Money Laundering: Pulling out the rug – Turkey slips back

Money Laundering Bulletin

 Turkey has major gaps in its AML regime - Construction of the new Golden Horn Metro Bridge, in Istanbul (2013).

Conflict rages just over the border in Syria yet Turkey goes slow (even backwards with recent amendments of its customs code) on terrorist financing. So, what is the agenda? asks Paul Cochrane.

Turkey may be on the frontline of the so-called 'war on terror,' but its new customs code asks no questions of incoming cash, while its definition of terrorism has been criticised for contrasting with international standards. Furthermore, judicial independence and reliability of the rule of law in the country are both often in issue.

Turkey's geographical positioning has always made it a crossroads between east and west. The country is a conduit for the heroin trade flowing to Europe from Afghanistan, a gray market exchange and trade hub for (sanctioned) Iran, and an entry point for fighters joining the ranks of the Islamic State (IS) and other radical groups in conflict-ridden Syria and Iraq. The country has also experienced multiple terrorist attacks over the past 12 months, including a devastating attack in the capital Ankara in March this year which killed 32 people.

Free cash flow

Yet despite myriad of problems, and removal from Financial Action Task Force (FATF) ongoing monitoring in 2014, Ankara has enacted legislation that would seem to be a gift to money launderers, organised crime and terrorism financiers.

In April, 2015, the Ministry of Customs and Trade amended the 2013 Customs Code, making it two pages shorter (now four), and allowing any amount of cash to enter or leave the country – the previous limit was US$50,000. “Frankly, why does it matter if the money comes in cash or through a bank as long as it is money earned from exports? If this is dirty money, it will not be allowed to enter the country. There are no changes with regard to unrecorded cash,” said the Minister of Customs and Trade, Nurettin Canikli, arguing that the newer code represented a simplification, as the previous version, albeit had been in line with EU regulations, was “unclear".

Canikli's statement, though, is not supported by the new code's text, which reads: “Revenues from the export of goods and services, revenues with regard to transit trade, cash from foreign capital and other resources are free to enter the country through custom gates. [The value of] the items is not required to be declared and passengers cannot be forced to make declarations.”

With the economy slowing down and the Lira having dropped by over 20 percent against the US dollar since 2014, the move is seen as a way to foster the return of much-needed Turkish cash. “It is more of an effort to repatriate holdings abroad than help terrorists or money launderers but, regardless of the intentions, it does open the door to these types of transactions,” said Atilla Yesilada, Istanbul-based analyst at Global Source Partners Inc, an international business advisory service. “As IS has a pernicious and pervasive network in Turkey, I speculate that there's no way to distinguish between legal money coming into the country and cash to help IS and other [designated terrorist groups] like Al Nusra Front. From a domestic viewpoint, it's a big problem.”

The new customs code is but one sign of Ankara's lacklustre approach to anti-money laundering (AML) and countering the financing of terrorism (CFT). “They were on the FATF gray list for several years, and were removed because they enacted laws that codified the approach to terrorist financing, but at the end-of-the-day it was a bureaucratic manoeuvre, as it didn't necessarily make the place safer from a AML and CFT perspective,” said Jonathan Schanzer, the vice president for research at the Foundation for Defense of Democracies, in Washington DC.

Gateway to the Front

On several fronts Turkey is not playing ball according to international AML/CTF rules say experts, frustrating international efforts to curb financing to the likes of IS. Its border with Syria and Iraq is “like Swiss cheese”, said Yesilada, and the country is still an entry point for Islamic fighters, over four years after the conflict started in Syria in 2011.

“Even today for Westerners seeking to join IS, they get a one way ticket [to Turkey], and make their way east. Apparently crossing the border [into Syria] is not challenging. Border issues are among those tracked by FATF, and this one has gone rather undocumented. Turkey is due for an evaluation as the deficiencies are clear,” said Schanzer. However, FATF scrutiny will not happen any time soon – the country's next mutual evaluation report (MER) is slated for release in 2019.

