FATF Ultimata to Iran and Pakistan threaten to cloud China’s FATF presidency

By James M. Dorsey

A podcast version of this story is available on Soundcloud, Itunes, Spotify, Stitcher, TuneIn, Spreaker, Pocket Casts, Tumblr, and Patreon, Podbean and Castbox.

China’s chairmanship of an international anti-money laundering and terrorism finance watchdog could put to the test the cohesiveness of global efforts to counter political violence with Iran and Pakistan hoping that they will be able to avoid blacklisting with China at the helm.

China takes over the chairmanship of the Financial Action Task Force (FATF) in July, weeks after the group’s plenary in Orlando under the outgoing presidency of the United States gave Iran and Pakistan until October to meet the group’s standards or potentially face blacklisting.

Both countries face potential sanctioning because they have failed to wholly implement measures and safeguards put forward by FATF.

Struggling to diminish the impact of harsh US sanctions, Iran is likely to be less concerned than Pakistan, that has already been grey listed, about the risks associated with grey listing such as reputational damage and the fact that foreign investors and international banks are more cautious in their dealings with countries that have not been granted a clean bill of health.

Foreign investors and financiers have largely curtailed business with Iran out of fear of running afoul of the US sanctions imposed since the United States last year unilaterally walked away from the 2015 international agreement that was designed to curb Iran’s nuclear program.

While Pakistan, dependent on generous financial support from Gulf states and to a lesser degree China as well as a US$6 billion International Monetary Fund (IMF) bailout package, needs to evade blacklisting, Iran would likely be less effected as long as the US sanctions remain in place.

Despite close relations with China, neither Iran nor Pakistan can be certain that Beijing will shield them from blacklisting if they fail to comply with FATF’s demands for improved legal measures and implementation of moves to counter money laundering and funding of political violence.

China together with Europe and Russia, all signatories to the nuclear agreement, has vowed to support Iran in a bid to salvage the deal. That has so far failed to produce the kind of economic relief Iran expects or stopped the Islamic republic from saying that it will progressively abandon its compliance as the US sanctions increasingly bite and tension in the Gulf remains high.

China’s most recent trade figures with Iran show that Iran’s exports, including crude oil, declined in the first five months of 2019 by 46.6 percent totalling $7.17 billion. China’s exports to Iran slowed by 26% reaching a low of $3.74 billion.

As a result, Iran is likely to be reading tea leaves as senior Chinese, Russian and European officials discuss ways of salvaging the nuclear agreement on the sidelines of this week’s Group of 20 (G-20) summit in Japan.

Beyond not wanting to jeopardize trade talks with the United States, China is likely to walk an increasingly fine line in balancing its relations with Iran and Saudi Arabia as pressure on Iran is cranked up.

Predictions by Chinese analysts that China is likely to pay lip service in Japan to countering US policy towards Iran but in the words of  Zhao Tong, a fellow at the Carnegie-Tsinghua Centre for Global Policy, not “devote major diplomatic resources to battling the American position,” will do little to inspire Tehran’s confidence in Beijing standing up for it in FATF.

The threat of FATF sanctioning has sparked intense debate in the Islamic republic about how to deal with the group’s demands that it joins the watchdog and significantly upgrade its legal anti-money laundering and terrorism finance infrastructure to evade being blacklisted.

Iran’s parliament has so far passed two of four bills required for membership and together with the Expediency and Discernment Council is debating Iranian accession to the Combating the Financing of Terrorism Convention (CFT) and the United Nations Convention against Transnational Organized Crime or Palermo Convention.

Similarly, Pakistan has reason not to take Chinese support in FATF for granted. China did not stop the group from last year grey listing the South Asian nation.

China, moreover, is concerned about the safety of its investment of tens of billions of dollars in the China Pakistan Economic Corridor (CPEC), a crown jewel of its infrastructure and energy-driven Belt and Road Initiative.

Beyond having been the target of violent attacks in Pakistan, China is worried about the broader wave of attacks that Pakistan has experienced.

CPEC, linking Pakistan’s volatile Balochistan province to China’s troubled north-western region of Xinjiang, is central to the Belt and Road and a key economic component in China’s brutal effort to reshape the cultural, social and political outlook of the region’s Turkic Muslim population.

China has reportedly detained at least one million Turkic Muslims in re-education camps, the largest faith-based internment since Nazi Germany hoarded Jews into concentration camps.

China is also wary of enhanced Saudi influence in Pakistan and mounting tension between the United States and Iran that could suck the South Asian state into regional conflict.

Insecurity in Balochistan with its port of Gwadar as a key CPEC node has prompted debate in China about the country’s political and economic exposure in Pakistan.

Beijing-based military analyst Zhou Chenming questioned the wisdom of China’s investment in Gwadar. “Gwadar wants to be in the shipping business, but it has failed to do so. Pakistan’s economy is not very good, and this port has become very wasteful … under these circumstances, how can China conduct its business? The roads and traffic cannot even be maintained,” Mr. Zhou said.

That statement and broader discussion in Beijing has not gone unnoticed in Islamabad.

As a result, Pakistan like Iran, is likely to wait for China’s adoption of the FATF presidency with a degree of bated breath.

China’s appointee as FATF president, Xiangmin Liu of the People's Bank of China, is certain to add to the unease.

A lawyer with a Yale PhD who was part of a leading New York law firm and a fellow at Harvard’s Kennedy School of Government, Mr. Liu is expected to take a tough position on money laundering and funding of political violence and pressure both Iran and Pakistan to comply with FATF demands by October.

That would perfectly serve China’s interest in avoiding that its FATF presidency is sucked into global geopolitical and trade disputes.

That may be easier said than done. No doubt, the US will want to see Iran blacklisted.

Regarding Pakistan, outgoing US president of FATF, Marshall Billingslea, suggested Washington may adopt a similar attitude towards Pakistan.

The Orlando meeting was “not the plenary where we would discuss a blacklisting issue. This was the plenary where we examine how far behind Pakistan is on its action plan... I must say they are far behind,” Mr. Billingslea said in his parting shot.

Dr. James M. Dorsey is a senior fellow at Nanyang Technological University’s S. Rajaratnam School of International Studies, an adjunct senior research fellow at the National University of Singapore’s Middle East Institute and co-director of the University of Wuerzburg’s Institute of Fan Culture.