Summary
In October 2025, the Financial Action Task Force (FATF) reaffirmed Iran’s position on its blacklist of high-risk jurisdictions for failing to meet global Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) standards. This decision, while expected, reinforced Iran’s economic and financial isolation. Iran’s refusal to eliminate legal loopholes that allow financing of designated terrorist groups led to continued global caution and stringent compliance measures by banks worldwide.
The EU’s simultaneous re-imposition of sanctions—triggered by the JCPOA snapback mechanism—further sealed Iran’s exclusion from the global financial system. These measures froze Iranian bank assets, restricted investments, and banned trade in key sectors like oil and gas, effectively rendering Iran untouchable to international financial institutions.
Domestically, Iran’s regulatory and banking systems remain paralyzed by opaque and outdated structures, relying on informal and high-risk financial mechanisms such as hawala and barter. Without deep, systemic reform—including modernizing banking laws, enforcing financial transparency, and dismantling networks tied to illicit financing—the country will remain excluded from legitimate global finance. However, genuine reform conflicts with Iran’s political and ideological interests, particularly its reliance on shadow financial networks that sustain its regional influence. This tension perpetuates the economic stagnation and isolation Iran currently faces.
In the least shocking turn of events, Iran has remained on the Blacklist of the Financial Action Task Force (“FATF”), a move that has prompted many regulators worldwide to let out a sigh of relief. Although many regulatory practitioners have anticipated that Iran will not slide away from the blacklist of FATF, some more cautious practitioners have been contemplating the fact that such a monstrous move may be unleashed. Luckily for them, the Iranian regime does not see eye to eye with them on banking reform, which is currently stuck with light reforms rather than in-depth reform.
The October 2025 reaffirmation of Iran’s placement on the Financial Action Task Force (FATF) blacklist, the High-Risk Jurisdictions subject to a Call for Action, was the definitive non-event that allowed global financial regulatory practitioners a collective sigh of relief, effectively cementing the status quo of Iran’s economic isolation due to its refusal to fully comply with core anti-money laundering (AML) and counter-terrorism financing (CTF) standards, particularly by preserving a legal exemption for funding designated groups.
For banks and financial institutions, this decision dictates an unwavering policy of de-risking and zero tolerance, transforming political risk into an insurmountable compliance mandate under FATF Recommendation 19, which requires “effective countermeasures,” including the termination of correspondent banking relationships and the automatic rejection of most Iran-linked transactions due to extreme Enhanced Due Diligence (EDD) costs.
This imperative is now lethally compounded by the EU’s re-imposition of sweeping sanctions (triggered via the JCPOA’s snapback mechanism in late September 2025) which directly legalizes and mandates the termination of financial ties by EU banks, the newly reinstated EU prohibitions include freezing the assets of the Central Bank of Iran and major Iranian commercial banks, restrictions on fund transfers and investments, and bans on trade in key sectors like oil and gas; the combined effect of the FATF’s AML/CTF Proliferation Financing risk and the EU’s renewed sectoral and targeted sanctions eliminates any legal or commercial ambiguity, solidifying the global consensus that Iran is too high-risk to touch, forcing the collapse of alternative mechanisms like INSTEX, and ensuring that European financial institutions fully prioritize compliance with their own, now-reinstated, restrictive laws and the FATF’s definitive global mandate.
Critically, the continuation of the blacklist also entrenches a detrimental status quo within the Iranian regulatory framework itself: Iran’s central bank and financial regulators are effectively crippled, unable to achieve the modernization necessary to implement adequate financial transparency (e.g., establishing advanced systems for tracking suspicious transactions, adopting modern banking technologies), and thus remain forced to rely on opaque, costly, and inefficient parallel exchange mechanisms (like barter, local currency swaps, and informal hawala networks) that serve only to increase domestic money laundering and corruption risks while simultaneously preventing the country from attracting any meaningful, legitimate Foreign Direct Investment necessary for economic stability and growth.
Hence, the prerequisite for Iran’s removal from the FATF Blacklist is not a series of theatrical, last-minute legislative gestures but a demonstrable, profound shift toward systemic financial transparency, marking a genuine, good-faith effort. The conditional ratification of the Palermo and CFT Conventions in 2025, which preserved the legal loophole for state-sponsored terrorism financing, is the quintessential “band-aid solution” the FATF explicitly rejected. True reform demands that Tehran move beyond political posturing to undertake a wholesale overhaul of its domestic financial apparatus, beginning with the long-overdue amendment and enforcement of Iran’s foundational banking laws. This involves dismantling the opaque, fragmented regulatory structure; establishing advanced, centralized reporting systems compliant with global standards and building the robust technological infrastructure necessary for effective, real-time customer due diligence and sanctions screening, thereby finally addressing the severe, endemic deficiencies that continue to risk the integrity and stability of the international financial system.
Yet achieving genuine financial compliance demands significant, ideologically painful sacrifices that currently sit outside the regime’s immediate priorities. To comply with the FATF’s mandates against Terrorist Financing and Proliferation Financing, the government must dismantle the very networks that sustain its regional influence, including the opaque “shadow banking system” and the “ghost fleets” utilized for illicit oil exports and sanctions evasion. This profound structural contradiction forces the regime to choose between retaining its paramilitary and geopolitical leverage through illicit finance and undertaking the comprehensive, in-depth banking regulatory reform necessary for economic survival. The continued avoidance of this reform, opting instead for fragmented and superficial legal fixes, is a self-inflicted wound that demonstrates that ideological commitments still supersede the dire necessity of financial reintegration.
