ABASTRACT: The principle of freedom of contract, as one of the foundational doctrines of civil law, enables individuals to enter into agreements within the framework of the law that secure their interests. However, the implementation of the Financial Action Task Force (FATF) standards to combat money laundering and the financing of terrorism has imposed certain limitations on this principle. Requirements for transparency, party identification, and reporting in contracts have, on the one hand, enhanced oversight and financial security, and on the other hand increased contractual complexity and costs. The aim of this study is to analyze the positive and negative effects of applying FATF standards on the principle of freedom of contract and to assess the extent to which these standards conflict with the legal principles governing contracts in Iranian law. The main research question is whether FATF standards have influenced the principle of freedom of contract in Iranian law, and if so, how these effects should be evaluated. This research was conducted using an analytical-descriptive method. The findings indicate that the application of FATF standards has had diverse effects on the principle of freedom of contract. Positively, these standards—by requiring transparency in contracts, identification of parties, and scrutiny of suspicious transactions—have contributed to mitigating money-laundering risks and strengthening financial security. Negatively, however, these requirements have increased contractual complexity, limited the freedom to choose contracting parties, and raised the costs of contract formation. In some cases, the speed of transactions has been reduced and certain financial services have become restricted. The results suggest that although FATF standards impose restrictions on the principle of freedom of contract, such limitations are justifiable in light of the objective to create a secure and stable economic environment and to combat financial crime. By adopting a balanced legal approach, it is possible to reconcile these restrictions with the preservation of contractual freedom.
SUMMARY: Introduction – 1. Restrictions on the Principle of Freedom of Contract – 2. Effects of FATF on Contracting Parties – 3. Impact of FATF at the Negotiation Stage – 4. The Impact of FATF on the Protection of Consumer Rights – Conclusion.
Introduction
In today’s world, international financial and economic systems are profoundly influenced by global developments and requirements. The principle of freedom of contract is one of the fundamental doctrines of commercial law and a cornerstone of the free-market economy. This principle allows individuals to freely conclude contracts and determine their terms based on their autonomous will. In Iranian law, it is also recognized as a governing principle in contractual relations and is explicitly reflected in various commercial and civil statutes.
On the other hand, the Financial Action Task Force (FATF) is an international body established with the aim of combating money laundering and the financing of terrorism. By formulating international standards, FATF obliges member states to adopt the necessary measures to counter these crimes. Accession to FATF and compliance with its standards, although potentially enhancing a country’s international standing and improving its economic relations, may also affect certain domestic legal principles, including the principle of freedom of contract.
Given the increasing significance of international economic relations and the necessity of aligning domestic legal systems with international standards, examining the impact of FATF on the principle of freedom of contract within Iranian law is of particular importance. This study seeks to provide a precise definition of both the principle of freedom of contract and the FATF standards, to identify the barriers and challenges arising from their implementation, and to propose recommendations for better harmonization between domestic legislation and FATF requirements while preserving contractual freedom.
The research employs a descriptive-analytical methodology. Data collection is conducted through library resources, statutory texts, judicial precedents, and scholarly articles, supplemented by qualitative methods such as expert interviews in the fields of law and economics for deeper analysis. The findings of this research are expected to be valuable for policymakers, legislators, judges, lawyers, and economic actors. By raising awareness of the implications of FATF standards for the principle of freedom of contract, they can make better-informed decisions in the fields of law-making and policy design. Furthermore, with an understanding of the newly imposed restrictions, contracting parties will be able to structure their agreements in compliance with the revised regulatory framework. Ultimately, the study aspires to contribute to improving the compatibility of domestic law with FATF standards while preserving contractual freedom, thereby strengthening the legal system and enhancing the business environment.
1. Restrictions on the Principle of Freedom of Contract
The principle of freedom of contract allows individuals to regulate their legal relations based on their will and mutual consent. Nevertheless, this freedom is not absolute. Certain restrictions are imposed to safeguard public rights and uphold social justice. Such restrictions may derive from mandatory provisions of law, considerations of public order, or principles of good morals. This section examines the limitations imposed on the principle of freedom of contract and the rationale behind their application.
1.1. Mandatory Rules, Public Order, and Good Morals
Mandatory rules are legal provisions that explicitly and directly render certain contracts void or unenforceable. Due to their crucial role in safeguarding public order, good morals, and fundamental rights, parties cannot derogate from these rules, even by mutual agreement. In the field of anti–money laundering and combating the financing of terrorism (AML/CFT), Iran—like many other countries—has enacted mandatory rules to prevent the misuse of its financial system for criminal activities. These laws aim to ensure financial transparency, identify and trace suspicious financial flows, and prevent terrorism financing. Some of the most significant mandatory rules in this area include:
1. The Anti–Money Laundering Act: This is the most comprehensive law on combating money laundering in Iran, most recently amended in 2018. It imposes obligations on natural and legal persons—including banks, financial and credit institutions, and professional groups such as lawyers, financial advisors, and real estate agents—to identify clients and report suspicious transactions (Ministry of Economic Affairs and Finance, 2021, p.16).
2. The Act on Combating the Financing of Terrorism: This law establishes duties for individuals and institutions to prevent and counter terrorism financing (ibid., p.36).
