Blog: "Asset Peace" or Invitation to Money Laundering?

Turkey in the contradiction between money laundering prevention and asset peace. But Turkey is not alone. Russia, too, is no stranger to this.

Turkey: a country between Orient and Occident, a country full of contrasts. Not only is it geographically partly in Europe, but also the motto of the founding father of this republic was: Always look to the West and not to the East. For decades, Turkey was considered pioneering and progressive for Muslim countries. Its longstanding aspiration to belong to the European Community has been reflected in its laws according to European standards. It has become a respected member of the international community, is a member of NATO as well as the OECD, and there has been a customs agreement between it and the European Union since 1995.

As a country between tradition and modernity, Turkey has been exposed to a wide variety of political currents. However, various developments over the last few years have led to a massive economic crisis and a decline in the rule of law. Turkey is now ranked 117th out of 139 countries worldwide in terms of the rule of law in the current list of the World Justice Project^[1] (WJP). In the region of Eastern Europe and Central Asia, it has even fallen to last place.

Turkey WJP 685x385

This divergence between European standards in existing legislation and conditions that lack the rule of law is also reflected in Turkey's anti-money laundering provisions. As a long-standing member of the FATF, Turkey has signed all major international agreements in the fight against money laundering and terrorist financing.

Turkey Agreements 685x385

The signed conventions have been incorporated into Turkey's national legislation. In 1996, a money laundering law was introduced in Turkey. In 2006, it was reformed to meet the international standards of the FATF.

An overview of the Turkish Money Laundering Act (MLA) shows the similarities with the German money laundering regulation in its structure.

Turkey AMLA 685x385

If we look at the obligated parties under the MLA, it is also apparent here that they are essentially no different from the group of obligated parties under the German MLA.

Obligated parties under the Turkish Money Laundering Law (Kanun 5549):

Banks
Insurance companies
Private pensions providers
Capital markets, credit and other financial services
Post and transport
Gambling and betting activities
Foreign exchange, real estate, precious stones and metals, jewelry, transport vehicles, construction machinery
Those engaged in the trade of historical artifacts, works of art and antiques or brokering these activities
Notaries, lawyers
Sports clubs and other areas designated by the Council of Ministers

Despite the existing laws, their application in practice gives rise to criticism.

The main criticism was that the country's supervision did not take sufficient action against high-risk sectors such as banks, gold and gemstone dealers and real estate agents. It is feared that terrorist groups, among others, are feeding their illegally acquired funds into the Turkish real estate market and integrate them from there into other sectors. Due to the geographical proximity to Iran, Iraq, Syria and Lebanon and the relatively permeable borders to Turkey, there is also the concern that terrorist financing does not stop at the gates of Europe.^[2]

Furthermore, in October 2021, the FATF reacted to the continuing crackdown on the civilian population with the grey listing. The specific criticism was directed against Turkey's "Anti-Terror Law" to "prevent the proliferation of the financing of weapons of mass destruction". Contrary to its title, this law does not contain any punitive measures or control mechanisms against money laundering or the financing of weapons of mass destruction for terrorist purposes. Instead, it authorizes the president to freeze the funds and assets of terror suspects.^[3]

Ultimately, Turkey's treatment of non-profit organizations was also the focus of the FATF's criticism. The mere existence of criminal investigations on terrorism charges against a board member of initiatives, associations and foundations entitles the Ministry of the Interior and the government-appointed governors to suspend the persons concerned, paralyze the activity of the respective association and appoint a receiver in its place.^[4]

This led to Turkey being placed on the grey list by the FATF in 2021. For example, it was found to have deficiencies in the implementation and enforcement of anti-money laundering and counter-terrorist financing laws.^[5]

Already in 2019, the FATF's Mutual Evaluation Report analyzed Turkey's anti-money laundering and counter-terrorist financing measures and identified a number of shortcomings. As a result, seven priority measures were called for. These include, for example, developing strategies for the confiscation of proceeds and instrumentalities and filling gaps in the legal framework in order to fully comply with obligations regarding targeted financial sanctions related to terrorism. There was also a call for the development of a Turkish national strategy for the investigation and prosecution of various types of crimes related to money laundering.^[6]

The FATF addressed the supposed improvements in its follow-up process. In this process, the implementation of the FATF recommendations that had been criticized was addressed and a classification was made as to whether the criticized points had been remedied or at least partially remedied in the meantime.^[7]

„Asset Peace“

One aspect that was not mentioned in any of the justifications submitted by the FATF is the so-called "asset peace". This Turkish law "Varlık Barışı", which translates as Asset Peace Law, has existed since 2008. This law was initiated to declare money, gold, foreign currencies and other capital market instruments from abroad and bring them into Turkey.

