Financial transparency: Turkey could be grey listed

Next year will be a critical one for Turkey in terms of financial transparency as it faces the risk of being grey listed by the Financial Action Taskforce (FATF), the international watchdog that helps combat money laundering and terrorist financing across the globe.

Since a coup attempt in 2016, Turkey has not made positive progress in contributing to the global fight against such crimes. Rather, it has used financial investigations in a crackdown on dissidents, which created an enormous workload on the relevant authorities. These efforts were combined with frequent government measures to attract assets from abroad and deregulate inward capital transfers, part of a plan to fund the cash-strapped Turkish economy during an economic crisis.

On Monday, the FATF published its 2019 Turkey Mutual Evaluation Report, the third such evaluation of Turkey after similar documents published for 2007 and 2014. According to the report, Turkey has loopholes that require fundamental improvements in dealing with proliferation of nuclear weapons, corruption and terrorist financing.

The FATF report argues that the 2016 coup attempt led to a lapse in Turkey’s policy stance as the Turkish Financial Investigation Unit, MASAK, investigated cases relating to alleged coup perpetrators and dissident groups, which Turkey has labelled as terrorist organisations.

Since 2016, Turkey has undertaken many terrorist financing investigations. However, these probes involve only identification of the assets held by suspects rather than focusing on how these assets were acquired, used, or transferred. Turkey also failed to provide sufficient statistical evidence to support the good use of its legal framework that enables the authorities to confiscate assets. Almost all assets confiscated by Turkey - 10 billion euros and 99.99 percent of the total assets - belonged to supporters of the Fethullah Gulen movement, which Turkey blames for the failed coup. But the international community does not designate the movement as a terrorist organisation.

According to FATF, Turkey remains non-compliant in implementing financial sanctions for proliferation of weapons of mass destruction and politically exposed persons. Regarding sanctions on proliferation, Turkey’s problems include its lack of a legal basis to implement UN sanctions on Iran, which makes the “framework fundamentally deficient at the most basic level” and the existence of essential deficiencies in the implementation of UN sanctions on North Korea, the FATF said.

Regarding politically exposed persons, no definition exists in Turkish legislation, and financial institutions have no means to identify such customers or beneficiaries.

Turkey remains partially compliant on 10 points in the report. In some cases, the underlying reasons for such semi compliance are political rather than technical. Regarding targeted financial sanctions related to terrorism and terrorist financing, for example, a delay caused by the need for presidential ratification of UN listings is stated as the reason. 

In an article summarising the FATF report, the Financial Times said this week that Turkey could be subject to a monitoring process called the International Co-operation Review Group – the so-called FATF grey list - should it not comply with the recommendations of the Mutual Evaluation Report. The Financial Times also said that the Turkish government lobbied extensively to prevent the report from being disclosed to the public.

Turkey was removed from FATF’s so-called grey list in 2014 after a monitoring period that lasted four years. Based on the findings of a 2007 mutual evaluation report, Turkey was submitted to the FATF International Co-operation Review Group process and identified as a country with deficiencies in money laundering and combating the financing of terrorism in 2010. After implementing an action plan agreed with the FATF, Turkey was removed from the grey list in the organisation’s 2014 Mutual Evaluation report.

Now Turkey faces a substantial risk of re-entering the FATF grey list. Currently, 12 countries are monitored, including Syria, Panama, and Pakistan. When a country is put on the list, it may face problems in securing funding from international organizations and be subject to other severe financial and commercial sanctions. Currently, only two countries are on the FATF blacklist: North Korea and Iran.

The FATF report notes that although there are no major problems concerning Turkey’s regulatory infrastructure, there has been no coordination of policies and actions. Even though financial regulators took supervisory measures, the sanctions applied were not “effective, proportionate, and dissuasive” in most cases. A reason for this may be extensive purges of staff in the relevant authorities that crippled their human resource capacity.

Another reason for the government’s failure to implement sanctions for financial crime may be its determination in attracting funds from abroad to help bankroll economic growth. Its approach involved loosening control and supervision of capital to allow unregistered inflows. In 2018, $21.2 billion, recorded by Turkey’s central bank in its net errors and omissions item, was the most important source of financing for the current account deficit. Later, this figure was revised to $17.3 billion.

Data privacy provisions in the Turkish Statistics Law are also misused to limit traceability. The volume of non-monetary gold trade and the concealment of international trade accounts enable movements of unregistered money to look like international trade. Imports from a so-called “undisclosed country” in 2018 reached $11 billion, ranking that country fifth among all countries in 2018. After a revision, this so-called country disappeared. The FATF also referred to the non-existence of detailed statistics regarding anti-money laundering and anti-terrorist financing.

A circular by the Ministry of Customs and Trade dated 2015, which designated passengers’ declarations of the source of their belongings imported into the country as correct, practically legalised unregistered cash inflows.

Turkey has also enacted three asset repatriation schemes in the last three years that allow taxpayers to repatriate foreign assets without any investigation. According to the current scheme effective till the end of 2019, by paying a 1 percent tax for their repatriated foreign assets, Turkish citizens are granted immunity from any backward tax investigations.

One reason behind the aggressive asset repatriation schemes could be Turkey’s determination to participate in the Automatic Exchange of Information program after 2020, a step that it must take in order to avoid being blacklisted by the EU as a non-cooperative tax jurisdiction.

Turkey has also yet to publish an official list of tax havens for the corporate tax code. Thus, implementation of tax laws that enable charging extra taxes for transfers to tax havens is practically impossible, and the transfer of (informal) money to tax havens requires no special procedures. This also limits the effectiveness of financial investigations. 

The large volume of capital contained within the net errors and omissions item in the balance of payments statistics and significant unexplained revisions and hikes in foreign exchange deposits show that Turkey’s welcoming of all kinds of capital inflows has worked to some extent. However, as the findings outlined in the FATF report demonstrate, sustaining such measures may soon cause many problems.