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

Child labor in agriculture on the rise in Lebanon

Executive magazine

The sun is rising over the Anti-Lebanon mountain range that borders Syria. Kowsa Ibrahim, a 12 year old refugee from Aleppo, is already at work pruning grape vines. She will work for the next several hours for 6,000 Lebanese Lira ($4), although she will not get that amount; an overseer, known as a “shawish,” will take 2,000 LL ($1.33) as a form of commission.

Kowsa prefers working the vines to collecting potatoes. “It’s better as there’s more shade. Potato work is out in the open fields under the sun, and it’s hard. I collect the potatoes in 20 kilogram sacks which I have to carry to the collection point,” she says.

Kowsa never had to do such back-breaking work in Aleppo, but for the past three years she has had to help support her family since fleeing Syria to Lebanon’s Bekaa valley. The war in Syria, now in its sixth year, has caused millions of refugees to flee their homes, putting significant strain on already stretched labor markets and services in neighboring countries.

“The number of working children has increased exponentially since the Syrian refugee crisis began. Because the country is struggling economically many families are relying on their children to contribute to their livelihood,” says Hayat Osseiran, a child labor consultant at the International Labor Organization (ILO).

In addition, international aid has been reduced. Last year, the World Food Program (WFP) was forced to cut its food voucher aid from $27 a month per refugee to just $13.50.

“It is a major problem, how can people live on that? But it is not only lowering the monetary amount, the targeted assistance program has been reducing the number of people it aids every year,” says Solange Matta Saade, Assistant Representative at the Food and Agricultural Organization (FAO) of the United Nations.

As a result of such cuts and the economic situation, refugee children are being forced to work as farm hands. But it is not just Syrian children working in the fields.

“We think only Syrians are being affected, but from 2009 to 2016, there has been an increase in the number of Lebanese child laborers,” says Carlos Bohorquez, a child protection specialist at UNICEF, referring to a study the agency carried out on child labor in the country. “There are three times more Lebanese (children) working than before, so the Lebanese are also being affected.”

Out of school, into the fields

There is a dearth of national data on child laborers, but an indication of the rise in their numbers can be gaged through school attendance.

“Last year there were around 10,000 Lebanese students that dropped out,” said Sonia Khoury, Director of the RACE project (Reaching All Children with Education) at the Ministry of Education and Higher Education (MEHE).

Among Syrian refugee children the numbers are even starker. Currently, out of the 482,034 school aged Syrian children, only 33 percent are enrolled in school. To bolster attendance among refugees, the MEHE’s RACE project implemented a second school shift in the afternoons to cater to the surge in students.

“Four months after starting the second shifts we lost 45,000 students,” says Khoury, attributing this to children being forced to work and the lack of affordable school transportation in the more rural areas. There is also a correlation between the picking season and school attendance.

“We are noticing 2,000 to 3,000 are absent during that time,” she adds.
However, the problem has moved beyond seasonal work. “Child labor in agriculture is classified as seasonal labor, but what we’re seeing now is that it is no longer the case as picking seasons vary, from potatoes to year-round greenhouses to picking flowers,” says the ILO’s Osseiran.

Hazardous work

It is not only the workload that Kowsa finds tough. She says she has been frequently exposed to pesticides. “I get a rash from the pesticides. Sometimes I get flu or breathing difficulties too as we get no protection,” she says.

Such exposure can lead to pesticide poisoning and long-term health problems, explains Rana Barazi-Tabbara, a public health lecturer at the American University of Beirut.

“For children it is especially dangerous as there will be immediate health effects from pesticide toxicity, which at the most acute level can cause vomiting and even death. In the long term, pesticides affect nearly all the organs in the body, from the neurological to the reproductive system, and results in cancer,” she says.

Raising awareness

Indeed, the ILO notes that agriculture is one of the three most dangerous sectors in terms of occupational safety and health, irrespective of the age of the worker, because – in addition to occupational diseases – it results in a high rate of work-related fatalities and non-fatal accidents, largely through use of motorized agricultural machinery.

To raise awareness of these dangers, the agency held a children’s funfair in the town of Saadnayel in the Bekaa, one of the areas with a high prevalence of child labor in agriculture.

