Infighting in Iran escalates over global financial compliance

Iran's political elite is divided over the nation's refusal to comply with international financial regulations under the Financial Action Task Force (FATF), which has placed the country on its blacklist.

The hardline faction has ramped up their opposition to the international anti-money laundering and counter-terrorism financing body after eight years of its appeals for compliance.

The infighting within the government comes at a time when Iran’s economy is grappling with sanctions, inflation, and widespread public dissatisfaction, posing challenges for new President Masoud Pezeshkian’s administration. The FATF demands compliance with global rule on money laundering and terrorism financing among other requirements.

Iran continues to fail to meet FATF requirements to exit the organization’s blacklist, a designation that continues to isolate the country from international financial systems. However, the hardline faction, embedded within Iran’s power structure, views compliance with FATF as a threat to Iran’s regional influence, particularly its financial and military support for its proxy groups like Hezbollah and Hamas which the Islamic Republic has built to exert military influence across the region.

Abolfazl Aboutorabi, a member of Iran’s parliament, made the case against FATF clear in a statement earlier this week. He described the organization as "a tool and weapon in the hands of the enemy to pressure us so that we are forced to hand over our data to them."

Aboutorabi’s comments encapsulate the mistrust that many within Iran’s political elite have towards international institutions, fearing that adhering to the FATF’s standards would jeopardize Iran’s ability to maintain its alliances with regional proxy forces, which Tehran views as essential to its defense and regional strategy.

One of the most contentious aspects of the FATF debate in Iran is the Palermo Convention, which requires member countries to combat transnational organized crime.

Aboutorabi and other opponents argue that joining this convention would result in Iran labeling groups like Hezbollah and Hamas as "terrorist organizations," a move they say would cripple Iran’s ability to support what they call "liberation movements."

"If we join the Palermo Convention, we are cutting off our own strong arms," Aboutorabi warned, reflecting the belief among hardliners that FATF compliance would weaken Iran’s hand in the region.

The new president faces growing resistance

The internal discord over FATF poses a challenge for President Masoud Pezeshkian, who was elected on promises of economic reform. After an election campaign marked by low voter turnout and public disillusionment with the political system, Pezeshkian secured victory by promising to address the country’s dire economic situation amid the worst crisis since the founding of the Islamic Republic. But fulfilling these promises has become an uphill battle, as regional instability, particularly growing tensions with Israel, further complicate the situation.

Critics of FATF, bolstered by hardline media outlets like Kayhan, have framed the debate as a matter of national security. The newspaper, which frequently echoes the sentiments of Iran’s conservative establishment, wrote in a recent editorial that "we are in the middle of a war," and argued that joining FATF would tie Iran’s hands in supporting Hezbollah and other groups.

Kayhan accused the pro-FATF camp of “failing to grasp the gravity of the situation,” asserting that FATF membership would be tantamount to surrendering Iran’s strategic capabilities.

In late June, Iran remained on the FATF's blacklist after a meeting in Singapore. The blacklist status means that Tehran is subject to increased scrutiny and restrictions from international financial institutions on top of banking sanctions imposed by the United States.

Toby Dershowitz, Managing Director of the Foundation for Defense of Democracies, explained that being on the FATF blacklist carries both "reputational and real consequences," deterring foreign investment and complicating trade relations. "It sends a message to the whole financial system…that basically says it’s not safe to do business with Iran," Dershowitz said.

However, not everyone believes that exiting the blacklist will solve Iran’s problems. Nour News, a media outlet close to Iran’s Supreme National Security Council, stated on X on Tuesday that the government’s efforts to leave the FATF blacklist would not lead to improvements in foreign trade due to the "oppressive sanctions" still in place. Iran has been sanctioned for its nuclear program, support for Russia's war on Ukraine and rights abuses by the US and European countries.

The outlet emphasized that Iran should prioritize national production and strengthen ties with neighboring countries and regional economic organizations instead. "Focusing on national production and regional economic cooperation holds a higher priority," the post read. However, the policy of isolationism has further plunged Iran's economy into crisis.

President Pezeshkian’s administration continues to face pressure to resolve the FATF issue. According to Mahdi Ghodsi, an economist with the Vienna Institute for International Economic Studies, FATF compliance could help normalize trade relations and reduce Iran’s reliance on black-market oil sales.

Ghodsi pointed out that while Iran continues to sell oil through intermediaries in countries like Malaysia, the profits from these sales primarily benefit a small group of government insiders, leaving ordinary Iranians to suffer the consequences of international isolation.

"So these are the people who we don't know. They are not part of the government. They are hidden financial apparatus that nobody cares about," Ghodsi told Iran International. "They're benefiting the government, but at the same time, they're benefiting themselves enormously."