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Transcript of press call on Iran’s place on Financial Action Task Force (FATF) Counter-measures list

Topics:

  • FATF’s agenda at upcoming plenary June 18-24
  • Iran’s record of money laundering and illicit finance
  • Risk assessment for companies doing business with Iran
  • Boeing deal to Iran

Experts:

  • Mark Dubowitz, Executive Director, Foundation for Defense of Democracies
  • Chip Poncy, former head of US delegation to FATF, former Treasury official
  • Eric Lorber, former Treasury official, serving in the Office of Chief Counsel, Office of Foreign Assets Control, and in the office of Terrorist Financing and Financial Crimes

Joe Dougherty: Good afternoon to everyone. My name is Joe Dougherty, the Director of Communications at the Foundation for Defense of Democracies. Thank you for joining us today as we discuss the upcoming Financial Action Task Force meeting, and in particular Iran's place on the FATF counter-measures list.

We have three outstanding experts in the field of illicit finance here for you today. The first is Chip Poncy, who led the US delegation to FATF from 2010 to 2013, and who co-chaired the FATF policy working group from 2007 to 2013. Chip also managed US participation on various G7, G8, and G20 illicit finance experts groups. He is a senior advisor to FDD’s Center on Sanctions and Illicit Finance.

Eric Lorber formerly served in the office of Chief Counsel at the Treasury Department, including the Office of Foreign Assets Control, and in the office of Terrorist Financing and Financial Crimes. Eric is also a senior advisor to the Center on Sanctions and Illicit finance.

Lastly, we have Mark Dubowitz, executive director of FDD, who heads its Center on Sanctions and Illicit Finance. At FDD, Mark leads projects on Iran, sanctions, and nonproliferation. He is widely recognized as one of the key influencers in shaping the Iran sanctions architecture of the past decade.

Mark, over to you, to kick off the conversation.

Mark Dubowitz: Great. Thanks, Joe, and thanks, everyone for joining. I know there's a lot of news out there so we're going to try and make this as short as possible. There's an important meeting coming up next week, the Financial Action Task Force’s (FATF) plenary meeting in South Korea. It's important for Iran watchers because there are a number of important issues on the agenda which will affect Iran including whether Iran will remain on what is called the counter-measures list, which Chip and Eric can explain to you in more detail.

Currently, Iran is looking for financial legitimization, as it seeks to engage with the rest of the world. There have been recent announcements about large commercial deals, including an Iranian announcement about a deal with Boeing. It's in Iran's best interest to try and show the rest of the world it is no longer an illicit financial actor, despite the fact that it continues to be recognized as such by the Financial Action Task Force, under the USA Patriot Act 311 for primary money laundering, and under an architecture of non-nuclear U.S. sanctions for supporting terrorism, ballistic missile financing, money laundering, and sanctions evasion.

Let's start with a basic question. I'm going to ask Chip, if you could very briefly describe what FATF is, what's its mission, what's on the agenda next week vis-à-vis Iran, and perhaps just provide some basics on FATF and what it does?

Chip Poncy: Mark, thanks so much. Chip Poncy here. Thanks to everyone for joining the call. The challenge here is brevity, when talking about FATF. It's a terrific organization, and I will make no effort to hide my affinity for the group.

The objective of FATF is really four-fold. It is an international inter-governmental task force. It really does four things.

The first is that it serves as the primary international, or global, policymaking body for combating illicit finance. It does that primarily by setting global standards to combat money laundering, terrorism finance, proliferation finance, and an expanding list of predicate offenses to money laundering, to include tax evasion or serious tax crimes.

The second thing that FATF does is it senses jurisdictional compliance against those standards through peer review processes and public reports called mutual evaluations.

The third thing that FATF does is it assists those that are combating financial crime through the publication of typology, or methods of trends by which illicit financiers operate.

Lastly, FATF protects the international financial system from jurisdictions who have failed to adopt or meaningfully implement FATF standards to combat money laundering, terrorism finance, or proliferation finance. That's FATF in a nut shell.

