Turkey has been added to the ‘gray’ list. Who added Turkey to the list, and what does this mean for the country?
The Financial Action Task Force (FATF), a global anti-money laundering body, has added Turkey to its “gray” list. Apart from Turkey, Jordan and Mali have also been added to the list. This means increased monitoring on money laundering, terror financing, and proliferation financing for these countries. Pakistan is already on this list.
Before we tell why Turkey is on this list, we need to understand what FATF is. FATF is an inter-governmental group that sets standards to control money laundering. They are perhaps better known for pioneering the “know-your-customer” rules that need institutions to determine the true identities of accountholders. They have also set guidelines for national laws and the best ways to manage account data. Post 9/11, the FATF developed standards for fighting terrorist financing. It is made up of 39 members, including the G7, China, Russia, Japan, and emerging economies in South America and Africa.
The watchdog’s recommendations are taken quite seriously because at the end of the day, no country wants to be flagged for deficiencies that might cast a doubt on the integrity of its banking system. Their lists also affect a country’s ability to attract foreign capital, which is crucial for the growth of any nation.
Dr Marcus Pleyer, FATF President said, as mentioned by Reuters, Turkey, which is the largest to be downgraded, needs to address “serious issues of supervision in its banking and real estate sectors, and with gold and precious stone dealers.
Pleyer added, “Turkey needs to show it is effectively tackling complex money laundering cases and show it is pursuing terrorist financing prosecutions…and prioritising cases of U.N.- designated terrorist organisations such as ISIL and al Qaeda.”
What Should Turkey Do?
The FATF has given eight specific tasks to Turkey, including, in broad terms:
(i) dedicating more resources to the supervision of AML/CFT (anti-money laundering and counter terrorism financing) compliance by high-risk sectors and increasing on-site inspections;
(ii) applying “dissuasive sanctions” for breaches of AML/CFT, including unregistered money transfers;
(iii) enhancing use of financial intelligence to support money laundering investigations;
(iv) undertaking more complex money laundering investigations and prosecutions;
(v) fixing responsibilities and measurable performance objectives for anti-terror finance authorities;
(vi) conducting more financial investigations in terrorism cases;
(vii) concerning targeted financial sanctions under the UN’s anti-terror resolutions, and pursuing actions against UN-designated groups; and,
(viii) implementing a risk-based approach to supervision of non-profit organisations to prevent their abuse for terrorist financing.
The Impact On Turkey
In recent years, foreign investors have left Turkey due to political interference in monetary policy, double-digit inflation, and low official foreign currency reserves. Foreign ownership of bonds plunged to around 5% from 25% five years ago. This is the period in which the Turkish lira had depreciated two-thirds of its value against the dollar.
This move could affect Turkey’s lira further. But why? A study by the International Monetary Fund this year found that gray-listing reduces capital inflow by an estimated 7.6% of gross domestic product (GDP), while foreign direct investment (FDI) and portfolio flows are also affected. We could already see the news impacting the country’s currency, as lira hit a record low earlier on Thursday.
In a statement, the Turkish Treasury said, “Despite our work on compatibility, placing our country on the grey list is an undeserved outcome.” “In the coming period, necessary measures will continue to be taken in cooperation with FATF and all relevant institutions, to ensure that our country is removed from this list, which it does not deserve, as soon as possible.”
Turkey might be saying that it doesn’t deserve to be on the list, but the way in which the country’s condition worsened during President Recep Tayyip Erdoğan’s almost 20 years of rule says otherwise. The country’s foreign investment is already close to the lowest level, so Turkey must take FATF’s tasks seriously, and implement measures that will take the country out of the list.