As Policies and Technologies Change, Iran's Compliance Dilemma Deepens

As Policies and Technologies Change, Iran's Compliance Dilemma Deepens

“Regtech” is the latest buzzword in the world of banking and finance. Last week, Martin Arnold, Banking Editor at the Financial Times, explored "regtech," the new technologies being developed to help financial institutions manage ever more complicated regulatory and compliance frameworks. This same week, Jeremy Kahn of Bloomberg reported on the rise of UK-based ComplyAdvantage, an early leader in regtech solutions, in another major story. 

For Iran, the rise of regtech is a signal that the international standard for compliance policies and practices is changing at an accelerated pace. Importantly, the turn to technology is a response to the stricter policies instituted by regulators in the US and Europe, particularly in anti-money laundering (AML) and counter-terrorist financing (CTF)—key areas of reform for Iran.

In light of stricter policies, compliance work is getting more expensive. A recent report from management consultancy Accenture found that the cost of AML compliance has risen more than 50% in three years. In 2015, the Financial Times reported that for big banks such as HSBC, JPMorgan, and Deutsche Bank, compliance costs have surged past USD $1 billion each year. The costs are rising further still. A significant 72% of Middle East compliance executives surveyed as part of Thompson Reuters’ 2016 “Cost of Compliance Survey” expect costs to increase in 2017.  

Costs are being driven upwards in large part due to the push by regulators to establish personal liability for compliance failings. In order to deter risky or lax activities on the part of banks, regulators intend to hold specific individuals accountable for violations. Sally Quillian Yates, Deputy Attorney General at the U.S. Department of Justice, has argued that “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Thompson Reuters found that 60% of compliance professionals expect their personally liability to rise in just the next 12 months as new regulatory expectations come into force.

On its own, the introduction of personal liability will prove a major barrier for Iran’s reintegration to the global financial system. While banks have been deterred from engaging with Iran due to the legacy of heavy fines from regulators, personal liability introduces a whole new dimension into the risk calculation at major financial institutions. Now, compliance officers evaluating whether to facilitate transactions with Iran will have to weigh an immediate personal risk of prosecution in the event of a failure or violation. The legal precedent has already been set in the United States with a February 2016 decision in the case of U.S. Department of Treasury v. Haider in which the former Chief Compliance Officer of MoneyGram was held personally responsible for compliance failings at the company and was fined USD $1 million. In short, “green-lighting” Iran transactions is becoming fundamentally riskier despite sanctions relief.

Concurrently, the requirements for Iran’s reform efforts may be expanding as practices change in response to the new policies. According to Accenture, compliance officers are managing rising liability and heightened regulatory expectations by enhancing transaction monitoring systems, expanding know-your-customer (KYC) due diligence procedures, and creating deeper training programs to raise competency. Each of these initiatives contributes to rising compliance costs.

Iranian authorities are aware that technology needs to be a part of their reform efforts. In a recent interview with Barbara Slavin of Al Monitor, Iran’s Minister of Economic Affairs and Finance, Ali Tayebnia, stated that Iranian banks had installed software to track suspicious transactions in accordance with Iran’s effort to comply with a Financial Action Task Force (FATF) action plan. Several banking technology companies are known to be entering Iran, with Mysis, SAP, and Temenos, publicly confirming their interest.

However, the accelerated pace of technology innovation and adoption in the area of compliance is going to make it more difficult for the Iranian banking system to catch-up to international standards. According to a recent report by the International Institute of Finance, interest in regtech is exploding as financial institutions try to find ways to reduce costs. Banking executives believe that “by making compliance less complex and capacity-demanding, regtech solutions could free capital to put to more productive uses.” Yet, regtech is still a “niche sector” and there has been limited knowledge sharing or coordination between financial institutions, technology developers, and regulatory experts.

The concern for Iran is that the industry will develop new and even more complex standards at a time when Iran remains outside the “networks or platforms bringing together regulatory experts, software developers and [financial institutions], needed for regtech development.” Particularly in the area of AML/CTF compliance, the IIF report notes that while currently “surveillance is on a per-institution basis… a coordinated or centralized surveillance could significantly improve efficiency and effectiveness in recognizing suspicious trades.” Iran cannot afford to be left out of the creation of any new centralized compliance system and risk instituting reforms that will be insufficient or obsolete from the day they are announced.

Given Iran’s status as a “primary concern” for AML/CTF compliance, Iranian regulators and financial institutions need a role in the development of new international standards to ensure that their reforms can keep pace with best practices.

Unfortunately, some of the key voices in the future of compliance may be less than willing to invite Iran to the table. Speaking at the prestigious Sibos financial technology conference in last month, HSBC Chief Legal Officer Stuart Levey called on banks and regulators to work more closely to develop and adopt technology. He described “a basic structural flaw in the whole effort… The dots are not being connected, and certainly not in a real-time, iterative, and dynamic way.” Mr. Levey, former Under Secretary for Terrorism and Financial Intelligence at the US Treasury, penned a widely-read op-ed in the Wall Street Journal in May, in which he declared with antipathy that “HSBC has no intention of doing any new business involving Iran.”

Understandably, the global banking community is reluctant to engage with Iran until the country institutes difficult reforms. Yet, at the same time, global financial institutions are setting new standards for compliance best-practices, which could “move the goalposts” for Iran as it strives for financial reintegration. With limited capacity to reassure its critics, Iran faces a deepening compliance dilemma. 


Photo Credit: Financial Tribune

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