3. Monetary and Banking Regulations: These include provisions that directly or indirectly address AML measures, such as customer due diligence (CDD), recordkeeping, and suspicious transaction reporting (Mortezania, 2021, p.21).
4. Laws on Combating Organized Crime: Closely linked with money laundering, these laws provide mechanisms that indirectly or directly support AML efforts.
The significance of mandatory rules in AML lies in their deterrent function: they prevent financial crimes, enhance transparency in financial transactions, and facilitate supervision of financial flows. They also protect the national financial system from criminal misuse and enable Iran to fulfill its international obligations in AML and cooperate with other states (Shams Natari, 2004, p.110). In short, mandatory rules play a vital role in preserving the integrity of the financial system and creating a secure and transparent environment.
Public order refers to the body of imperative legal rules and regulations enacted to ensure the proper administration of the state, preserve security, and uphold morality in social relations. In other words, public order consists of rules essential for maintaining public interests, social stability, and the prevention of disorder.
Public order may take different forms depending on the area it regulates. For example, in family law, it requires paternal guardianship of children and mutual respect between spouses. In economic matters, it demands that wealth be distributed fairly and proportionately according to work and contribution. In legal systems, it mandates judicial independence, the right to defense, and the issuance of judgments based on law (Katouzian, 2010, vol. 4, p.51).
Mandatory rules are often referred to as rules of public order, enacted for the welfare of society as a whole; hence, individual autonomy must yield to them. Article 975 of the Iranian Civil Code provides:
“A court cannot enforce foreign laws or private contracts that are contrary to good morals or, by offending public sentiment, are deemed inconsistent with public order, even if such laws would otherwise be enforceable.”
The weight of public order is not uniform across all contexts. In civil law, all mandatory rules are considered to belong to public order. For contractual security and to prevent disruption in commercial relations, the general principle is that new laws should not affect contracts concluded under earlier legislation. However, when a new law is so intimately connected with the higher interests of society that legislative intent clearly indicates its universal application, the law may govern even existing contracts, applying immediately. Not all mandatory rules fall into this category; only those closely tied to public interests and the essential policies of the state qualify.
Some contracts, such as employment contracts and insurance agreements, are so heavily regulated that party autonomy plays only a limited role in their formation. Over time, the concept of public order has evolved, particularly under the influence of social thought: agreements once deemed permissible may now be viewed as contrary to public order. In modern legal doctrine, public order is often divided into political public order (traditional) and economic public order. The latter emerged due to the expanding role of the state in ensuring social welfare and economic stability (Safa’i, 2000, pp. 58–60).
Examples of contracts contrary to public order include:
Contracts relating to narcotics trafficking, prohibited due to their threat to public health and violation of criminal law.
Contracts aimed at violating individual rights, such as slavery agreements or contracts involving bodily harm.
Contracts obliging one party to commit unlawful acts, such as agreeing to perpetrate a crime.
Contracts involving the unlawful appropriation of public property.
Identifying contracts that violate public order or good morals is of paramount importance since such agreements are not only legally void but may also give rise to significant social and economic problems. In the author’s view, the nullification of contracts that contravene public order and good morals illustrates the critical role of mandatory rules in preserving social security and protecting moral values. By imposing limits on contractual freedom, these rules prevent the abuse of private autonomy and contribute to the creation of a healthy and sustainable society.
1.2. Article 975 of the Iranian Civil Code and Article 6 of the French Civil Procedure Code: Public Order and Good Morals
Article 975 of the Iranian Civil Code and Article 6 of the French Code of Civil Procedure mention good morals alongside public order, expressly stating that private contracts cannot be contrary to good morals. Good morals refer to socially approved conduct — in other words, “the manners and behaviour of the virtuous and devout members of society.” This concept varies with time and place and may differ from religious morality. Good morals are an instance of public order; the broader concept of public order therefore encompasses good morals, so the relationship between the two is one of generality and particularity. (Shahabi & Shahidi, 2018, p.512). Accordingly, contracts that conflict with the socially accepted morality — for example, prevailing sexual morals — are void and lose legal validity.
French jurisprudence, invoking conflict with good morals, has voided obligations whose purpose was to establish, facilitate, or sustain illicit sexual relations, or that merely rewarded such relations, as well as contracts concerning the establishment and operation of brothels or the provision of necessary means for such venues. To void contracts that violate public order or good morals, it is not necessary that a specific statutory prohibition exist; it suffices that the judge determines the contract to be contrary to public order or good morals and declares it null even if the law is silent on the matter. Generally, the determination of public order and good morals rests with the judge, and Article 179 of the Civil Procedure Code does not require a specific statutory text. Article 197 of the Constitution also corroborates this view. French case law has adopted the same approach. (Safa’i, 2000, p.65)
Article 975 of the Civil Code designates good morals as one of the sources of public order, while Article 6 of the Code of Civil Procedure lists it alongside public order among the obstacles to the enforceability of contracts, stating: “Contracts and obligations that disturb public order or are contrary to good morals shall not be enforceable by the court.” This raises the question: what is the relationship between good morals and public order? Are they essentially the same concept with two faces, or are they independent?
