This
article is from the political-economic monthly IRAN FOCUS, published
by the UK based Menas Associates. For
more on Menas Associates please visit www.menas.co.uk.
Legislation to combat money
laundering in Iran was submitted to the Majlis on 8 October 2002 by Minister of
Economic Affairs and Finance Tahmasb Mazaheri.The issue has attracted more
attention from observers of Iran outside the country than from the Iranian
public. Yet the decision to counter money laundering is of economic, domestic
and foreign policy significance for Iranians. Moreover, it could play a crucial
role in advancing the agenda of Iran's reform movement. On 25 April, the Majlis
passed the act and it is now awaiting the approval of the hardline-dominated
upper house, the Guardian Council. This article will elaborate on different
aspects of countering money laundering in Iran. Iran Focus will elaborate on the
content of the bill, its advantages and shortcomings in later issues.
Money laundering in
Iran has been increasing since the end of the 1980-88 Iran-Iraq war. According
to Hossein Heshmati Moulai, a member of the financial research centre of the
Central Bank of Iran, the amount laundered in Iran rose from about 6% of GDP in
the mid-1970s to close to 15% in the 1980s. In 2003,
a prominent Iranian
banking official estimated that money laundering encompassed 20% of Iran's
economy.
Money laundering, although not confined to developing countries,
arises from extensive underground financial activities that are made easier when
financial institutions are underdeveloped as is the case in Iran. From the $11.3
billion a year that is spent on smuggling commodities in Iran, some $6.1 billion
is laundered by international criminal networks.
The decision to initiate
an anti-money-laundering campaign falls under the Khatami government's policies
of improving the underdeveloped economy. In this effort, the government's
economic team has sought to strengthen the national currency, control inflation,
promote the private sector, enact stringent banking regulation and monitor
policies, and expand social and job-related insurance. All this marks the
government's intention of clamping down on illegal financial activities, a
strategy that it considers necessary to counter underground economic activities.
However, what is in question is the extent to which such policies will face
resistance from monopolists and those engaged in rent-seeking activities.
Iranian
specifics
Drug
trafficking One area where money laundering is extensively used is in drug
deals, to which Iran is highly exposed. There are two main illicit
opium-producing areas in Asia, the Golden Crescent (Iran, Pakistan and
Afghanistan) and the Golden Triangle (Burma, Laos and Thailand). Iran has
central strategic significance in the former but also serves as a transit route
to the latter as a gateway to Europe, Turkey and Russia.
The Islamic
Republic has been zealously trying to combat drug trafficking in Iran. Against
all the odds, this did not diminish after the fall of the Taliban, which used
the cultivation of poppies in Afghanistan to destroy the younger generation in
the West and among Iranian Shiites.
In the past 10 years, some 1,500
members of the Iranian law enforcement forces have been killed in the battle
against drug trafficking. Despite an extensive assault on the drugs trade, opium
addiction in Iran is vast, with some 2% of the population of almost 70 million
citizens addicted.
The UN Office on Drugs and Crime estimates that 2.8%
of the Iranian population aged over 15 used opiates in 2001. That makes Iran the
third consumer worldwide. In 2002, the number of deaths from drug abuse
increased by 370%, reflecting a shift in Iran to abuse of heroin. Opiate drug
seizures during 2002 in Iran included almost 208 tonnes of opium. In that level
of seizure, Iran ranked first in the world.
Illegal
jetties Because of
deficient trade regulations, many commodities are being smuggled into Iran. Some
62 jetties in Iran have been identified as illegal and are not supervised by
customs authorities. So not only has there been a failure to stop illegal
business but certain monopolists have been encouraged to import commodities. The
fact that these commodities are illegal for import - for the sake of protection
of domestic industry - but legal for trade at the market has encouraged
unofficial economic activities for some monopolists and influential rent
seekers.
Traditional
interest-free funds Another factor
that encourages Iran to tackle the issue of money laundering are the aspects of
traditional economic activity that are deeply rooted in Iranian society. Even if
traditional business systems do not necessarily mean that a society based on it
is more exposed to fraud or corruption than a modern economy, the existence of
such "interest-free funds" is a handicap for a country that is already suffering
from all kinds of prejudice, accusations and lack of international legitimacy.
These unofficial institutes, known as Sandoq-e Qarzolhasaneh, work parallel to
the country's official economic infrastructure. Their activities have reduced
the government's control over liquidity and financial and monetary markets.
These "interest-free funds" lack any operation permit from the Central Bank of
Iran. This state of affairs has seriously undermined the government's monetary
policies to contain inflation just as it has prevented the government from
making efficient use of the people's savings. Especially, the rising inflation
rate has been a source of concern for international financial institutions such
as the IMF.
