On 21 November 2021, Turkey was placed on the so-called “grey list” by the Financial Action Task Force (FATF)[1] alongside Mali und Jordan because its anti-money laundering and counter-terrorist financing (AML/CFT) measures were assessed as insufficient.[2] The grey list is a global list of countries that have insufficient safeguards against money laundering, proliferation and terrorist financing.
Why was Turkey included in the grey list?
Turkey is one of the member states of the FATF and has thus committed itself to the fight against financial crime. In the FATF’s view, the country has made some progress in the past, but according to FATF President Marcus Pleyer, numerous problems remain.[3]
The FATF concretised its criticism in its press release of 21 October 2021. The main criticism was that the country’s supervision did not take sufficient action against high-risk sectors such as banks, gold and gemstone traders as well as real estate agents. It is feared that terrorist groups, among others, feed their illegally acquired funds into the Turkish real estate market and integrate it into other sectors from there. 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 to Europe.
Furthermore, the FATF reacted with the “grey listing” to the ongoing harsh approach towards the civilian population. Specific criticism is directed against Turkey’s “Anti-Terror Law” to “prevent the proliferation of the financing of weapons of mass destruction.” Contrary to the title, the law does not contain penalties or control mechanisms against money laundering or the financing of weapons of mass destruction for terrorist purposes. Instead, it entitles the president to freeze the funds and assets of terror suspects.
Ultimately, Turkey’s handling with non-profit organisations was also at the centre of the FATF’s criticism. The mere existence of criminal investigations on terrorism allegations against a board member of an initiative, association or foundation entitles the Ministry of Interior and the government-appointed governors to suspend the person concerned, paralyse the activities of the respective association and appoint an official receiver in their place.
What are the consequences for Turkey of its inclusion in the grey list?
Turkey’s inclusion in the FATF’s grey list means that it is under increased scrutiny. At the same time, it is obliged to
- cooperate with the FATF
- launch an action plan[4] which resolves the certified deficiencies in the area of anti-money laundering and anti-terrorism
- adhere to its action plan (implementation will be monitored)
Specifically, the FATF demands Turkey to ensure a risk-based approach for the supervision of non-profit organisations in line with the FATF standards in the future. However, legitimate activities should not be prevented or hindered by the authorities.[5]
What are the consequences of the “grey listing” for obliged entities under the German Anti-Money Laundering Act (AMLA)?
The FATF does not impose any direct obligations on its members to take action against “grey” listed countries. However, the members are asked to take the FATF information into account in their risk analyses and to take further measures if necessary.[6]
This has far-reaching consequences. First of all, all obliged entities according to Section 2 of the German Anti-Money Laundering Act (GwG) must react as quickly as possible to Turkey’s inclusion in the grey list and adapt their risk analyses. Internal security measures must be derived from the results of the risk analysis and be implemented. The specific scope of the measures to be taken is determined by the obliged entities themselves.
For companies that maintain business relations with Turkey and for companies based in Turkey, enhanced due diligence obligations may apply. One may criticise the fact that neither the Federal Ministry of Finance nor BaFin have made any clear recommendations on this matter at this point in time, although this would be permissible under the German AMLA (Section 15 (8)). However, enhanced due diligence obligations are already derived from Section 15 (2) GwG.
What are the consequences for correspondent banking business?
Turkey’s inclusion in the grey list may put a strain on its relationship with foreign banks and investors. States that maintain business relations with Turkey may have to conduct due diligence audits significantly more often, taking into account the risks of working with Turkish banks.
The German Anti-Money Laundering Act (GwG) defines a catalogue of mandatory due diligence for the correspondent banking relationships, which consists of general due diligence obligations and, under defined conditions, additional enhanced due diligence obligations.
Turkey’s “grey listing” could also entail enhanced due diligence audits. Obliged entities under the German Anti-Money Laundering Act (GwG) should check whether their supply chains pass through Turkey or another “grey” listed country. Checking Turkish government officials or state-owned companies against sanctions lists, for example, is also an option for enhanced due diligence.
What effects does the grey list have on supply chain relationships?
From 2023, German companies will be obliged to identify and eliminate risks to human rights and the environment as well as violations of protected legal positions along their supply chains. The German Supply Chain Due Diligence Act (LkSG) requires this under certain conditions. Here too, the fact that a country is on the grey list must be taken into account when conducting a risk analysis. Based on a risk-based approach, companies must decide how far down the supply chain they want to extend their due diligence. This also raises the question to what extent due diligence obligations can be imposed on the direct contractual partner to check the other companies in the supply chain. “For companies on international terrain, the regulatory expectations are relatively clear. The need and requirements for effective business partner managements are comprehensively set out in the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA), for example.”[7]
What are the impending economic consequences of the FATF classification?
The Turkish lira is on a downward trend and inflation is close to 20 per cent. Foreign investment in Turkey is declining. The inclusion in the grey list may have devastating consequences for Turkey’s already struggling economy, as it is likely to have an additional deterrent effect on foreign investment and trade flows.
The International Monetary Fund (IMF) has confirmed in a study[8] that a listing on the FATF’s grey list has a large and significant negative effect on a listed country’s capital inflows: incoming capital flows – both foreign investment and bank transfers – decreased by an average of 7.6 per cent of gross domestic product.
This will most likely be accompanied by an even stronger trend towards cryptocurrencies, which are attractive to many Turks, in order to escape the further decline of their own currency.
Conclusion
The inclusion of a state in the grey list is often seen by experts as the first step to stricter sanctions. In the case of Turkey, the grey listing possibly also creates pressure on the EU to include Turkey in its own money laundering list.[9] Transparency International suspects that, as a next step, Turkey could face sanctions from the World Bank, the European Bank for Reconstruction and Development and difficulties in securing loans.
Companies trading with Turkish business partners are now subject to special due diligence obligations. Obliged entities under the German Anti-Money Laundering Act (GwG) should compare their risk assessments for all countries with the FATF’s grey list and adapt their risk analyses. Otherwise, this may lead to violations of the GwG.
The FATF’S grey list has negative implications for the listed country. However, it can also be seen as an incentive to initiate reforms in order to resolve existing deficiencies in the fight against money laundering and terrorist financing and to generate capital flows into the country again.
[1] The FATF is the world-leading anti-money laundering organisation. It develops guidelines, sets standards and makes recommendations to combat money laundering, terrorism financing and the financing of weapons of mass destruction (proliferation). More than 200 states – including Turkey – and jurisdictions have committed themselves to compliance of FATF standards. The implementation of the measures by the member states is regularly reviewed by the FATF.
[2] Turkey had previously been added to this list in 2011 and removed in 2014.
[3] https://anfdeutsch.com/aktuelles/turkei-auf-grauer-liste-fur-finanzstraftaten-28920
[4] Meanwhile, Turkey has formulated an action plan. Its content can be read here: www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-october-2021.html
[5] www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-october-2021.html
[6] www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-october-2021.html
[7] www.catuslaw.com/wp-content/uploads/2021/10/Trossbach_CCZ-Geschaeftspartner-Compliance.pdf
[8] www.imf.org/en/Publications/WP/Issues/2021/05/27/The-Impact-of-Gray-Listing-on-Capital-Flows-An-Analysis-Using-Machine-Learning-50289
[9] www.mena-watch.com/tuerkei-koennte-auf-graue-liste-fuer-korruption-und-geldwaesche-kommen/