The content of this law aims to bring unregistered assets from abroad into Turkey without asking about the origin of the money brought into the country and without having a tax audit carried out in order to maintain the "asset peace". Assets brought into Turkey under the asset peace are not taxed. This law has been in place for 14 years now, and is renewed every six months. The last time it was extended for another six months was on New Year's Eve on December 31, 2021.

Residents also benefit from this scheme. Taxpayers who own money, gold, foreign currencies, securities and other capital market instruments as well as real estate that are located in the country but not included in the statutory general ledger records can declare them to the tax authorities and legalize them through the asset peace. Eligible persons are individuals and legal entities. The only condition is that the declared assets are brought into Turkey or transferred to an account to be opened with banks or brokers in Turkey within three months of the date of notification. Turkish citizenship is not required to benefit from the asset peace. The cash brought into the country is sufficient for a customs document.

The official rationale is that those with unregistered savings at home and abroad can now make their money official without fear of prosecution by the tax authorities. Retired auditor general and author Kadir Sev pointed out that implementing "asset peace" is one of the easiest ways to launder assets.^[8]

The law is an amnesty scheme according to which it is irrelevant from which sources the assets originate. But it is precisely the examination of the origin of funds that is the basis of the fight against money laundering. It is a contradictory approach to combating money laundering if, on the one hand, asset peace means that there are no checks on where the money or assets actually originate. On the other hand, there are regulations in the Money Laundering Act that correspond to the international standards of the FATF.

The money enters the country via banks, brokers and intermediaries. This begs the question how such an arrangement can be reconciled with a bank's AML provisions. Is it black money, bribe money or are these funds used to finance terrorism? These aspects are not taken into account, so that, by law, banks are not supposed to analyze these aspects at all and reporting to the Financial Crimes Investigation Board (MASAK) is not required. This counteracts MASAK's very own task of combating money laundering.

Consequences

Assets that - for whatever reason - were previously exempted from state control can become legal and registered assets through the asset peace incentive, without the source of these assets being questioned and those affected being subjected to a tax audit.

How can money laundering and terrorist financing be combated if the origin of the money is not questioned? Against the background of the country's geographical location, these circumstances hold enormous potential for laundering drug money and money from human trafficking in Turkey. Tax evasion is also legalized by this scheme. The tax amnesty removes the deterrent function and decreases the willingness to pay taxes voluntarily. The decline of the Turkish lira is driving more and more people into poverty. The impact of tax evasion, money laundering and corruption, according to a report by the UN body for transparency and accountability, is that resources needed to fight poverty caused by tax evasion, corruption and financial crime are exhausted.^[9]

Against the background of such a law, it seems more than questionable that asset peace is not mentioned in the deficiencies in the fight against money laundering and terrorist financing criticized by the FATF. Even if the criticized circumstances that led to Turkey being placed on the grey list were all remedied, the question arises as to how a scheme such as asset peace can be brought into line with a FATF membership that is committed to combating money laundering and terrorist financing.

At the same time, asset peace represents a major risk factor with regard to money laundering. This raises the question of whether the FATF actually did not notice this scheme or whether it was deliberately left out.

While granting some legitimacy to tax amnesties by invoking supposed benefits in terms of addressing economic challenges, it must not be the case that illicit assets are legitimized under the guise of asset peace.

Ultimately, Turkey will have to decide sooner or later whether it wants to continue on this path or credibly be a fellow combatant of the international community in the fight against money laundering and terrorist financing.

Capital amnesty also in Russia

Russia is currently under economic pressure due to the sanctions imposed as a result of the invasion of Ukraine. The Russian rouble, like the Turkish lira, is plummeting. For these reasons, a so-called "capital amnesty" was enacted in Russia. This means that money taken abroad beyond the reach of the tax authorities can return to Russia without the threat of penalties or taxes.^[10] However, this is nothing new in Russia. The Russian government has already passed amnesty laws in the past. As with asset peace, the purpose was to repatriate financial resources located abroad. This offer was intended to provide the Russian economy with urgently needed liquid funds. In return, this was made possible without subsequent payment of taxes.^[11]

Even more intensively than in the first amnesty attempt in 2015, Russians are being offered to close the companies they control abroad and bringing back the money without having to pay tax on it afterwards.^[12]

History of capital amnesty in Russia

Russia had introduced an amnesty for past tax and foreign exchange offences in 2014, when the country was struggling with massive capital outflows, low oil prices and sanctions from the West over the Ukraine dispute.^[13] This first amnesty scheme was in place from 2015 to 2016, providing exemption from liability for tax and criminal offences, as well as regulatory offences related to declared assets. The amnesty had rarely been used and expired in mid-2016.

