Is Anti-Money Laundering Enforcement Helping to Tank the Iranian Rial?

flickr / basheem

Iran’s currency is in free-fall. After a slow slide throughout 2012, the Iranian Rial all of the sudden took a dive last week, according to CNN:

So Iranians, who need dollars to both buy imported goods and guard their savings against rampant inflation, have developed an extensive black market in dollars. It’s on this market that the value of the rial has tumbled.

At the beginning of the year, rials on the black market were worth [relatively close] to the official rate. But by late September, the rial had lost half its value, trading around 24,000 to the dollar.

In the last few days the currency has plummeted even further. Reports Wednesday said money changers in Tehran were charging 39,000 rial for a dollar — a staggering 60% slide in a matter of days.

“This is one of the most intense episodes for the county in the last 100 years,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.

The price of local currency can depreciate versus foreign currency for three primary reasons. The first is that the supply of the local currency increases – governments print money, and so the existing money becomes less valuable. But this is only part of what is happening to the rial right now.

The second is that the real demand for exports of the country increases. When a country exports goods, people who buy them often pay for the goods in their own currency, which means they need to buy that currency in order to pay for it. This drives demand for that currency up and increases the price. A country like Iran might also trade exports directly for foreign currency like dollars, which they can use more easily to buy goods on the international market.

But the impact of exports to boost the rial is limited, given that Iran’s oil exports have been cut in half by sanctions, we can expect considerable currency depreciation over the long term. And we are seeing that this year. But over the past week, we’ve seen the rial lose a remarkable amount of value. It lost 17% alone last Monday, and 60% over the course of last week. Inflation in Iran is officially at 25%, but estimates point to a true rate that is likely much higher. It may not be too long until we are seeing hyperinflation in Iran.

This abrupt shift is much different from the slower decline over the past year, as the inability to access the proceeds of Iranian oil exports have slowly pushed the value of the rial down. Instead, I also think that we may be seeing some effect from the U.S. anti-money laundering crackdown on banks doing business with Iranian clients. Over the past four months, U.S. authorities have fined major international banks ING and Standard Chartered, and are rumored to be investigating several more, including the massive Deutsche Bank, for stripping wire transactions of information relating to their Iranian clients. The Wall Street Journal’s Corruption Currents blog reports that the EU could follow in a similar crackdown.

Oil is usually traded worldwide in U.S. dollars. Banks that provide U.S. dollar accounts, even if both parties to the transactions and the bank are not from the United States, have to open correspondent accounts stateside. This includes Iranian entities trying to sell Iranian oil. If U.S. authorities sent a strong enough message to international banks that using loopholes or deception to continue doing business with Iranian oil exporters will bring consequences, it could all of the sudden become very difficult to transfer money to those clients worldwide. Anyone in Iran stuck with large rial holdings could end up finding it very difficult to spend the currency on useful things in the future – tanking its value. They might also speculate that in order to cover its sanctions-induced deficit, the Iranian government might just print loads of money.

This kind of crisis of confidence is like one giant bank run on the Iranian currency. No one wants to be left holding a medium of exchange that they can’t exchange. Anyone on the fence sees everyone else going to the market to sell off their rial, and it creates a vicious circle that—if not halted—could result in hyperinflation.

There are a lot of things that could cause this effect. We should be very clear not to attribute it solely to any one cause. But if the new anti-money laundering enforcement contributed to the collapse, we should note one very important fact. No new laws were passed by the United States. U.S. law enforcement acted this summer to investigate and fine banks that were violating the law during the 2000s – not to directly stop crime that was occurring real time.

The (still-ongoing) crackdown by U.S. law enforcement was in reality an impressive demonstration of U.S. intention to go after banks that are violating the law. When Ben Lawsky very publicly threatened to take away Standard Chartered’s banking license, I bet that quite a few banks saw their potentially weak compliance programs as an existential threat to their institutions.

It proves that enforcing anti-money laundering laws of all kinds is something that the United States government is capable of doing, if the political will exists. Money laundering does not only cause harm to the United States and elsewhere when sanctions against a geopolitical enemy are involved. If we want to fight it, we can. Enforcement of financial crimes works when we want it to work.