MCC OKs Compliance Risk Regulations

For making Iranian financial institutions conform to international standards, Money and Credit Council–a top monetary decision-making body–has approved a directive that requires banks to implement compliance risk standards.

"With the implementation of this directive in the banking system, another step will be taken for making the banks of our country comply with international banking supervision standards and for creating a favorable climate to prevent a violation of standards," the Central Bank of Iran wrote in a statement on its official news website.

The directive is mainly concerned with compliance risk which, as CBI notes, has become one of the main risks facing financial institutions in recent years, hindering Iranian banks' efforts to engage with their international peers.

According to Basel Committee on Banking Supervision, compliance laws, rules and standards generally cover issues such as observing standards of market conduct, managing conflicts of interest, treating customers fairly and offering customer guidance.

They typically include specific areas such as the prevention of money laundering and terrorist financing, and may encompass tax laws that are relevant to the structuring of banking products or customer advice.

A bank that knowingly participates in transactions intended to avoid regulatory or financial reporting requirements, evade tax liabilities or facilitate illegal conduct will be exposing itself to significant compliance risk.

CBI says it devised and communicated this directive to MCC, in light of the importance of this risk and its significance in the international banking community.

Since the implementation of the nuclear accord in January 2016 and especially in the past few months, CBI has been focused on gradually upgrading Iranian banks and credit institutions in terms of standard conformity, as correspondent banking ties with international counterparts, most notably with major European banks, are still far from ideal.

In mid-May, the policymaker notified Basel III principles on corporate governance to private banks and credit institutions, and placed the oversight of state-owned lenders on its agenda.

MCC also approved another directive aimed at enhancing banks' capital adequacy ratio in line with international standards in mid-June, which replaced previous guidelines that had remained intact since 2003.

Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on banks' capital adequacy, stress testing and market liquidity risk. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007-8 to strengthen capital requirements by increasing liquidity of banks and reducing their leverage.

Changes in MCC Structure

This week, at the recommendation of CBI Governor Valiollah Seif, President Hassan Rouhani officially appointed two well-respected figures, namely his deputy for economic affairs, Mohammad Nahavandian, and his special aide for economic affairs, Masoud Nili, to become MCC members.

Nahavandian and Nili were subsequently inducted into the council and were present at late Tuesday's meeting where the new directive was approved.

Late August, Masoud Karbasian, the new economy minister, and Mohammad Shariatmadari, the new minister of industries, mines and trade, were sworn in as new members representing the administration in the 14-strong committee.

Minister of Roads and Urban Development Abbas Akhoundi and Minister of Agriculture Mahmoud Hojjati were other recent appointments.

As Donya-e-Eqtesad, Financial Tribune's sister publication notes, these new appointments represent a notable change in MCC as, for the first time, two recognized monetary and banking experts–Nahavandian and Nili–are in the committee and officials act as policymakers.

This enhances the independence of CBI and MCC, and aligns them with the macroeconomic requirements of the country, such as maintaining a low inflation rate and registering a high GDP growth rate.

The permanent members of MCC include the CBI governor, the economy minister, two ministers chosen by the Cabinet, the head of Iran Chamber of Commerce, Industries, Mines and Agriculture as the representative of the private sector and the country's prosecutor general, as well as two parliament members.