Mark Dubowitz: Okay. Great, Chip. Talk a little bit about the FATF black listing process. Obviously, it's set up to protect the international financial system from these illicit financial risks, from Iran, and from other countries. How does this process work? Could you explain the various lists that everybody hears about? We hear about black lists. We hear about “really black lists.” We hear about gray lists, white lists. Give the group a little bit of clarity on what exactly all these lists are and how do the actual process at FATF works.

Chip Poncy: Sure. To understand the FATF listing process, the black listing process, there has to be two points that are kept in mind. The first is that the FATF black listing process really has duel objectives. One is to protect the international financial system from any of the vulnerabilities or threats that emanate from countries that do not implement FATF standards.

The second is to encourage those countries that are deficient—strategically deficient in implementing those standards—to make the progress necessary to become responsible members of the international financial system.

The first mission is really about risk management. The second is really about political motivation.

The second point to remember about the black listing process is that it is a technical process. Because it is a technical process, it is largely insulated from many of the political debates or conversations that take place in other forums, and is about risks that countries may present to global security or to international financial systems.

In order to make the process work as a technical process, and one that effectively warrants the financial system of jurisdictional risk, and encourages jurisdictions to make progress, the listing process has a number of different kinds of lists. The counter-measures list is the most grave or acute of those lists. And that is reserved, and it has only been used in this listing process by FATF, since it was resurrected in 2008, for two countries, Iran and North Korea. It was frankly built around the risks that Iran presented to the international financial system, over the past eight years. It specifically entails a call from FATF to its members and to all jurisdictions, to warn their financial institutions about the risk of doing business in or with Iran, and to issue counter-measures to protect their financial systems from those risks.

That is the most grave of the lists that FATF has. There are other lists that FATF has including the black list, in which FATF identifies countries whose deficiencies in adopting the main FATF standards present substantial or strategic risks to the international financial system. It falls one step shy of demanding its members to issue counter-measures against those jurisdictions. It does warn the international financial system about the risks that emanate from black listed countries. But it is one step below the counter-measures list, which, again, is a list that includes Iran and North Korea.

There's the so-called gray list, in which FATF identifies countries that present strategic deficiencies in implementing international standards. Those countries have made political commitments that diminish their risks through actions taken to implement reforms to address the concerns that FATF has identified.

Those are the different lists within what has broadly been called the black listing process. In those lists, the most severe is the counter-measures list, which Iran has occupied since its inception. It's a list that specifically requires FATF members to issue counter-measures to protect their financial system against the risk emanating from Iran and North Korea, as the other country on that list.

Mark Dubowitz: Okay. Chip, just so I understand this, there's a counter-measures list that has Iran and North Korea on it today. There's a black list. Who's on that today? Myanmar? Possibly some other countries?  Then there's a gray list that has about a dozen and a half countries, working towards getting off the gray list, on to a white list, but also could fall back into the penalty box, as it were, if they don't implement these changes in a one year period.  Is that right?

Chip Poncy: Yes. Now you're getting technical, Mark. That's exactly right. These lists are fluid and allowing FATF to move countries across lists as progress is achieved, or as it stalls. What is relatively unique among the lists is that the counter-measures list has not seen any movement downward, to date. Any effort to move a country on the counter-measures list to, say, the black list, would be unprecedented. That is exactly the issue that I think people are looking at, coming into this FATF plenary, where FATF has engaged Iran to discover what is it Iran needs to do to get off of this list. As you'd say, they are campaigning to integrate into the financial system and the global economy, and this list is obviously an obstruction to that. That they are engaging with FATF to pursue the listing, is something that I'm sure is going to be a topic of interest at the plenary.