The answer is that good morals are a particular aspect of public order. Although the ultimate aim of morality is the cultivation of virtuous and devout persons, and the law aims at justice and equality, the legal system has never been independent of moral considerations. In many instances the maintenance of social justice requires the law to uphold certain moral norms. For this reason, morality must unquestionably be regarded as one of the important foundations of law. (Ahmadi & Estani Abdolghani, 1968, p.113)
Some moral rules that are codified in mandatory legal provisions or that form the basis of such provisions should be classified as rules of public order. Other moral rules — whose only sanction may be the force of public conscience — fall specifically under the rubric of “good morals.” Conversely, the foundation of legal rules is not exclusively moral; sometimes economic and political necessities give rise to principles about which morality is silent. Thus, it is possible that an act contrary to public order does not conflict with any moral rule. Accordingly, public order and good morals each occupy their own domains; although they influence one another, they should be considered and applied distinctly. (Katuzian, 2014, p.180)
Nevertheless, because matters contrary to good morals also disturb public order and because the law cannot ignore immoral acts, the logical relationship between these two concepts should be considered one of general and particular: that is, whatever conflicts with good morals will also conflict with public order, although the converse may not always hold. Adding good morals to the obstacles to contractual enforceability grants the adjudicator the authority to go beyond statutory texts in moralizing contracts; otherwise good morals and public order are so interconnected that they cannot reasonably be treated as independent. For this reason some scholars have attempted to provide a comprehensive definition encompassing both concepts, describing them as the set of rules indispensable for social life. (Adalatjou & Esmati, 2018, p.271)
1.3. Restrictions on the Principle of Freedom of Contract in Legal Systems
The principle of freedom of contract, as one of the most important tenets of private law, rests on the idea that individuals may freely regulate their legal relations on the basis of their will. However, this freedom is not absolute and, in many instances, is constrained by legal, social, economic, and international necessities. Such restrictions are enforced to preserve public order, protect the rights of third parties, safeguard public interests, and prevent potential abuses. In this section, we examine the various types of limitations imposed on freedom of contract across legal systems, including restrictions arising from special laws, state policies, third-party rights, collective and adhesion contracts, and international regulations.
Restrictions Arising from Special Special laws are statutes that govern particular domains of legal relations. For example, commercial law governs commercial relationships, the civil code regulates general private relations, and labor law addresses employer–employee relationships. Each of these bodies of law, according to the nature of the relations they regulate, imposes specific limitations on contract formation. The rationale for such special restrictions often includes protection of weaker parties: certain special laws are enacted to protect vulnerable groups such as workers, consumers, or tenants by limiting the freedom to contract in ways that would disadvantage them. Moreover, some types of legal relations—such as commercial transactions—by virtue of their complexity and economic importance, require more detailed and comprehensive regulation; hence special laws provide precise rules for contracts in these fields. Some restrictions are also imposed to preserve public order and to prevent misuse of contractual freedom. (Esmaeili et al., 2020, pp.102–103)
1.4. Examples of Restrictions Arising from Special Laws
Commercial Code. The Commercial Code imposes limits on the conclusion of commercial contracts—such as sales contracts, lease contracts, and partnership agreements. For example, company registration may be mandatory for entering into certain commercial contracts.
Labor Law. Labor legislation prescribes restrictions on employment contracts. For instance, an employment contract must be concluded in writing, and the employee’s minimum wages and benefits must be specified.
Consumer Protection Law. Consumer protection statutes restrict contracts between producers and consumers. Producers are required, for example, to provide consumers with sufficient information about their goods or services.
Respect for special laws when drafting and executing contracts is of great importance because non-compliance may lead to contract nullity, liability for damages, and other legal consequences.
The author submits that special laws—by imposing restrictions on contracting—contribute to order and legal certainty in private relations. Although these restrictions limit contractual freedom, they serve to protect individual rights and public interests.
1.5. Restrictions Arising from Government Policy
In certain circumstances, governments impose limits on freedom of contract to protect public interests or respond to crises. Contracts that contradict public morality or national security, for example, are void. To protect consumers from abusive practices by manufacturers or sellers, states may enact laws restricting contractual freedom; consumer-protection legislation often prescribes specific conditions for concluding sales contracts for goods and services. In times of crisis—such as war, natural disasters, or pandemics—governments may restrict contractual freedom to allocate resources equitably and to prevent market disruption.
States may also use contractual restrictions to promote a fairer distribution of wealth and reduce inequality. Tax law and land-ownership regulations are examples. Environmental protection may similarly require limits on contracts that would harm natural resources.
In our legal system many contracts with a social character are governed by statutory templates that the contracting parties must observe; their only real freedom is to refrain from contracting. Once they decide to contract, they must choose from the predesigned statutory frameworks. For example, labour law and its implementing regulations set minimum wage, working hours, rules for overtime pay, leave and holidays, and detailed procedures for resolving disputes between workers and employers, leaving little room for initiative by either party. Likewise, in leases of immovable property many of the legal effects of the contract are predetermined by statute: for instance, obligations concerning stipulated rent or the tenant’s liability for fair compensation after expiry or termination are prescribed (see art. 11(7) of the Law on Landlord-Tenant Relations). That statutory constraint is not absolute, however: art. 4 of the same law allows lessor or lessee to petition for revision of the rent on grounds of rising or falling cost of living, subject to certain temporal conditions. In real-estate transactions, pursuant to land-registration instructions, many contractual options may be extinguished even if the parties agree to preserve them.
