Are Melli and Sepah ascending towards global compliance standards?

Very interesting reports emerged this long weekend about a very unique and curious “crisis” in Iranian politics.  Specifically, it was reported that Bank Melli and Bank Sepah, two of Iran’s largest financial institutions, had recently rejected business related to the country’s Islamic Revolutionary Guard Corps (IRGC, commonly referred to as the Sepah).  The reason presented was the issues facing the IRGC, which still remains on the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list.  The Iranian banks’ decisions show a readily-apparent desire to rejoin the international banking community – a significant challenge for financial institutions in Iran even after the Joint Comprehensive Plan of Action (JCPOA, the so-called nuclear deal) was implemented in January 2016 as part of sanctions relief afforded Iran. This has certainly not pleased certain elements in Iran’s political system. But why?

Being on the SDN list effectively means the IRGC is banned from dollar transactions and still cannot deal with foreign entities owned or controlled by U.S. persons.  The Guards, which control large swaths of Iran’s economy, face much bigger problems, however.  Given the de-risking trends we have seen in banks in recent years, the sanctions have indeed led to a cascading effect – the positions embraced by international banks on matters concerning designated entities, sanctions, and anti-money laundering, among other compliance concerns, is often far more conservative than what may be required by law.  For example, despite the vast majority of banking restrictions on Iran being lifted in the wake of the JCPOA and U.S. Secretary of State John Kerry and U.S. Treasury officials explicitly stating non-U.S. banks can engage in legitimate, lawful business with Iran, no major global financial institutions have yet taken the plunge.

How does this relate to the IRGC and what’s going on now? Many banks around the world will not work with the IRGC even if their national laws do not necessarily ban it. However, as Iran seeks to reengage the world and accede to standards called for by the Action Task Force (FATF), a multilateral group that calls for increased transparency to counter international money laundering, it will need to start playing by the rules of international banking and finance.  And that’s what it’s come to with Bank Melli and Bank Sepah.

These old, large institutions, both state-owned, now find themselves in a political “catch-22” situation – on one hand, the Iranian government has not traditionally prioritized foreign direct investment or trade, seeking instead to bolster its ideological agenda even if at the expense of growth and economic development – on the other hand, Iran’s decision to enter nuclear talks and reach an agreement signals its need for its economy to be reconnected with the rest of the world.  What we are seeing now may signal an eventual bifurcation of the Iranian economy – one group seeking to do business considered transparent and clean under international best practices and standards established by groups like the FATF or laws like the UK Bribery Act and U.S. Foreign Corrupt Practices Act (FCPA), and then a second group that will conduct business as usual.  Reconnecting with the world requires playing by the international order’s rules, an action that many centers of power in Iran may oppose due to such behavior’s ramifications.  It remains to be seen if Iranian entities will follow on Melli and Sepah’s actions and begin turning their back on business that will close their door to the world economy, and whether designated groups will themselves begin to lift the rogue status granted them by global political and financial circles.

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An international trade and regulatory lawyer.

Posted in Compliance, Iran, OFAC, Sanctions

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