Bank towers in Toronto’s financial district. Senior bankers flagged concerns on Tuesday about potential hits to the economy and their clients if the conflict in the Middle East persists.Fred Lum/The Globe and Mail
Regulators are urging financial institutions to be vigilant in countering financial crime risks emanating from Iran as Canada’s largest lenders brace for potential headwinds stemming from the U.S.-Israeli air strikes on the Middle Eastern country.
The Financial Action Task Force strengthened its position on Iran and introduced new countermeasures at its plenary in Mexico City last month. The intergovernmental body, which sets standards to combat money laundering and terrorist financing, cited Iran’s failures to address deficiencies in its financial crime regime.
Anti-money-laundering watchdogs in Canada and the United States both issued advisories after the meeting.
“U.S. financial institutions should consider the FATF’s stance toward these jurisdictions when reviewing their obligations and risk-based policies, procedures, and practices,” the U.S. Treasury Department’s Financial Crimes Enforcement Network said Friday.
In Canada, banks and other companies are required to treat every financial transaction to or from Iran as high-risk and report it to the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC). Canadian banks that operate in the United States are also subject to U.S. anti-money-laundering laws.
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Senior bankers, meanwhile, flagged concerns Tuesday about potential hits to the economy and the lenders’ clients if the war persists. The oil market was rattled by severe volatility this week, whipsawing stocks as traders and investors rushed to make sense of conflicting signals.
Canadian Imperial Bank of Commerce CM-T chief financial officer Robert Sedran said the lender does not have any direct exposure to Iran. While a drawn-out war and its effect on oil prices, inflation and interest rates could temper profits, Mr. Sedran said the bank has built up strong capital and liquidity reserves to withstand economic shocks.
He added that CIBC has invested significantly in its risk management systems, particularly in its capital markets unit.
“So far, it’s just kind of watching and seeing how long this will play out,” Mr. Sedran said at a conference held by Royal Bank of Canada RY-T. “But you start to build the playbook, and we feel comfortable that we’re in a good place.”
While geopolitical uncertainty in recent years has dampened lending and activity in retail and business banking, volatility has been a boon for capital markets and wealth management units as clients turn to equity markets. But the conflict in the Middle East threatens to curb dealmaking and financing.
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Bank of Montreal’s BMO-T head of capital markets, Alan Tannenbaum, said it is still too early to gauge the impact of the war, but if it persists over a longer period, “it will start to have a negative impact on our business.”
“When I think about the impact of what’s happening in oil markets, equity markets or fixed income markets, after a surge in activity where people are trying to reposition or exit positions, what ends up happening is that, candidly, people sit on their hands and they wait. Our corporate clients are less active,” Mr. Tannenbaum said at the conference.
“To us, that’s what really causes challenges.”
The Canadian Bankers Association said in a statement that the industry takes the fight against financial crime “very seriously,” and that the country’s lenders devote “significant resources” to anti-money-laundering and anti-terrorist-financing programs, internal controls and employee training.
“Much of this investment focuses on continuous improvements to address the shifting landscape of compliance requirements and the evolving nature of domestic and international money laundering, terrorist financing and sanctions evasion risks,” said Nathalie Bergeron, a spokesperson for the CBA.
The Department of Finance said the government is closely monitoring developments in the Middle East, “its impact for regional stability, global economic conditions, and financial markets, and the importance of secure trading routes.”
“The government, along with allies, stand ready to take necessary measures, if warranted,” Finance Department spokesperson Marie-France Faucher said in an e-mail.
Jessica Davis, president of advisory firm Insight Threat Intelligence, said that as international sanctions have restricted Iran’s access to the traditional banking system, the country has developed an alternative financial system that allows it to move money to militant groups such as Hamas, Hezbollah and the Houthis.
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That alternative financial system includes using informal value transfer systems, cash couriers and cryptocurrency, said Ms. Davis, the author of Illicit Money: Financing Terrorism in the Twenty-First Century.
“Crypto is increasingly important for Iran,” Ms. Davis said.
“For a long time, there almost wasn’t enough liquidity in the crypto market for it to be useful for sanctions evasion. But as Chinese professional money-laundering networks, other organized criminal entities, North Korea, Iran and even Russia have all created this illicit finance marketplace where they can trade amongst each other, cryptocurrency has become even more important and more useful for illicit actors,” she added.
Iran committed to an action plan aimed at addressing deficiencies in its anti-money-laundering and counter-terrorist-financing regime back in 2016, according to the FATF. However, the country has failed to enact the majority of that plan, the task force said in its Feb. 13 call to action.
The organization is calling on jurisdictions to apply effective countermeasures on Iran, including refusing to allow Iranian financial institutions to establish subsidiaries or branches in their countries, prohibiting their own banks from setting up branches or offices in Iran and limiting business relationships and financial transactions with people in Iran.
“When applying countermeasures, countries should ensure that flows of funds involving humanitarian assistance, food and health supplies, diplomatic operating costs, and personal remittances are appropriately handled on a risk basis considering the terrorist financing or proliferation financing risks emanating from Iran,” the FATF said.