Price-stabilization measures adopted by government also limit contractual terms. For example, no operator in the pharmaceutical trade or any pharmacy may sell medicine above the price set by the Ministry of Health; changing a government-set price may give rise to criminal fines and custodial penalties (see proviso to art. 5 of the Medical and Pharmaceutical Regulations). Similarly, private electricity providers may not charge more than the rates fixed by the Ministry of Water and Power. Historically, traders, hoteliers, restaurateurs, and food vendors who sell above government- or municipality-set prices have been subject to custodial sentences, fines, and occupational bans (single article law dated 17 Shahrivar 1322 on price gouging). It has also become common that the terms of contracts with state enterprises, companies, and banks are prefigured in their articles of association, leaving no room for bilateral negotiation. (Katuzian, 2014, p.202)
1.6. Restrictions Originating in International Law
International law likewise imposes limits on contractual freedom. Important examples include:
International public order: Contracts that contravene fundamental principles of international law are void.
International mandatory rules (lex specialis): These rules explicitly render certain contracts void or unenforceable.
Governing-law rules for international contracts: The choice of law for an international contract may substantially affect the parties’ rights and obligations. (Bagherzadeh, 2004, p.45)
1.6.1. The Palermo Convention (UN Convention against Transnational Organized Crime)
Subject matter: This convention is the principal international instrument addressing transnational organized crime. It criminalizes certain organized criminal activities across borders, facilitates international judicial cooperation, extradition, and the confiscation of proceeds of crime.
Relevance to AML: A substantial portion of the convention concerns money-laundering; member states are obliged to take measures to prevent and counter money-laundering.
Iran and the Palermo Convention: Iran has acceded to this convention. (Salimi, 2003, p.172)
1.6.2. The Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
Subject matter: This convention targets illicit trafficking in narcotics and psychotropic substances, criminalizing related offences, promoting international cooperation, and enabling confiscation of proceeds arising from such crimes.
Relevance to AML: Because drug trafficking is a principal source of laundered proceeds, the convention places special emphasis on money-laundering countermeasures.
Iran and the Vienna Convention: Iran is a party to this convention.
1.6.3. The United Nations Convention against Corruption
Subject matter: This convention addresses prevention and suppression of corruption in both the public and private sectors. It criminalizes corruption offences, fosters international cooperation, and provides for the restitution of stolen assets.
Relevance to AML: Corruption commonly facilitates money-laundering; consequently, this convention contributes to global AML efforts.
Iran and the UNCAC: Iran has acceded to this convention.
1.6.4. The Financial Action Task Force (FATF)
The FATF is an international body composed of representatives from 39 countries and two regional organizations that sets standards to combat money-laundering and the financing of terrorism. Its primary objective is to strengthen the international financial system so that it is resilient to financial crime. FATF evaluates national AML/CFT systems, identifies weaknesses, and issues recommendations for improvement. Recognized as the global standard-setter in AML/CFT, many countries treat FATF recommendations as effectively binding.
FATF’s role complements UN conventions such as Palermo and the Vienna Convention: it sets standards for the practical implementation of those treaties and assists states in meeting their international obligations. The FATF periodically assesses member states’ performance in implementing AML/CFT standards and publishes reports. In effect, the FATF functions as an international supervisory and guidance body, promoting the effective implementation of international instruments to combat money-laundering.
2. Effects of FATF on Contracting Parties
The FATF recommendations on internal controls and supervision are designed to prevent money-laundering and the financing of terrorism. These recommendations can have significant effects on the contractual freedom of parties under Iranian law. The following subsections examine these effects.
2.1. Impact on Freedom of Choice
FATF requirements may lead to the identification and management of counterparty-related risks. Consequently, banks and financial institutions may refuse to transact with counterparties they deem suspicious. This practice can restrict the contractual freedom of choice and effectively bar certain individuals or entities from entering contracts because they do not satisfy Know-Your-Customer (KYC) requirements. (Habibi & Zarneshan, 1400, p.314)
2.2. Impact on Commercial Relations
FATF obligations can negatively affect market diversity and competition. If some entities or individuals cannot meet FATF requirements, they may be excluded from the marketplace, which in turn reduces the variety of available contracting parties and commercial arrangements.
2.3. Collection of Sensitive Information
To comply with FATF standards, contracting parties may be required to provide additional personal and financial information. This expanded data collection can raise privacy concerns for the parties involved.
2.4. Restrictions on Cash Transactions
Reduction in cash usage. To prevent money-laundering, FATF-oriented measures tend to limit the use of cash in large transactions. Such limits can constrain the parties’ freedom to choose payment methods.
Increase in electronic payment methods. As cash transactions are curtailed, electronic payment methods—such as bank cards and online transfers—tend to become more prevalent.
Enhanced transaction monitoring. Financial institutions are required to continuously monitor customer accounts to identify suspicious activity. This monitoring may result in restrictions on executing certain transactions.
Rising transaction costs. Implementing FATF requirements imposes additional compliance costs on financial institutions. These costs may be passed on, directly or indirectly, to clients, thereby raising the overall cost of transactions. (ibid., p.315)
2.5. FATF’s Impact on Reporting Mechanisms
FATF emphasizes the necessity of establishing reporting mechanisms to detect and report suspicious activities. Reporting mechanisms are the processes by which financial and non-financial institutions must report any suspicious or illegal activity—including money-laundering and terrorism financing—to the competent authorities. These mechanisms are intended to increase transparency and oversight of financial activities.