That engagement alone is not enough to warrant countries moving on these FATF lists. There have to be actions to match rhetoric. Underlying all of this is the conduct that Iran has engaged in for several years by FATF's watch, and decades by the watch of others, that has led to a serious credibility gap and rhetoric that is unmatched by action. Both Iran and North Korea have been identified for years by FATF as suggestive counter-measures though neither country has taken meaningful action to change their conduct with respect to the basis for these listings: money laundering, terrorism finance, and now, proliferation finance, which includes ballistic missile development --  Notwithstanding the complexities of these various lists, I think the take away is that any movement off of a counter-measures list, by either Iran or North Korea without actions to address those concerns, in particular terrorism finance and money laundering, any movement off of these lists would be at odds with the risks that these countries continue to present. That's the primary issue.

Mark Dubowitz: Eric,  I guess the implication of your analysis is that because this is precedent- setting, whatever criteria are applied to Iran, whatever steps Iran can take to get off the counter-measures list, the North Koreans are going demand the same treatment. Is that correct?

Eric Lorber: This is Eric and thanks again to FDD for hosting. I think North Koreans might try to make that claim, but I think that there is a credible reason that that claim by the North Koreans might hold significantly less water, simply because the North Koreans haven't signed anything like the JCPOA. They haven't made any types of moves to at least speak about reforming their AML and countering the financing of terrorism laws, or their support for a variety of other nefarious activities. I think that the Iranians probably have a more substantial claim that they should be taken off the counter-measures list. At the same time, without a change in underlying conduct, the risks still remain for countries and for private actors who are considering doing business in either of these jurisdictions. Without that change in underlying conduct, it's hard to make a credible argument that they should be removed from the counter-measures list and moved to a black or a gray list.

Chip Poncy: I think it's really important, just in putting this into context, to recognize three walk-away points. One is that the FATF's black listing process, as it's called, which obviously includes a number of different lists, has been, in my view, remarkably effective or successful. Both in helping jurisdictions and markets and financial institutions understand and manage jurisdictional risks accordingly. I think that's a real success of the FATF's mission.

Secondly, that that success has found ways of accommodating and encouraging reform from countries that have presented those sorts of concerns, threats, and vulnerabilities to the financial system, that's an essential part of the process. To the extent that there is noise or action coming from black-listed or deficient jurisdictions continuing to validate their efforts through recognition by FATF has been a big part of this. There are various ways to do that.

The third point is that in recognizing and encouraging reform from deficient jurisdictions, FATF has been very good in not undercutting the message of the risks from those jurisdictions present, as long as the underlying deficiencies or behavioral concerns continue.

Those are the three walk- away points that I would have for anybody who’s looking at events next week, and beyond, about the context here. The final, sort of departure, from this conversation to the bigger picture with Iran, is also important. That is, this FATF listing process operates by consensus, from financial centers around the world, from political authorities around the world, as a consensus—a global consensus—it's the base line. It's the floor, not the ceiling. From that base line, it's been very clear that jurisdictions and coalitions have taken additional measures, beyond warning their financial institutions, to include specific sanctions or due diligent requirements for their financial institutions, because of these risks.

Regardless of the very important floor that FATF has set, there are opportunities that jurisdictions have taken to be more specific and more in stringent, beyond the floor that FATF has set over the years.

Mark Dubowitz: Okay. I know I still have a lot more questions, but much more important that we turn to some of the folks on the line.

Reporter: Thanks so much for doing this call today. I have two questions that are really straight forward. One is, should Iran be taken off the FATF's counter-measures list, yes or no, and why? The second is should the US government allow this Boeing deal to go through and yes or no and why? If you could speak to those two issues, it would be great. Thank you.

Chip Poncy: I'm happy to take that one, and welcome Mark and Eric’s comments as well. I think these are pretty straight forward questions with pretty straight forward answers. I do not think that Iran should be taken off the counter-measures list because Iran's underlying conduct and behavior and deficiencies that it presents to the international financial system in implementing FATF standards, none of that has changed. By virtue of that, the risks associated with doing business with Iran have not changed. From a credibility perspective, it would not make any sense to move Iran off of the counter-measures list. If FATF feels otherwise, and it's important to understand the government's process of FATF is by consensus, which is not specifically defined, but if the room generally feels that Iran deserves some consideration, in moving from, say, from the counter-measures list to the black list, I think the USG would oppose that as strenuously as possible.