The dilemma of
hawala One other
component of the conventional economy is the use of the hawala. This is an
alternative remittance system. It operates outside Western banking or
conventional financial channels. It is based on trust and extensive use of
family connections or regional affiliations.
The source of the money is,
however, not always illegitimate. Nor are recipients necessarily engaged in
illicit activities. Yet, as against "white hawala", the term "black hawala"
refers to illegitimate transactions, specifically money laundering. "Black
hawala" transactions are almost always associated with some serious offence such
as narcotics trafficking, fraud or money laundering. However, what makes Western
observers sceptical about the use of hawala is that it has the underlying
potential to offer channels for money laundering. Money laundering consists of
three phases: placement, layering and integration. Since hawala is a remittance
system, it can be used at any of these phases.
Hawala across borders is
endorsed by most of the Islamic banks as it is founded in the Quran. The threat
to the non-Muslim international community lies in the fact that Islamic banks
are becoming large enough to operate with Japanese and European banks. Moreover,
the Islamic banks are now big enough to resist pressure from the US. Some
observers are confident that the US will not be able to crack into the Islamic
banks after the 9/11 incidents. The US economy, many Arabs believe, will be
adversely affected if Islamic funds are touched.
Today, in Washington
circles, hawala is associated with the systematic money transactions used by
outlaws such as Osama bin Laden for his business with diamonds and gold. The
hawala is today considered illegal not only in the US but also in Pakistan and
India where it was very widely used. Also, World Trade Organisation membership
requirements specifically demand a ban on hawala. It is noteworthy that Iran has
already applied 16 times for WTO membership, but the US has vetoed this on every
occasion.
The process of money
laundering in Iran
The procedure for
money laundering in Iran is different from that in the West. For example, the
international criminal networks in the Golden Crescent and Golden Triangle
transfer the sums received from drug smuggling from local currencies to
different types of commodities. These commodities are then transferred to their
registered companies in the UAE, Hong Kong or Singapore. These firms place these
products at the disposal of Iranian criminal operators who then use the illegal
jetties to import them into Iran. These commodities or drugs are sold in the
Iranian market. The amounts raised from these transactions are transferred to
the traditional "interest-free funds" which through the hawala or otherwise
transfer these monies out of Iran.
All this could explain why the
unofficial economic sector (money laundering is part of it) in Iran contributes
to something between 45% and 52% of GDP.
Iran, the
international community and money laundering
Iran-US The
9/11 attacks brought new dimensions to security issues since the attacks related
money laundering to terrorism. US President George W Bush's State of the Union
Speech in 2002, in which he designated Iran as part of an Axis of Evil, and the
subsequent intensified accusations of terrorism against Iran, have placed the
Islamic Republic in a difficult situation in various fields such as nuclear
proliferation, money laundering and drug smuggling.
One instance is
reports from US institutions such as the US Postal Inspection Service. This is
America's oldest federal law enforcement agency, which fights criminals who
attack the US nation's postal system and misuse it to defraud, endanger, or
otherwise threaten the American public. The service has been focusing on illicit
proceeds such as money gained through narcotic sales, the smuggling of illegal
aliens, tax evasion or the selling of counterfeit merchandise. Postal inspectors
arrested an Iranian national on 5 October 2001 for conducting an illegal money
transmitting business and violating the International Emergency Economic Powers
Act and money laundering laws. They reported that from January 1997 to October
2001, this Iranian national transferred more than $19 million to Iran. Examples
like this have been among the many reasons why Iran at this point feels it
necessary to address concerns of the international community, such as money
laundering.
Apart from direct US accusations about terrorism and drug
trafficking, which are hampering Iran's effort to integrate in the international
community, the stances of a few intergovernmental institutions such as the IMF,
World Bank and the European Union have also pushed Iran to respond to the
hazards of money laundering. Iran's geo-strategic situation - as part of the
Golden Crescent - its closeness to the poppy-cultivating areas of Afghanistan as
well as the lucrative business of smuggled goods in Iran, but also extensive
drug addiction make this country an optimal case for money laundering; a reality
that has raised eyebrows among Iran's foes to the same extent as its allies.
The IMF and the World Bank focus on the degree of transparency in
states' economic policies. Several Middle Eastern states have voluntarily
participated in IMF-World Bank-initiated processes of assessment of fiscal,
monetary and financial policy transparency. Iran is among those whose
legislation is assessed on anti-money laundering and combating of terrorist
financing. Despite Iran's hostility to the US, the Islamic Republic has been
relentlessly trying to engage with the IMF, World Bank and WTO. Moreover, many
of the Khatami government's economic policies have been in harmony with IMF
criteria. Iran sees the end of its political isolation in an economic opening
assisted by these multilateral institutions. (For more on Iran and these
institutions see Iran Focus, 16:11, December 2003, 10; 16: 7, July-August 2003,
8.)