Such mechanisms may reduce contractual freedom because parties must continuously monitor and report their activities and be prepared for scrutiny. FATF stresses the creation of effective reporting frameworks. (Alizadeh, 1402, p.12) Key components of these mechanisms include:
Suspicious Transaction Reporting (STR): Institutions are obliged to report any transaction that appears unusual or suspicious and may relate to money-laundering or terrorism financing. These reports must be made promptly and accurately.
Primary objectives of STRs: Identify and prevent criminal activity (e.g., money-laundering, terrorist financing); and enhance financial transparency by enabling precise supervisory oversight, thus protecting the integrity of the financial system.
Main stages in the STR process:
1. Detection of suspicious transactions: Institutions should detect transactions that appear abnormal or suspicious.
2. Analysis and review: Detected transactions must be analyzed to determine whether they are indeed suspicious.
3. Reporting to competent authorities: If analysis confirms suspicion, the transaction is reported to the appropriate authority.
Customer Information Reporting (KYC): Institutions must collect, maintain, and update accurate and comprehensive customer information, and report material changes in a customer’s status.
Transaction monitoring: Institutions must continuously monitor customer transactions and report any irregular or suspicious cases. (Jamali Hajiani et al., 1402, p.27)
In Iran, the Anti-Money-Laundering Law (approved 1386) and the Combating Financing of Terrorism Law (approved 1394) specifically address reporting mechanisms. These laws include the following obligations:
Reporting suspicious activities: Financial institutions are required to report suspicious transactions to the Financial Intelligence Unit (FIU).
Allocation of responsibilities: These statutes assign specific duties to financial institutions regarding detection and reporting. (Mortezania, 1400, p.180)
The reporting mechanisms mandated by FATF and implemented in Iranian law give rise to several challenges. Some of the most important of these challenges are:
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Challenges of Reporting Mechanisms
Legal complexities: The multiplicity of laws and divergent reporting requirements can create confusion for obliged entities and make effective implementation of reporting mechanisms difficult.
Resource constraints: Financial institutions may lack adequate resources and technical expertise to implement reporting obligations effectively, leading to non-compliance.
Privacy concerns: Reporting obligations may result in disclosure of sensitive customer information and raise data-protection and privacy concerns.
Restrictions on flexibility: Reporting requirements can limit contractual flexibility; parties may be compelled to disclose more information than they otherwise would, thereby restricting their autonomy.
Impact on commercial relations: Increased surveillance and mandatory reporting may deter parties from entering into certain transactions—especially those that could be perceived as linked to suspicious activities—adversely affecting market competition and contractual diversity.
Reduction in public trust (counterpoint): Conversely, effective reporting mechanisms can enhance public confidence in financial and commercial institutions and facilitate broader cooperation.
Reporting mechanisms under FATF and Iranian law are key tools for preventing money-laundering and terrorist financing. However, implementation challenges can affect contractual rights and the principle of freedom of contract in Iran. A careful balance is thus required between compliance with legal obligations and preservation of contracting parties’ autonomy. FATF standards are designed to create a secure and transparent financial system, but they may impair contractual freedom—e.g., the requirement for transaction transparency and counterparty identification can reduce contractual flexibility and increase compliance costs and transaction times. (Jamali Hajiani et al., 1402, pp. 31–33)
The author believes these obligations demand a careful balance between safeguarding financial security and protecting the principle of freedom of contract. States should seek legal frameworks that permit compliance with FATF requirements while preserving contractual autonomy. This subject merits further empirical and doctrinal study and may stimulate the development of novel legal solutions.
2.6. FATF’s Impact on the Principle of Presumption of Validity and the Presumption of Possession
Under the principle of presumption of validity, where there is doubt about the validity of transactions they should be regarded as valid until evidence establishes otherwise. Similarly, according to the evidential rule known as the presumption of possession, an individual’s possession of property is prima facie evidence of lawful ownership unless proven otherwise. Consequently, suspicion about transactions or assets and administrative reporting of them by obliged entities under AML rules appear, at first glance, to be inconsistent with these two legal presumptions. The following examines this issue in greater depth.
Several provisions of the Iranian Civil Code—largely following Imami jurisprudence—affirm the principle of presumption of validity, most notably Article 223 of the Civil Code, which provides that a transaction is presumed valid until its invalidity is proved. Thus, when the validity of a transaction is in doubt, the principle of presumption of validity requires that the transaction be treated as valid. Undermining this principle would disturb social and economic order. (Mousavi Bejnoordi, 1377, vol. 2, p. 287)
On the other hand, the presumption of possession (the rule of yad) set out in Article 35 of the Civil Code treats possession of a thing as an indicium of ownership. As the presumption points to a corresponding legal effect, it also supports related and consequential legal consequences; therefore, the evidential presumption of possession can extend to presumptions about legal transfer and other attendant legal bases. Accordingly, after stating the primary legal effect of possession (ownership) in Article 35, the legislator codified its consequential implications—such as transfer to a lawful transferee—in Article 36 (Nosrati, 1397, p. 362). By virtue of the presumption of possession, property held by a person is, until proven otherwise, indicative of lawful ownership; therefore, one should not subject assets to suspicion of criminal origin and report them on that basis without proof.