Law and effect

CFT legislation that Ankara adopted to avoid an earlier threat of being expelled from FATF in 2013 – the Law on the Prevention of the Financing of Terrorism - included freezing and confiscation of assets, but the question of enforcement remains. The US State Department is among those with concerns – stating, in June 2015, that while the government “has issued freezing orders without delay (three to five days), it remains unknown whether any assets have actually been frozen”.

FATF and the US have also criticised Ankara for not having a wider and more international approach to combating terrorist financing. “Efforts to counter international terrorism are hampered by legislation that defines terrorism narrowly as a crime targeting the Turkish state or Turkish citizens,” stated the US State Department's 2015 country report.

A mute point

So it is odd that the Turkish government has avoided being flagged for its CFT deficiencies by FATF and other agencies. Some say this is because of Turkey's strategic importance to NATO, with the Incirlik air base being used for strikes against IS, and to the European Union (EU) in tackling the Syrian refugee crisis. “Because Turkey is a NATO country and not a basket case like Sudan or Iran, they are able to get away with quite a bit. There is a sense among Western policy makers that its a bit dangerous to air [concerns] and tackle them head on, so instead they kick the can down the road on illicit activities in Turkey,” added Schanzer.

Reporting, supervision, prosecution

Meanwhile, evidence that concerns about Turkey's AML and CFT regime are warranted continue to pile up. According to a 2013 report by the country's interior, justice and finance ministries, no judicial investigations into terrorist financing had ever been conducted. But following FATF's threat to demote Ankara from the gray to the black list, the finance ministry’s Financial Crimes Investigation Board (MASAK) has been a bit more active. In its latest report, on fiscal year 2014, 0.4% of all suspicious activity reports (SARs) were related to terrorism, while out of 623 judicial notices issued, 10 were related to terrorist financing, compared to 117 related to tax evasion and 83 to fraud.

“MASAK has fined banks for failing to have the necessary AML mechanisms in place, but not many, if any, individual convictions for financial crime have resulted from SARs or MASAK intelligence,” said a London-based financial crime researcher who focuses on Turkey and asked for anonymity. MASAK did not respond to interview requests from MLB.

Political influence

Disquiet over judicial inaction has also been fuelled by the dropping of a high-profile case that surfaced in December 2013, in which four ministers and the son of the then Prime Minister (and now President), Recep Erdoğan, were accused of being involved in a 'gas for gold' deal when an alleged US$13 billion was traded between Turkey and Iran, in breach of international sanctions.

“The judiciary has removed all the prosecutors and judges responsible for those trials from the profession. The parliament has also acquitted the four ministers named in the indictments,” said Yesilada.

Nor was any judicial action taken following a Turkish prosecutor's report in 2013 into some US$100 billion in illicit transfers from Turkey to Iran to circumvent the multilateral sanctions against Tehran. “The report was essentially scuttled,” said Schanzer. “The entire (judicial) process is completely devoid of transparency, so there are serious problems.”

Discontinuance of such cases is widely considered to be politically motivated, part of the ruling Justice and Development Party's (AKP) consolidation of power within the country which, since 2013, has included overhauling the judiciary to remove supporters of political leader Fethullah Gulen. The state has also been increasingly heavy handed with academics and media outlets speaking out against the AKP; in March, the government seized control of Zaman, one of the country's leading private newspapers.

“The AKP has managed to have control over who it appoints. As a result you don't have the separation of powers in a democracy between the executive, legislative and the judicial branches. It doesn't necessarily exist in Turkey at the moment, so it's hard to talk of the rule of law. As a system, you don't see prosecutions in cases where the government or those affiliated are accused,” said the financial crime researcher.

Indeed, the overhauling of the judiciary extended to members of the police force as well as ministries and the central bank. On top of political meddling in the legal process, it has left government bodies without experienced personnel.

“The purging of people from institutions has hurt institutions somehow. In their defence, I'm not saying they're not functioning, but they've lost a lot of human capital, experienced people who were not with the AKP. Now there's no one to replace them,” said Emre Deliveli, an independent economist based in Turkey.

Photo from Wikicommons, by Arild Vågen