I could also see a scenario where if that happened, that the U.S. government would demand that that black list, which is still prohibitive risk for just about every market in the world—particularly with respect to Iran—that that black list be maintained until there is verifiable, demonstrable, and meaningful change to Iran's conduct, behavior, and its implementation of FATF's standards. That will take some time to demonstrate.

That's my sense. I also think that's a fallback that the U.S. government would only take if the room were strongly committed to moving Iran from a counter-measures list to a black list. I don't see that happening because I don't see changes in Iran's conduct warranting that.

Eric Lorber: Just to give a sense of the risk of this whole process, I think from a private sector prospective, if Iran were to be taken off of the counter-measures list next week, immediately that would have, I think, a fairly limited impact in how private actors, financial institutions, et cetera, that view the risk in the country. It still recognizes that there is a great deal of risk there that is, frankly, prohibitive for most major financial actors.

The longer risk, though, is that over time, as Iran has potentially not changed its conduct, but shifted down from the counter-measures list to the black list, or maybe even, though unlikely, to the gray list, that financial institutions begin to view Iran as a safer jurisdiction, than the actual underlying conduct presents to them.

Iran should not be able to integrate back into the international financial system without a change in its underlying behavior and a change in the risk that it actually poses to the international financial system.

Mark Dubowitz: I’ll take the Boeing question, because I think it is related. I think the short answer is if Boeing concludes the sale to Iran, that is going to pose a massive sanctions, money laundering, and corruption risk for Boeing, and for the financial institutions that are actually doing the deal, because there are very serious concerns that the U.S. government has and Congress has that the American equipment is going to be used to ferry Revolutionary Guard troops and weapons and money, to the Assad government, to Hezbollah, and to other designated U.S. terrorist organizations. You've got serious concerns that Iran Air, for example, is flying a regular route from Iran to Syria. Boeing and these financial institutions are going to have to reassure themselves, and reassure regulators, that those routes, that Iran-Syria route, is not carrying Revolutionary Guard troops, or weapons, or money for the Assad regime, or for Hezbollah, or for any designated entities.

Mahan Air, which is essentially “Revolutionary Guard Air,” is still designated under U.S. law. Boeing and the financial institutions are going to have to reassure themselves and reassure regulators that any of the equipment that is being sold to the Iranian airline industry is not ending up in the hands of Mahan Air and therefore the Revolutionary Guards.

It's a due diligence nightmare for Boeing, and a due diligence nightmare for any financial institution trying to finance or facilitate or enable that transaction.

Reporter: I'm trying to get a sense of whether or not you feel that Boeing will actually go forward with this. Two things. One, will Boeing go forward with this, regardless of that due diligence burden? Two, does the FATF listing correlate to the Boeing deal? If the change is made and Iran is taken off of the counter-measures list, is it actually going to inspire a major American company to come through with a watershed deal?

Chip Poncy: My own view is that if FATF does anything, it'll be a move from the counter-measures list to black list, and I can't imagine that having any material impact on the calculations of major multi-national corporations, or international financial institutions, or certainly U.S. companies. The reason why I say that is because, again, FATF has a floor to a global consensus of the risks. If that floor is a black list, there are a handful of countries that are on that black list. Historically, it has included countries like Burma, and Afghanistan, and Iraq, and others that are clearly prohibitive. If you look at the FATF listings now, the black list is empty. There is an occupied gray list. Iran would move from being one of two members, with North Korea, on the counter-measures, to the sole member of the black list. It's not as if a black listing is a real improvement. But for Iran, there would have never been a counter-measures list to begin with. I can't see that move as being really a sign of confidence.