Nevertheless, the amending provision (Note/paragraph) to Article 7 of the Anti-Money-Laundering Law attaches reporting obligations to transactions and operations in respect of which there exists a suspicion of money-laundering or terrorist financing. In that paragraph the legislature used the two terms “doubt” and “suspicion” together without clear distinction. Principled scholars distinguish between the two: shak (doubt) denotes a mental hesitation between two equally likely alternatives as opposed to certainty, whereas zann (suspicion) denotes a state of belief that is stronger than doubt yet falls short of knowledge or certainty. (Raghib Isfahani, 1404 AH, p. 265). In other words, doubt is an indecisive state without a leaning, while suspicion implies some degree of inclination—higher than mere doubt but lower than certainty. This imprecise wording could therefore be criticized.
A closer reading of the examples of suspicious transactions and operations listed in the paragraph to Article 7 and in clause (c) of Article 1 of the same law—such as transactions that are manifestly sham, transactions involving forgery, false statements, or fabricated reports—shows that these indicators are of a higher evidentiary order than mere balanced doubt; they give rise to suspicion of money-laundering. Hence the enumerated cases can be regarded as flags that the legislator imposes on obliged entities to report without waiting for judicial proof to the contrary. The invocation of the principle of presumption of validity and the presumption of possession is principally relevant before a judicial authority and serves to protect an accused person in criminal proceedings. As is expressly stated in paragraph 1 of Article 136 of the Executive Regulations of the appended Article 14 of the Anti-Money-Laundering Law, reports of suspicious transactions and other reports that obliged entities are required to submit do not by themselves amount to an accusation against the persons reported, nor do they constitute unlawful disclosure of private secrets to the Financial Intelligence Unit. The same assurance appears in the 2009 “Directive on the Identification of Suspicious Transactions and the Manner of Reporting” (Directive on STRs).
In effect, the legislature—by obliging reporting of suspicious transactions—has sought to fulfill international AML/CFT obligations and to harmonize domestic legal measures with global instruments so as to close off the many channels through which money-laundering is committed and to detect and examine the smallest irregularities at an early administrative stage. Therefore, the proper domain of applying the presumption of validity and the presumption of possession is the adjudicative phase when a criminal charge is brought: there they operate to protect the accused. By contrast, these presumptions have no bearing on the administrative duty of obliged entities to report suspicious transactions under AML/CFT regulations. (Jamali Hajiani et al., 1402, p. 35)
3. Impact of FATF at the Negotiation Stage
The process of contracting has transformed to such an extent that traditional rules of offer and acceptance alone are often insufficient for interpreting and scrutinizing contractual relations. On the one hand, many contracts are now standard-form instruments drafted unilaterally by companies and organizations, leaving counter-parties little or no room to negotiate terms. On the other hand, other contractual obligations arise not from a simple offer and acceptance but from lengthy negotiations and bargaining over warranties and guarantees. During such negotiations goods or services are introduced, bids and counterbids are exchanged, and the parties learn about one another’s terms. At times these dynamics become even more complex: parties may reach preliminary understandings, one party may give provisional consent, or they may commence cooperation prior to signature. In some cases parties sign a contract while certain essential matters remain unresolved. In any event, disputes may arise both during pre-contractual negotiations and after formation, and parties may suffer loss even before a binding contract exists. (Asghari Afshadi, Fakhr al-Din & Ayoubi, 1387, p. 32)
An obligation to negotiate means that once parties enter into discussions, consistent with the principle of freedom of will and in good faith, certain duties governed by pre-contractual covenants may bind them and impose limits on matters they had freely intended to raise. Parties are expected to negotiate diligently and honestly, to refrain from abruptly terminating negotiations, disclosing the other’s trade secrets or confidential information, or engaging in fraudulent conduct; they must provide essential information to the negotiating counterparty and make best efforts to conclude the agreement. (Ebrahimi, Yahya, 1388, p. 81)
3.1. FATF’s Effect at the Contract Formation Stage
At the contract-formation stage, the scope of application of the principle of freedom of contract typically expands; its basis is the sovereignty of will. Under this principle, first, the parties’ will to create the contract and incur obligations suffices; and second, the parties are free to determine the legal effects of the contract. Contracting parties are free to create the contract and to set its terms; their consent is sufficient to give rise to obligations. (Haeri, Masoud, 1383, p. 39) Article 10 of the Iranian Civil Code reflects this principle but confines it to the extent that private contracts are not contrary to clear statutory provisions: “Private contracts are valid between those who conclude them, provided they are not expressly contrary to law.” However, legislated constraints such as good morals and public order (Article 960 of the Civil Code) and Article 6 of the Code of Civil Procedure carve into this “unpleasant enclosure” of contractual freedom. (Katuzian, 1389, vol. 2, p. 218)
Two aspects of freedom exist during formation: a positive aspect and a negative aspect. The positive aspect is the freedom to create a contract and to choose its wording and conditions. The negative aspect is the freedom not to enter into a binding contract: until a binding contract is concluded, parties are free to negotiate and are under no obligation to reach agreement. In other words, the principle has two faces: the freedom to contract and the freedom not to contract. During pre-contractual negotiations that freedom is generally absolute—neither party owes duties to the other and either may withdraw for any reason. (Babaei et al., 1398, p. 69)
The author observes that in modern practice some duties in the pre-contractual phase—such as confidentiality obligations, duties to disclose information, commitments to refrain from parallel negotiations with third parties for a defined period, and, above all, the obligation to negotiate in earnest and not to impose costs on the other—have constrained the principle of freedom of contract prior to formation.