“The fair was one of our ways to raise awareness, among both locals and refugees, on the very real dangers and risks children face when working in agriculture,” says Osseiran as the fair closes, which was held just ahead of World Day against Child Labor, marked globally on 12 June. “It also included artistic performances by working children and their parents, which provided them with a means to express some of the distress they feel due to their life of toil and hardship.”

Legal loopholes

Children have often been extra hands during harvesting time to pick olives and other cash crops in Lebanon. In fact, children as young as 10 are legally allowed to engage in family farming.

“Not all participation by children in agriculture is defined as child labor. It can be to acquire skills for the future, and is allowed as long as the children are not coming to harm, being abused, or their opportunity to get an education is denied,” says Faten Adada of the FAO’s Social Protection Focal Point.
Lebanon’s Decree No. 8987 of 2012 defines which forms of agricultural labor minors can engage in.

“It specifies which forms of hazardous work and which forms of agricultural work children should not be exposed to, which includes family farming. However, there is a loophole in the law that says that when a child is engaged in family farming they can work from the age of 10 onwards. We are working with General Security on closing this loophole,” says Nazha Shalita, Director of the Child Labor Unit at the Ministry of Labor.

Minimal enforcement

But with minimal enforcement of the Decree at the national level, children are openly working in the agricultural sector. “As children are working freely, and can be filmed doing so, it shows they are not worried about being caught,” says Adada.

An issue is that the inspection department at the Ministry of Labor has just 90 staff, while there are only around 45 inspectors to monitor labor practices nationwide. To Adada, such inspectors need to be bolstered not only in number but also at the technical training level to properly assess child labor practices, while they should be backed-up during inspections by the General Security. This is considered crucial to take on the shawish.

Forced labor

“We asked General Security to enforce the law, to have a reason to tell the shawish that it is not us (requiring no children to be employed) but the law. We need to show them the law is being enforced, and to get more inspectors for the ministry,” says Elie Massoud, Head of the Agriculture Department at the Chamber of Commerce, Industry and Agriculture in Beirut.

The shawish used to organize Syrian farm hands that came to Lebanon on a seasonal basis before the 2011 uprising. Once the Syrian conflict started, and the number of refugees rose to the government estimated 1.5 million today, the shawish moved into the informal refugee camps to capitalize on an abundance of cheap labor and their agriculture contacts.

“Those living in the agricultural camps pay no rent, and they are obliged to work for the shawish. If they don’t work, they have to leave,” says Riad Jaber, Co-Founder of civic organization Beyond, at the Fayda camps outside of Zahle.

“There are 15,000 refugees there – it’s about 10 camps grouped together, and each group has its own shawish. If there are at least 100 women and children going from their camp, the shawish will be making about $200 a day,” he adds.
Unless greater action is taken by the authorities and public awareness around the issue improves, children will continue to be exploited and exposed to hazardous working conditions while missing out on crucial schooling years.

“There should be a concerted effort by the Lebanese government, supported by international donors, to eliminate child labor in agriculture, among refugees as well as Lebanese host communities. Unless it is addressed, it will contribute to a ‘lost generation’ in terms of education and human development,” says Frank Hagemann, Deputy Regional Director of the ILO Regional Office for Arab States.


Photo by Tabitha Ross/ILO

Jordan's Pharmaceutical Sector Punches Above Its Weight

Zaatari Refugee Camp. ‘Bluntly, demand for pharmaceuticals did not reflect the 15% rise in the population. Refugees are buying in small quantities, and only the essentials,’ said Mohammad Shahin, Chairman of JAPM. 

Manufacturing Chemist

By Paul Cochrane in Amman

Jordan may be small in population terms, but it packs a hefty punch in the Middle East pharma manufacturing sector

With a population of just 6.6 million, Jordan may be a small country but it is one of the largest pharma manufacturers in the Middle East. A key reason for this is that production is export focused, particularly in the generics sector.

The country’s manufacturing sector, with an annual turnover of US$500m, had been steadily growing at 8–10% per year until 2012, according to the Jordanian Association of Pharmaceutical Manufacturers and Medical Appliances (JAPM). But since the ‘Arab Spring' of 2011, exports have slowed due to instability in the region, notably the conflict in neighbouring Syria.