Secondly, because it's a floor, where you have US sanctions that have been levied for decades against Iran for everything from terrorism, to human rights, to money laundering, to proliferation finance, to ballistic missile development, each of those are still in play. It's difficult to imagine those calculations changing because of a move from being on the counter-measures list alongside North Korea to being the sole occupancy of a FATF black list. It’s difficult to imagine this move somehow encouraging a Fortune 100 company to mortgage potential risk by getting into a market the size of Pennsylvania. It just doesn’t make a lot of sense.

Mark Dubowitz:  Iran has said it wants to reintegrate into the global financial system, and obviously a deal like the Boeing deal or the Airbus deal is certainly a way to help legitimize Iran. How are the financial institutions that you are working with evaluating whether to engage in business with Iran? How would a FATF move to take them off of the counter-measures list and have them be the sole occupant of the black list change their calculations? Do you see tier one financial institutions stepping up to help finance a seventeen billion dollar Boeing deal? Or are they going to continue to be very reluctant to bet the viability of their banks on such a deal? On the other hand, I'm sure they are feeling a lot of pressure from the Boeings and Airbuses and other major companies to provide those banking services. What are you hearing from the private sector and how are you assessing their willingness to go back in?

Eric Lorber: That's a great question. I think that from all of our contacts with the private sector and our work with large international financial institutions, the story remains fairly similar. They continue to view Iran as a persona non grata jurisdiction. There's no appetite amongst the large banks, for example, the Wolfsberg Group banks, to go back into the country. The proposed Airbus deal for the sale of 118 jets to Iran from a couple of months ago, still hasn't been finalized. There are a number of reasons arguably for that. One of the reasons is that Airbus had a tremendously difficult time finding a private financial institution to bank the deal. I think that Boeing is also going to have a similar problem because, from our experience, there will not be a financial institution of note that will be willing to go ahead and provide financing for their proposed sale.

For the most part, even if FATF next week does move Iran off of the counter-measures list to the black list, at least from the perspective of each financial institution, that's not going to make much of a difference in how they approach Iran. They still see Iran as a jurisdiction that is engaging in illicit behavior, support of terrorism, money laundering, that pose very significant risks. In addition, a number of restrictions still remain on the country. We all know about the sanctions that still remain. Under U.S. law, Iran is still a jurisdiction of money laundering concern, under section 311 of the USA Patriot Act, which means that any bank that's considering doing business in Iran could potentially have their correspondent access to the United States cut off. That is serving as a necessary deterrent for any of these major banks that rely heavily on U.S. dollar clearing, in connection with U.S. banks, from going back into Iranian market.

At the end of the day, I don't think we're seeing a significant change in their approach to Iran.

Chip Poncy: I couldn't agree more with what Eric has said. I also want to add that it is important to recognize that the end game here is obviously not a permanent counter-measure list on Iran. The end game here is to have an Iran that is committed to and is implementing responsibly and demonstrably and verifiably, the measures that combat money laundering and terrorism financing on a systemic basis. That's the objective. I do think that it's important to be mindful that FATF isn't going to have a conversation about this in which it is either unwelcoming or ignoring Iran's rhetoric about commitments to, potential commitments to FATF standards. What's important to recognize is that those commitments have to be met by changes in behavior. What everyone at FATF is going to want to see, and certainly what the US government has always wanted to see, is verifiable changes in Iran's behavior, that begin to justify a movement of listing, whether from counter-measures to black list or beyond, that is commensurate with the risks that Iran is addressing, through the behavior and deficiencies that to-date, have put them on the counter-measures list.

It's to understand the importance of the engagement, while at the same time, recognizing that that engagement has to be met with changes in conduct to warrant any change in risk. Without changes in risk, it's hard to understand changes in market behavior.

Mark Dubowitz: There will be a lot more coming from FDD on this issue in the coming days and weeks. I certainly would expect folks on the hill to have something to say about this. Please let us know if you have any further questions, need any further information, explanations, Chip and Eric, and myself and the FDD team are certainly here and available on all these issues.