The current mindset in Khatami's economic team holds that Iran has to
address the IMF and World Bank's concerns. Also, various conservative factions
are more comfortable with economic reforms in line with IMF guidelines than with
a liberalisation of Iran's domestic and foreign affairs.
Financial Action Task
Force In February 2004, the Financial Action Task Force (FATF) - the
international body charged with fighting money laundering and terrorist
financing - announced that it had removed Ukraine and Egypt from its list of
non-compliant countries because they had made substantial reforms. This not only
showed that there is a trend in the Middle East that endorses substantive action
to clean up financial systems but it also encourages other states, such as Iran
to follow suit. After 11 September, the EU's participation in such international
forums enhanced the possibility of Iran's closer cooperation. Iran is well aware
of the EU's political and economic importance, especially because of the current
US administration's coercive attitude towards Tehran.
The EU's
stance
Another
repercussion of the 11 September incident has been that US and EU security
objectives and policies have converged. Since that date the transatlantic bond
has found a new common threat in "Islamic extremist terrorism". The EU and US
enhanced their cooperation within multilateral forums such as New Transatlantic
Agenda (NTA), the G7/G8, FATF, the UN and Nato. By the same token, the EU has
involved the US in issues of terrorism, despite their differences. For instance,
all three EU pillars now work towards US security so that the US has access to
Europol and Eurojust. Washington has also pushed the EU to freeze assets of
unidentified persons as a contribution to the countering of money
laundering.
On 19 October 2001, the European Commission reiterated the
importance of effective measures to combat the funding of terrorism by the
formal adoption of a directive on money laundering. Moreover, rapid ratification
by all member states of the United Nations Convention for the Suppression of the
Financing of Terrorism also points in the same direction. Consequently, the EC
welcomed the proposal to upgrade the EU's money laundering directive. The EC and
the member states are playing an active role in the work of FATF.
Even if
the EU's strict Common Foreign and Security Policy (CFSP) has been partly
circumvented by the member states' bilateral agreements with Iran, the recent
security developments will make it almost impossible for the EU and its member
states to continue cooperation with Iran without Tehran improving its situation
with regards to money laundering.
Conclusion
Underground
economic activities in Iran have an effect on the underdeveloped state of the
economy, dual foreign policy standards and the protracted democratic movement in
the domestic arena. Simply put, the economic mafia has managed to influence
certain power centres as well as decision-makers in all areas of governance. The
influence of many political activists derives from their rents, monopolies and
connections (see Iran Focus, 17:4, April
2004,
1).
The
establishment is aware of this reality and some political leaders from both ends
of the political spectrum have been trying to change this state of affairs,
despite the existing associations with the operators of the underground economy.
The reason for this is that even these political leaders are losing control over
the activities of these operators, once loyal associates of the revolution.
Moreover, the spillover effect of the growing unofficial sector in Iran has not
only severely undermined the economy but has led to the creation of "new" power
centres that are actively affecting the country's foreign and domestic
policies.
The
paradox lies in the fact that with the given family and tribal connections a
serious attempt to eradicate roots of underground economic operations seems, at
least under the current circumstances, a difficult task, if not an impossible
one.
Nevertheless,
the legislation against money laundering indicates that there are incentives to
reform the traditional economic system. If the Guardian Council approves the
act, one can assume that it has the blessing of the country's highest
institutions.
What
observers should take note of, however, is the content of the act once turned
into law and efforts to change it. Both the Guardian Council and the Expediency
Council can contribute to changes in this act. Moreover, the advantages and
shortcomings of the act/law may as well indicate to which extent this effort
will manage to address the hazard of underground economic activities in Iran.
This
law will probably not succeed in eradicating the roots of money laundering, let
alone other underground activities that adversely affect the economy. To attain
significant results in this area, Iran will primarily need an efficient,
depoliticised and unbiased judicial system, something that is seriously lacking.
The best that can be hoped of the new legislation is that it might give rise to
a new trend that will put limits on certain illicit operations and accelerate
the pace of economic reforms in Iran which is at the root of all the country's
political hazards.
What
serves as a signpost to an evaluation of the degree to which money laundering
will be tackled in Iran are Tehran's interaction and cooperation with
international forums on issues related to good governance, money laundering,
drug trafficking, terrorism and international banking.