3.2. FATF’s Effect at the Performance Stage
The performance stage concerns the fulfillment of contractual obligations that one or all parties owe by virtue of the contract. Performance is the principal effect of a contract. The legal effects of a contract can be divided into two groups with respect to performance timing. The first group comprises effects that arise immediately upon formation and accompany the contract’s validity—for example, transfer of ownership of specific movable goods, extinguishment and transfer of debt, and creation of a license or permission in gratuitous contracts. The second group comprises effects that remain obligations incumbent upon one party or both, such as where a contractor undertakes under contract to build a dam or construct a road. In the first group, when two goods are exchanged, each party becomes owner of the other’s goods at the moment of contract (i.e., conveyance occurs by formation), whereas in the second group, even after formation the performance of contractual duties remains outstanding.
The performance stage primarily concerns the second group of contractual effects because performance, in temporal terms, follows formation and requires parties to carry out acts. A contract may, however, entail both types of effects simultaneously. For example, in the sale of a specified external (identified) movable, ownership may pass at formation but delivery (the physical handover) remains the seller’s duty and requires subsequent performance.
Below is an academic, faithful English translation of the Persian passage you provided, kept in the original numbering and structure and rendered in formal legal language suitable for an ISI conference submission.
3.3. Performance Stage and Judicial Scrutiny
In contracts whose legal effects persist after conclusion and require subsequent performance, the fulfilment of contractual obligations constitutes the most important phase of the contractual relationship. After all, the purpose of such contracts is the execution of the obligations that they create. The most significant consequences of Iran’s accessionary commitments and the restrictions imposed on international contracts likewise materialize at this stage of the contractual lifecycle.
On the other hand, some scholars maintain that the judge must examine whether the contract has been performed accurately and in good faith. This view is persuasive because vesting this function in the court at the time of dispute is appropriate: a court assesses whether the parties’ conduct in performance has been governed by honesty, integrity, and fidelity. With respect to Iran’s acceptance of FATF conditions, our monetary and financial contracts may be subject to review by international tribunals, and where indicators of money-laundering exist such contracts may be either adjusted or annulled. Thus, accession to these instruments entails cooperation in contract performance, disclosure of information, observance of honesty and trustworthiness, and avoidance of conduct such as frustrating contractual purposes, abusing contractual rights, or engaging in fraud or deceit. (Habibi, 1400, p.577)
3.4. FATF’s Impact on the Principle of Good Faith (Bona Fides)
The principle of good faith requires parties to perform their obligations fairly and honestly toward one another. Pressure to comply with FATF obligations may, however, undermine good faith between contracting parties. For example, concerns about disclosure of personal data may reduce parties’ willingness to cooperate and may erode their bona fides during negotiations. The principal ways FATF can affect this doctrine are as follows:
1. Increased compliance pressure. FATF obligations—especially those concerning customer identification and identity verification—impose significant burdens on institutions and firms. Such pressure may erode good faith if parties, fearing legal or social consequences, withhold information or cooperate less fully.
2. Fear of disclosure. Reporting and transparency requirements may create anxiety about revealing sensitive information. Parties may refrain from disclosing full facts to avoid exposure of private or commercially valuable information, which in turn lowers trust and good faith in commercial relations.
3. Effects on negotiation candour. If the parties fear the consequences of FATF-related disclosures, they may be less candid in negotiations. Reduced transparency can diminish good faith and increase the risk of misunderstandings in agreements.
4. Legal and financial consequences. A decline in good faith stemming from compliance concerns may lead to contractual breaches and consequent legal and financial liabilities, further damaging trust in commercial relationships.
3.5. FATF’s Influence on the Rule against Breach of Contract
The doctrine of breach of contract prescribes that parties are bound to perform their contractual obligations. If institutions refrain from fulfilling contractual duties because of FATF-related constraints, such conduct may constitute a breach and give rise to legal and pecuniary consequences.
Although the FATF does not directly alter the substantive rule on breach of contract, its indirect effects on contractual practice and the regulatory environment can influence how breaches occur and are adjudicated. The principal mechanisms through which FATF may affect the law and practice of breach are:
1. Increased contractual complexity
New contractual clauses: To comply with FATF standards, additional clauses may be incorporated into agreements, thereby increasing contractual complexity. Greater complexity can heighten the likelihood of disputes and divergent interpretations.
More precise obligation definitions: To prevent exploitation of contractual forms for money-laundering, parties may need to define their duties more precisely. Narrower or more onerous obligations increase the risk that a party will fail to meet them and thus trigger breach claims.
2. Heightened monitoring of contracts
Supervision of performance: Financial institutions and regulatory bodies are obliged to monitor contract performance to detect suspicious activity. This oversight means breaches or irregularities may be identified and pursued more quickly.
