Iran’s Currency Crisis Spurs Action in Financial Reform Efforts
In the 2017 anti-money laundering (AML) index report published by the Basel Institute on Governance, which develops standards for financial regulations and compliance, Iran topped the list of the world’s 10 highest-risk countries failing to comply with AML standards. This index, published since 2007, ranks 140 countries in terms of their efforts combatting dirty money transactions and countering terrorist financing (CTF). Iran has made little progress to date in improving its standing. Yet, the recent reunification of Iran’s exchange rates by central bank is seen to be an effective step toward more economic transparency and part of wider efforts against smuggling and rent seeking in their diverse forms.
The high-risk assessment of Iran highlighted in the Basel Institute report is primarily due to weak AML/CFT regimes practiced in the jurisdiction. High rates of perceived corruption combined with poor financial sector regulations are major drivers of the structural and functional failures in the Iranian economy. Importantly, these are among the critical issues, which the Financial Action Task Force (FATF), an intergovernmental organization which develops politics to combat financial crime, had mandated Iran to address as part of its "action plan."
Following an extension granted in February, the deadline for Iran’s compliance with FATF’s action plans is set for June 2018. This means that Iranian authorities have limited time at their disposal to earn the continued suspension of counter measures against Iran. Lack of membership in organizations such as the World Trade Organization and the FATF, in particular, has led to a myriad of problems in the implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal agreed by Iran and E3+3 in 2015. Due to shortcomings in meeting FATF technical requirements and Basel II and III banking regulations, Iran has failed to expand its business and correspondent banking ties with International financial institutions, with significant consequences. For example, the number of letters of credit opened since “Implementation Day” has been far lower than expected.
As such, financial reform in Iran is motivated by the need to spur economic growth. The mandate that the Supreme Leader of Iran Ali Khamenei gave to the Rouhani government to start negotiations with world powers over Iran’s nuclear program reflects the wider policy of the state to continue interacting with the international bodies on economic matters. To that end, cooperation with the FATF is set to carry on unless that authorization is withdrawn. Yet given the importance of such reforms, this authorization may remain in place regardless of what happens on May 12 with respect to President Trump’s decision to extend sanctions waivers issued as part of the JCPOA.
According to some estimates, the magnitude of organized money laundering in Iran amounts to some USD 26 billion per year. Transacting such sizeable amount of money outside the official financial system is impractical and requires that criminals abuse the conventional financial system to support their illegal activities. The Central Bank of Iran is seeking to increase its powers of supervision to monitor and prevent suspicious money transfers and smuggling of goods, ensuring the integrity of Iran’s financial system.
The central bank's recent moves to stem currency market volatility will make financing of illegal businesses in the economy more difficult. CBI’s new policies prohibit purchasing or holding of more than USD 10,000 or its equivalent in international currencies. In the same parallel, any bank account that whose aggregate debits and credits exceed IRR 50 billion rials will be subject to anti-money laundering probes to monitor for suspicious activities.
Although it will remain possible to find loopholes in the new regulations, these moves reflect significant progress after years of unfulfilled promises to unify the dual foreign exchange rate regime. The move is also viewed as an important step towards obtaining approval from FATF in respect to countering money laundering and removing the rentierism prevalent in the country’s largely state-controlled economy.
In addition, based on the new legislation, revenues from petrochemical exports that are not repatriated to the country will be subject to greater supervision. Firms in the industry will now be required to report their trade transactions in the same system used to record the oil companies’ export revenues. Previously earnings from petrochemical products sales were kept outside Iran in offshore bank accounts in the absence of proper supervision over their transactions and trades.
Interestingly, to further reinforce its oversight, the central bank has launched the an integrated system for monitoring foreign exchange deals or known as NIMA. This is a system which will monitor the activities of four groups of actors who shape the currency market: merchandise and service importers who purchase foreign currency, exporters of goods and services who earn foreign currency, banks and brokerages who act as intermediaries, and the policymakers who seek to manage supply and demand.
According to CBI governor, Valiollah Seif, the operationalization of the NIMA, will change CBI’s current reactionary response mechanism to one that is more proactive and will make controlling hazardous speculative or systematic fluctuations in foreign exchange markets possible by enabling the calculation of the effective demand so that the bank can aptly manage the available foreign exchange reserves.
In sum, the implementation of these targeted measures by CBI is expected to gradually put an end to capital flight and massive conversion of rial to other hard currencies. These moves can also undercut crimes such as smuggling and money laundering by increasing oversight and the likelihood of penalties for their perpetrators. But the effectiveness of CBI’s mandate will be determined by the political will of both the government and the state to fully enforce the letter and spirit of the new regulations and laws. A great deal is at stake. If the Rouhani government can continue to persist in its long-awaited macroeconomic policies and resist pressure from vested interests, then it remains possible that Iran’s economy could find new momentum after years of recession.
Photo Credit: Tasnim