Development is also being hindered because Jordan, unlike some of its regional competitors, notably Iraq and Iran, abides by the World Trade Organisation (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and data exclusivity. Since becoming a member of the WTO in 2000 and signing a free trade agreement with the USA in the same year, Jordanian companies have not developed any significant new medicines.

That said, Jordan’s domestic pharma market is growing. According to UK- based BMI Research, the total market, including imports, reached Jordanian Dinars JOD643m ($905m) in 2014, and is forecast to grow by 6.4% in 2015, to JOD683m ($962m). Samer Al-Ansari, Marketing Director for the Middle East and North Africa (MENA) at Hikma, one of the region’s leading pharma manufacturers and exporters, established in Jordan and listed on the London Stock Exchange, says the total market grew by 9.4% in 2014, while according to BMI generic growth was 10.5%.

Driving sales is burgeoning population growth, at 4.2%, further boosted by the influx of Syrian refugees: 937,830 were registered as of 2015, according to the United Nations High Commission for Refugees (UNHCR). Demand comes from the UN and other agencies supporting the refugees, and the market’s value is increasing due to the entry of patented products with high prices as well as an increase in generics, said Al-Ansari.

However, aid agencies import medicines and individual refugees have low purchasing power. ‘Bluntly, demand for pharmaceuticals did not reflect the 15% rise in the population. Refugees are buying in small quantities, and only the essentials,’ said Mohammad Shahin, CEO of the Jordan Sweden Medical and Sterilisation Company (JOSWE), and Chairman of JAPM.

The Jordanian healthcare sector is heavily supported by the government, with the ministry of health providing insurance to 40% of the population, followed by state health services organisation Royal Medical Services (RMS) covering 27.5%, according to the Jordan Journal of Pharmaceutical Sciences (JJPS). Government healthcare spending is on the rise, projected to go from JOD1.86bn ($2.62bn) in 2014, to JOD1.97bn ($2.78bn) in 2015, a 6.2% increase, according to BMI Research.

In 2016, compulsory health insurance is scheduled to be introduced to cover all Jordanians. If such a move happens, it is expected to be a boost for pharmaceutical sales. ‘The goal is to have local insurance companies support the private sector, but so far it has been only discussions, nothing has been agreed on yet. But you see that Jordan is moving towards the privatisation of healthcare, and wants to boost medical tourism,’ said Al-Ansari.

Jordan has 16 pharmaceutical firms, which manufacture mostly generics or branded generics, bulk antibiotics and cancer-related treatments. The market is dominated by Hikma, followed by Dar Al Dawa, Arab Pharmaceutical Manufacturing, JOSWE, Pharma International and United Pharmaceutical Manufacturing. ‘Local companies supply around 20% of total domestic consumption, and the rest is imported,’ said Shahin. More than 70% of Jordanian pharma production is for export, to more than 65 countries, primarily in the Middle East, Africa and Asia.

Regional instability has had a negative impact on exports, affecting the country’s overall economy, which is expected to grow by just 2.5% in 2015, according to the International Monetary Fund. ‘Our export markets are challenged to Iraq, Syria, Egypt and Saudi Arabia, as well as to Yemen and Sudan. You can anticipate issues in one or two countries but not four surrounding countries all having problems,’ said Hana Uraidi, CEO of the Jordan Enterprise Development Corporation (JEDCO).

Financing has also been complicated by the instability, while credit lines are under pressure. ‘It’s hard to get extended credit lines as insurance companies are seeing Jordan as higher risk, so traders have to pay up front, and we have a cash problem. If we take out loans it affects overall costs and profits. Before, we thought the situation would calm down after two or three years, but the government is now forecasting problems for 10 years,’ she added.

The closure of the Syrian border has hit the pharmaceutical sector particularly hard, as it was a major transit route for exports to Lebanon, and on to Turkey and northern Iraq, while the western Iraqi border has also been closed due to the presence of Islamic State. Companies are managing, however, to export to Kurdish Iraq and Baghdad, avoiding areas controlled by IS, while the central Iraqi government is still delivering drugs.