The second stage of the amnesty scheme was implemented from March 1, 2018 to February 28, 2019 and covered activities carried out before January 1, 2018. Due to the low take-up of the first amnesty scheme, new laws on the second stage of the amnesty were passed before the new presidential term:

Federal Law No. 33-FZ “On Amendments to the Federal Law "On Voluntary Declaration of Assets and Accounts in Banks by Individuals” and “On Amendments to Individual Legal Acts of the Russian Federation" of 19.02.2018
Federal Law No. 34-FZ “On Amendments to the First and Second Parts of the RF Social Code...” of 19.02.2018
Federal Law No. 35-FZ “On Amendments to Article 76-1 of the Criminal Code of the Russian Federation”^[14]

For example, changes were made such as the abolition of the 13 per cent tax on retrieved funds. The tax exemption extended to funds in accounts at foreign banks and to foreign accounts that were closed before January 1, 2018.^[15] However, the essence of the amnesty scheme remained untouched. Those claiming the amnesty were required to submit a special declaration to the Russian tax authorities, thus disclosing information about their assets and bank accounts abroad, as well as their shareholdings in foreign companies (including controlled companies). The amnesty covered violations of both foreign exchange and tax laws contained in the Criminal Code (Art. 193, 194, 198, 199, 199.1, 199.2), Administrative Offences Code (Art. 15.1-15.6, 15.8, 15.11, 15.25) and Tax Code of the Russian Federation.^[16]

The third stage of the amnesty scheme was to last until March 1, 2020. The targets of the amnesty were now investors and businessmen who are willing to transfer their funds to Russian accounts and move their foreign assets to the special administrative areas in the Kaliningrad and Primorye regions.^[17] Individuals can benefit from this, provided they move their funds from foreign to Russian accounts as well as re-register their foreign assets in the Russian offshore zones.

Commonalities and legitimacy

As with asset peace in Turkey, the Russian "capital amnesty" does not require disclosure of the source or origin of the money. In both countries, it is not only their own nationals who can take advantage of these schemes. The measures apply to Russian nationals and foreigners with a settlement permit. Like Turkey, Russia is a member of the FATF. In June 2013, Russia joined the FATF, committing to adhere to the FATF guidelines and benchmarks in its legislation. Here, too, the amnesty schemes cannot be reconciled with the essence of the FATF, the fight against money laundering and terrorist financing.

The capital amnesty laws in both Russia and Turkey aim to generate capital flows into the country in order to be liquid again. The examples of Russia and Turkey demonstrate that autocrats introduce measures to cushion themselves in the face of economic difficulties - even if this opens the door to money laundering and violates their obligations under their FATF membership.

^[1] The World Justice Project (WJP) is an independent, multidisciplinary organization whose aim is to document the development of the rule of law around the world, to outline developments and to promote the rule of law worldwide.

^[2] See blog post: What are the consequences of Turkey's inclusion on the FATF grey list?

^[3] See blog post: What are the consequences of Turkey's inclusion on the FATF grey list?

^[4] See blog post: What are the consequences of Turkey's inclusion on the FATF grey list?

^[5] See blog post: What are the consequences of Turkey's inclusion on the FATF grey list?

^[6] FAFT, Anti-money laundering und counter-terrorist financing measures - Mutual Evaluation Report 2019, Page 10 Priority Actions

^[7] FAFT, Anti-money laundering und counter-terrorist financing measures – 1^st Enhances Follow-up Report & Technical Compliance Re-Rating

^[8] www.haber.sol.org.tr/haber/kara-para-aklamanin-en-kolay-yolu-erdoganin-varlik-barisi-aski-308261

^[9] www.giz.de/en/downloads/170330_factsheet_BMZ_Steuer.pdf

^[10] www.puls24.at/news/politik/russland-droht-westen-mit-harten-strafmassnahmen/258923

^[11] www. ostexperte.de/oligarchen-ziehen-geld-aus-europa-ab/

^[12] www.diepresse.com/5374305/wie-die-russischen-oligarchen-geld-aus-europa-abziehen

^[13] www.handelsblatt.com/politik/international/russland-putin-will-devisen-zurueckholen/20790790.html