Money Laundering Bulletin
Financial Action Task Force patience was running on empty when Ankara finally passed terrorist financing legislation. One crisis averted, perhaps, but Paul Cochrane, in Beirut, finds that other deficiencies persist.
Since 2007, Turkey has been on the receiving end of repeated warnings from the Financial Action Task Force (FATF) to improve its regime to combat the financing of terror. While a anti-terrorism bill has now been passed, shortcomings still remain and new risks have emerged in Turkey's difficult neighbourhood. Ongoing political wrangling and a corruption scandal present further challenges, including the independence of the judiciary.
It was in February 2009 that the AML/CTF standard-setter gave Ankara to pass new laws on terrorist financing. This did not happen and in October 2012, Turkey was told it had three months to comply with the Recommendations on terror finance or face suspension from FATF. Specifically, Turkey is required to establish a “legal framework for identifying and freezing terrorist assets" meeting its guidance, notably Recommendation 6, and its Interpretive Note 6 on freezing, “without delay and without prior notice, the funds of other assets of designated person and entities.”
Not before time
In February 2013, at the eleventh hour, Ankara passed a domestically-controversial bill under which any individual or entity financially aiding terrorists, even if the money is not “used for an illegal activity,” faces five to 10 years in prison. The law authorizes the Finance Ministry’s Financial Crimes Investigation Board (MASAK) to freeze the assets of those involved in terrorist financing in Turkey or abroad without the need to first obtain a judicial ruling.
“I think the FATF observation was valid, as we didn't have the legal framework to confiscate or freeze assets on international watch lists or the red flag mechanism for suspicious transaction reports (STRs),” said Atilla Yesilada, an Istanbul-based analyst at Global Source Partners Inc. “The final warning of FATF has strengthened the legislative framework but it is very clear that Turkey doesn't have a very tight supervision on AML and on CTF. We live in a country where impunity exists.”
Still to do
Indeed, despite the new CTF law, a FATF public statement, issued in February, 2014, stated, “certain concerns remain, and Turkey should take further steps to implement an adequate legal framework for identifying and freezing terrorist assets” under United Nations Security Council Resolutions (UNSCRs) 1267 and 1373.
Such shortcomings places Turkey alongside Yemen, Algeria and Syria in the Middle East and North Africa (MENA) in having what FATF terms “strategic AML and CTF deficiencies.” As such, Turkey is lagging behind many of its MENA peers.
“On a comparative level, Turkey needs to update its regime to be in line with the rest of the region,” said Hossam M. Abd El-Rahman, Chairman and Managing Director of Allied Compliance Consultants in Dubai, which specializes in financial crime, consultancy and training in the MENA. “Turkey is falling behind in Recommendation 6, proper risk management, Recommendation 7, regarding financing of proliferation, and in others, such as Recommendations 11 and 12, on measures to be taken to prevent ML and TF. There are a lot of deficiencies, and all these gaps need to be filled up quickly.”
A further issue to be addressed are the tax amnesties Ankara introduced to repatriate capital. In 2008 and 2009, tax amnesties attracted some US$27 billion in assets, according to government statistics. In 2013, a third amnesty was introduced, with Ankara wanting to attract US$130 billion in untaxed assets kept offshore by Turkish taxpayers. Controversially, the Finance Ministry stated there would be no tax investigation or retroactive tax assessments, although criminal investigations could be launched if there is suspicion of ML.
“This wealth amnesty has completely undermined the system,” said Yesilada. “Part of the money brought in as being of “Turkish origin” may actually be borrowed or given to them by non-Turkish entities or cartels with no questions asked, and laundered in Turkey. These amnesties ask no questions and you just have to show a certificate of deposit that the money belongs to you, which is easy to get. It is a disgrace not to find out the source of that money, as there's no idea of its nature.”
Trouble at the top
Compounding regulatory and enforcement issues is the ongoing political wrangling between the ruling AKP party of Prime Minister Recep Erdogan, which has faced mass demonstrations over the past year, and the opposition. In December (2013), allegations of corruption among Erdogan's circle emerged following a police investigation, including a scandal that his son, Bilal, met with Saudi Arabian businessman Yasin Al-Qadi, whom the United States blacklisted via its Office of Foreign Assets Control (OFAC) as a "specially designated global terrorist," freezing his assets on 12 October 2001.
Another high-profile case involves Iranian-Turkish national Reza Zerrab, who is alleged in another police investigation to have launder billions of dollars for Iranian businessmen in a “oil for gold deal,” with commissions paid out to the Economy Minister (an alleged US$49 million), the CEO of the partly state-owned bank Halbank (US$7.7 million), and people close to the AKP. Zerrab was arrested in December 2013, and faces money laundering, corruption and fraud charges.
Political push and pull
Depending on how these cases turn out (and the government has made allegations that they are politically motivated), they could put pressure on Turkey's financial and business world to clean up its AML act. Abd El-Rahman said: “The corruption case will seriously affect the banks, and companies will have to do a lot of effort to boost compliance.”
But political plays are in motion that could mean the opposite. The Speaker of Parliament, Cemil Cicek, for instance, said in January that there is no independent judicial review in Turkey, while a bill is being debated that would restructure the Supreme Board of Judges and Prosecutors (HSYK).
However, Professor Recep Pekdemir, a faculty member of the Istanbul Business School at Istanbul University, believes this issue will be sorted out. “The judiciary issue will be stabilised soon, it's only a fight between politicians. If the country is stabilised there can be more control over illicit activities, but right now the government is focused on internal matters rather than external matters,” he said.
Syria - unknown quantity
Externally, Ankara is having to deal with the changing political environment in the Middle East: the West's relations are warming with sanctioned Iran while the conflict in neighbouring Syria has seen hundreds of thousands of refugees flooded into the country since 2011. There are also allegations of Turkey supporting Islamic rebel movements in Syria.
“Ankara denies it but everyone knows that Ankara is sending arms and money to the Syrian Islamic Front and Jabhat Al Nusra, and there are millions of Syrian refugees in the country; who they are and what they are living on no one knows,” said Yesilada. “There may be blow back for Turkey, and Syrian groups are allied with (the blacklisted terrorist group) Kurdistan Workers' Party (PKK), which is bad news. How can smuggling be stopped?”
Turkey has many challenges ahead to bolster its AML regime in addition to curbing the country's role as a trans-shipment hub for drugs, human trafficking and smuggling. “Turkey has many neighbouring countries which have been having troubles with not only terrorism but also human trafficking, illicit crime and money laundering. As Turkey is uniquely positioned on two continents, it is difficult to solve such issues,” said Pekdemir.