‘Overall exports are down by around 10–15% on 2014. It is not only neighbouring countries that have affected us, the whole region is affected, and in certain countries it is not clear who is in control. Payments are another problem,’ said Shahin. JOSWE expects a drop of 10% in its sales this year, with its business evenly split between local sales and exports.

Syria was not an export market for Jordanian manufacturers prior to the conflict as the country was practically self-sufficient in pharmaceutical production. But although the Syrian sector has been ravaged by war it has started exporting to the Arab Gulf and north Africa, according to Shahin, which has detracted from Jordan’s export competitiveness due to low prices.

Looking ahead, it may be generics that really underpin the Jordanian pharma sector’s success. WTO membership and its US trade deal have forced the country’s pharma sector to be transparent about producing generics and original research is still at an emerging stage due to a lack of investment, according to a 2015 article in the JJPS. The Jordanian Scientific Research Support Fund inked four agreements with public and private universities to develop pharmaceutical and medical research projects, worth $479,660 in September 2015, but it is not expected to cause any major upturn in the overall sector given the large investments elsewhere in the world.

‘We had hoped when we signed the WTO and IPR agreements that there would be a transfer of technology and know-how from multinationals to the local industry, but it’s been an unfulfilled promise,’ said Shahin.

Currently, local producers engage in contract manufacturing for global majors, which contributes to less than 5% of the sector’s overall revenue, according to the JJPS. The rest of production is generics under licence, with most licensing agreements still in effect signed before 1999.

Heightened competition

Due to data exclusivity and a lack of diversification, there is heightened competition among manufacturers, while JAPM estimates that few companies are operating at more than 40% of installed capacity. ‘Pharmaceutical companies are all making the same product, and each product has 15 or 20 competitors, while some have 50 or even 100 if we include imports as well,’ said Shahin. Such products include second-, third- and fourth-generation generics. To bolster business, JOSWE has started producing generics not in the market, but few others have followed the same route.

‘JAPM is trying to advise companies not to add more similar generic products but to create variety and products not in the market,’ added Shahin. The overcrowded generics market has led to a domestic price war, with companies trying to sell the same generics at a price 20% lower than the originator drug.

Companies are also having to make their generic products known in the market. ‘In the EU or the US you can sell a generic by its scientific name, but in the Middle East and North Africa (MENA) it is branded generics, so you have to build up a brand name,’ said Al- Ansari.

The fact that the writ of TRIPS does not run across Jordan’s region is a problem: ‘You find firms in such countries registering more products than us as they are not as strict in protecting IPR agreements,’ said Shahin. Egypt, for instance, has no TRIPS-Plus provisions, mandating more data exclusivity in its IPR law, yet it has had more foreign investment in its pharma industry, boosting competition for Jordan.

Price controls in Saudi Arabia to protect domestic production, and protectionism in Algeria to encourage pharmaceutical manufacturing are also affecting Jordanian exports.

The JJPS noted that data exclusivity related to TRIPS affected Jordanian exporters, as they ‘will be out of their export markets for at least seven years – five years’ protection due to data exclusivity, one year registration time in Jordan and at least one year registration in the export market’.

Meanwhile, exports to Africa have been affected, added Shahin, by changing rules and prices in certain markets, as well as the need to compete with cheaper imports from India and the Far East.

To bolster sales and enter more stable markets, Jordanian pharmaceutical companies are preparing for EU accreditation. Hikma is already in the EU market, but it is easier for US products with Food & Drug Administration (FDA) approval to enter than Jordanian products, said Al-Ansari.

But while its MENA business has been affected by the regional unrest, Hikma has continued to expand its portfolio globally. In 2014, it acquired the US’s Bedford Laboratories, and in 2015 bought the US’s Roxane Laboratories Inc and Boehringer Ingelheim Roxane Inc. Last September, the company acquired Egypt’s EIMC United Pharmaceuticals.

Hikma’s generics business, which sells non-injectable products in the US market, generated revenue of $216m and accounted for approximately 15% of group revenue. ‘If there is potential and a need we’ll bring some products (from the newly acquired companies) from the US to Jordan,’ said Al-Ansari.

Photo Credit: US State Department photo/ Public Domain