Obligation to report violations: Observed infractions in contract performance may be reported to competent authorities, accelerating remedial and enforcement processes.
3. Changes in the nature of certain contracts
Restrictions on particular contract types: To thwart money-laundering, some categories of contracts may be subject to regulatory constraints that alter their execution and the consequences of non-performance.
Overall, while FATF does not directly amend the legal rule of breach, by creating a more robust regulatory and supervisory environment it can reduce certain types of contractual misconduct and hasten the resolution of disputes arising from non-performance. The concrete impact of FATF on breach-of-contract issues is, however, contingent on each jurisdiction’s domestic laws and the manner in which FATF standards are implemented and enforced locally.
4. The Impact of FATF on the Protection of Consumer Rights
This section addresses how FATF-related measures intersect with consumer protection and the right to privacy. Although the primary objective of FATF is not consumer protection, the implementation of its standards implicitly affects consumers’ rights in commercial contracts—most notably by regulating the handling and disclosure of personal information.
4.1. Positive Effects of FATF on Consumer Rights
1. Increased transaction transparency. Requirements for accurate identification of contracting parties and for reporting suspicious transactions enhance transparency in financial dealings and help prevent fraud and deception. This, in turn, protects consumers from financial wrongdoing.
2. Reduced risk of dealing with illegal actors. Implementation of FATF standards limits transactions with persons or businesses engaged in unlawful activity. Consequently, consumers are less exposed to scams and the loss of funds.
3. Greater trust in the financial system. By strengthening transparency and AML/CFT safeguards, FATF-compliant systems can raise consumers’ confidence in financial institutions, enabling them to use financial services with greater assurance.
4.2. Potential Negative Effects of FATF on Consumer Rights
1. Higher cost of financial services. Compliance with FATF standards may increase operational costs for financial institutions; these costs can be passed on, directly or indirectly, to consumers.
2. Slower transaction processing. Stringent identification and monitoring requirements can delay transaction execution, causing consumer dissatisfaction.
3. Restrictions on certain services. To comply with FATF, some financial services may be curtailed or subject to stricter conditions, which can limit consumers’ access to those services.
Overall Assessment
On balance, the impact of FATF on consumer rights is predominantly positive. Although implementation can generate frictions—such as increased costs, slower processing times, and restricted access to certain services—these trade-offs generally accompany notable benefits: enhanced transparency, reduced exposure to illicit actors, and stronger trust in financial intermediaries. Practical examples include:
Online purchases: FATF-driven safeguards have contributed to safer online transactions and reduced fraud risk.
Money transfers: International transfers have become more transparent and secure under FATF-aligned regimes.
Payment cards: Strengthened AML/CFT controls have made card payments safer and helped reduce card-fraud risks.
Finally, it should be emphasized that FATF’s principal objective remains the prevention of money-laundering and terrorist financing; effects on consumer protection are ancillary. Nevertheless, these ancillary effects are generally constructive and contribute to the reinforcement of consumer rights within the financial system.
Conclusion
The findings of this study indicate that the implementation of FATF standards—aimed at combating money laundering and the financing of terrorism—has exerted both direct and indirect effects on the principle of freedom of contract. On the one hand, FATF requirements regarding contractual transparency, counterparty identification, and the reporting of suspicious transactions have increased oversight of contractual relations and helped reduce money-laundering risks. These measures have, in turn, strengthened financial system security and contributed to the protection of consumer rights.
On the other hand, the application of these standards has increased contractual complexity, constrained the freedom to choose contracting parties, and raised transaction costs. In some instances, FATF-driven measures have also slowed transaction speed and restricted access to certain financial services. Therefore, in answer to the principal research question, it can be concluded that FATF standards have influenced the principle of freedom of contract and have imposed measurable limitations on it.
The principle of freedom of will (freedom of contract) is a foundational tenet of civil law that allows private parties to conclude agreements that serve their interests within the legal framework. Nevertheless, in practice this freedom is not absolute and is subject to limits. The restrictions introduced by FATF partially conflict with this principle; however, their purpose is not to curtail economic liberty for its own sake but to create a secure and stable economic environment. With a balanced approach grounded in legal principles, these objectives can be harmonized.
Iran’s accession to FATF and the implications of that accession at different contractual stages are undeniable. The most pronounced effects are observed during the performance stage and in the international sphere, where contractual relations are conditioned by treaty provisions. Because money laundering frequently involves both domestic and transnational activities and infiltrates global financial markets, an effective response requires international cooperation. Consequently, combating money laundering depends heavily on cross-border collaboration, robust links with international financial centres, and the adoption of shared procedural instruments and operational directives among international bodies.
Accordingly, by acceding to FATF and adopting its remedial measures, Iran has taken steps—wherever appropriate—to prevent and detect the laundering of illicit proceeds, thereby narrowing avenues for criminal activity and enabling early disruption of laundering schemes. These measures do not contradict the principle of freedom of contract, because money laundering is an illicit activity outside the scope of legally protected contractual autonomy.
In sum, while FATF standards reinforce financial security and help combat financial crime, they also affect contractual freedom in both positive and negative ways. Achieving the objectives of AML/CFT while preserving contractual autonomy requires a calibrated legal response: rules and practices that satisfy international standards, protect public and private interests, and preserve as much contractual freedom as is consistent with the prevention of illicit activity.
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