Iran's banking sector faces hurdles to reconnect to global financial system post-sanctions

Al-Monitor Pro Members

Dr. Bijan Khajehpour

Managing Partner, Eurasian Nexus Partners, Vienna, Austria

Oct. 6, 2022

Even after a potential lifting of secondary US sanctions, Iran’s banking sector will be in need of reforms to successfully reconnect to the global financial system. Issues such as remaining sanctions and regulations related to the international financial watchdog, the Financial Action Task Force (FATF), will loom large in the assessment of international banks. However, Iran’s membership in the Shanghai Cooperation Organization (SCO) will ease some of the pressure on the country’s financial sector.

• Over the past decades, external sanctions have hampered the development of the country’s financial sector, which has been relatively isolated internationally.
• There are three types of commercial banks in Iran: governmental, semi-state and private. The governmental banks include the largest entity, Bank Melli Iran, as well as a number of sectoral banks such as the Bank of Agriculture. The semi-state banks are formerly governmental banks that were transferred to semi-state foundations through a pseudo-privatization. Private banks are relatively new and small in size, but they have played an important role in modernizing banking in Iran.
• A number of Iranian banks have branches and also stand-alone banking licenses outside Iran, especially in Europe and in the region. The operation of such entities has been limited due to sanctions.
• In 2016, when the Joint Comprehensive Plan of Action (JCPOA), more commonly known as the Iran nuclear deal, was initially implemented and sanctions were lifted, Iran’s banking sector was the weak link in the country’s attempts to reconnect to the global economy.
• Key obstacles were the failure to upgrade the banking standards and pass legislation to meet the compliance standards expected by the FATF. In its 2019 declaration, FATF stated: “While acknowledging that Iran has recently adopted the AML-CFT bylaw, …, the FATF expresses its disappointment that the Action Plan remains outstanding.” Iran’s failure to fully implement the relevant legislations is a reflection of its opaque business culture and the presence of many semi-state actors in the ownership of banks and corporations. In fact, the semi-state sector has engaged in a genuine push against transparency in banking transactions.
• Opponents of greater transparency are usually affiliated with entities that have engaged in corrupt practices. Incidentally, in 2019 former Foreign Minister Mohammad Javad Zarif admitted on the record that money laundering existed in high volumes.
• At the same time, lack of compliance standards and opaque ownership structures have been cited as the main reasons for the hesitation of international banks and companies to engage the Iranian market.
• In addition, the US withdrawal from the JCPOA and the re-introduction of sanctions also undermined any attempts to upgrade banking laws and regulations.
• In parallel, even though the Central Bank of Iran (CBI) has itself been subject to sanctions and pressure, it has tried to reform some of the banking regulations and introduce some basic tenets of anti-money laundering (AML) standards. However, the hands of the current CBI governor, Ali Salehabadi, are tied by the complex political structure in the country.
• One of the important reforms of the past few years has been the merger of all banks belonging to military organizations into the oldest bank in the country, Sepah Bank. This merger streamlined the footprint of military organizations in the banking sector.
• Should the US sanctions be lifted in the next few months, the government will have to make a decision on how to interact with the international financial system, especially as the economy would need international financial instruments, including bonds and financing structures.