Yemen.
• Iran has historically provided over 100 million dollars per year to Palestinian groups, including HAMAS and Palestinian Islamic Jihad.
• Iran has extended at least 4.6 billion dollars in lines of credit to Syria.
•INSTEX – “Instrument in Support of Trade Exchanges.”
When in May 2018 President Donald Trump announced his decision to withdraw from the 2015 nuclear agreement with Iran, European countries pledged to take steps to preserve the deal. The main issue was Iran’s demand to continue to enjoy economic benefits for abiding by the nuclear agreement, which was weakened by the U.S. withdrawal.
Europe promised a Special Purpose Vehicle to facilitate barter trade with Iran. After months of wrangling, in January Europe announced the Instrument In Support Of Trade Exchanges (INSTEX) to run a payments channel that would allow goods to be bartered between European and Iranian companies without the need for direct financial transactions. This would eliminate banking transactions that would violate U.S. sanctions.
What is INSTEX?
• A “special purpose vehicle – SPV” that will allow European businesses to trade with Iran, despite strict US sanctions.
• According to media reports, INSTEX will be based in Paris and will be managed by German banking expert Per Fischer, a former manager at Commerzbank. The UK will head the supervisory board.
• The European side intends to use the channel initially only to sell food, medicine and medical devices in Iran. However, it will be possible to expand it in the future.
To function, INSTEX will necessarily establish an international payment system structured to avoid the U.S. financial control. This would benefit the regime by providing economic relief and freeing up capital also needed to fund its military and terror proxies around the globe. The proponents of this SPV scheme would undermine U.S. sanctions against Iran and harming international security.
U.S. has a long history of tracking the movement of goods as part of sanctions enforcement and could readily cut off their access to American consumers and financial markets if such activities were detected. However, major European companies are not looking for ways to re-enter the Iranian market; therefore, INSTEX is a solution to a nonexistent problem.