In particular due to its location bridging Europe to Asia attracts the foreign criminal organizations of migrant smuggling, terrorism and narcotics. Turkey hosted many brass plate companies in the past set for the purpose of placement, layering and integration of laundering transactions by 1990s.
The first systematic drug trafficking and money laundering dates to the 1960s during Turkish immigration to Germany. Between the years of 1980s-1990s, due to the increase in illicit production and shadow economy and the lack of regulated financial institutions and effective laws, usury, in a form of typical business as a laundering method was very common.
The effects of globalization, increase in financial institutions and transnational business operations after 1990s required to regulate the financial market and to handle the matter of laundering both in domestic and international standards. For that purpose Turkey enacted its first regulation, law no 4802 in 1996. Even it is still defined as high risk jurisdiction in 2011 it came a long way to prevent laundering acts. Especially after 1988, the criminal organizations launched intensive anti-money laundering activities through off shore banking and almost none of these money laundering activities have been charged due to the lack of regulations.
Turkish National Police has divulged the 180 methods of laundering in 2004 that some of are as follows; to enter the privatization tenders, lotteries and games of chance and to reach people who win the lottery to buy their ticket, beach services, establishment a touristic resort, expensive ship / yacht trading, owning a car, buying precious metals, to go to the capital increase in companies, art and historical artifacts, enter the financial markets, opening shopping centers, to use false or inflated invoices, to open a casino and betting businesses in Turkish Republic of Northern Cyprus, the tax exemption from the countries.
In today's Turkey, in parallel with the developments of financial tools and diversity of financial systems, professionals such of financial, legal advisors, insurance companies or private bankers are used for laundering. When compared with recent years, since the volume of the money especially in terrorist financing has been increased and the increase in terrorist organizations to involve ordinary crimes to provide financial, the largest portion of laundering consists of speculation, smuggling, racketeering, aggravated fraud and bankruptcy, forgery on documents, producing and using counterfeit documents organ smuggling, kidnapping, arms trafficking, historical artifact smuggling, loan-backs, snatching and brass plate companies.
Besides, the hidden local-foreign partnerships shown as "investor" in capital markets and private equities choose smurfing through speculations and fraud investments. Such transactions have been reported by banks and financial institutions mostly with suspicion of unbalanced financial status and the volume of the transaction (22%), unreasonable transactions (20,6%) and suspicious cash flows (14,5%).
Turkey has also regulated its free trade zones and liaison office regulations in 2012 to prevent laundering through business organizations of transit trade. The new regulations lifted the effectiveness of inspections by central and local government authorities. However, especially due to the lack of inspection in eastern part of the country, there is still a potential risk of Syrian, Iranian, Iraqi drug traffickers and terrorist financing.
B. Turkey's Compliance with the 40 FATF Recommendations and Nine Special Recommendations
The Financial Action Task Force ("FATF") is an inter-governmental body founded in 1989 by the G7. FATF was developed to combat money laundering and terrorist financing. FATF outlines 40 recommendations and nine special recommendations in order for compliant countries to curb the growth of money laundering and terrorist financing.
Turkey is a member of FATF since 1991 and observer to EAG, the Euroasian Group of FATF. The FATF last released a mutual evaluation report in the February of 2007 and public statement for compliance for Turkey in the June of 2011.
1) 40 Recommendations
The FATF outlines 40 recommendations in order for countries to comply with to deter money laundering. Of the 40 recommendations, Turkey is compliant with three, largely compliant with eleven, partially compliant with fifteen, and non-compliant with ten of the recommendations (5, 6, 7, 9, 11, 12, 16, 21, 22, and 24). Since trusts do not exist under Turkish law, recommendation 34 in this regard is not applicable. In February of 2012, The FATF Standards have been revised to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. At the same time, these new standards will address new priority areas such as corruption and tax crimes.
a) Recommendation Five
Recommendation Five requires that financial institutions have adequate controls and procedures to recognize the new and existing customers and record keeping.
The only explicit customer due diligence (CDD) requirement is customer identification in Turkey and it is not specified whether identification must be conducted for linked transactions below the TRY 12,000 threshold. Customer verification of natural persons only partially complies with international standards however there are no verification requirements for legal persons, associations, and foundations.
Besides, documents authorizing a natural person to conduct transactions on behalf of a legal person are required as part of customer identification in accordance with primary or secondary law for legal persons registered in Trade Registry, but not for foundations or associations.
There is only a very limited provision, which is not yet implemented in supporting regulation, requiring the identification of the beneficial owner, and financial institutions are not required to take reasonable steps to understand the layers of ownership and control of legal persons which are their customers.
Measures for collection of information on the purpose and nature of the relationship for legal persons are only contained in unenforceable guidelines.
There is no provision applicable for insurance.
Measures for enhanced CDD for sensitive countries, sensitive business and higher risk customers, are only contained in non-mandatory and unenforceable guidelines and this is largely undefined.
There are no clear CDD requirements for the financial sector other than those for banks.
The exemption of requirements for identification for transactions carried out with central and local public administrations, state economic enterprises, quasi public institutions, banks and participation banks are overly broad.
There are no clear requirements to conduct ongoing CDD
b) Recommendation Six
Recommendation Six requires that financial institutions have appropriate risk management systems in place to determine whether the customer is a politically exposed person ("PEP"), obtain senior management approval for PEPs, take reasonable measures to established the source of wealth and source of funds for a PEP, and conduct enhanced ongoing monitoring of the business relationship with a PEP.
Turkey has not implemented anti-money laundering (AML) / counter-terrorist financing (CFT) measures concerning establishment of customer relationships with PEPs.
c) Recommendation Seven
Recommendation Seven is related with the targeted financial sanctions related to proliferation aimed at ensuring consistent and effective implementation of targeted financial sanctions when these are called for by the UN Security Council. Recommendation 7 is applicable to all current Security Council resolutions applying targeted financial sanctions relating to the financing of proliferation of weapons of mass destruction, any future successor resolutions, and any future Security Council resolutions which impose targeted financial sanctions in the context of the financing of proliferation of weapons of mass destruction. At the time of issuance of this Recommendation, (February 2012), the Security Council resolutions applying targeted financial sanctions relating to the financing of proliferation of weapons of mass destruction are: resolutions 1718 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1874 (2009), and 1929 (2010).
Turkey is non-compliant with recommendation seven for the following reasons:
i) Turkey does not address correspondent banking in law or regulation.
ii) Turkey has not implemented Recommendation 7. Again, the TBA has issued guidance on this issue, but that guidance is unenforceable and it is only issued to banks. While TBA guidance is implemented in fact by many banks in Turkey it does not deal with payable through accounts or the share of responsibilities between the institutions involved in the transaction are dealt. In practice, the Turkish authorities and representatives of the private sector indicated that Turkish banks have no correspondent banking relationship with foreign banks, nor payable through accounts relationships.
d) Recommendation Nine
Recommendation nine outlines the criteria for countries should ensure that financial institution secrecy laws. Accordingly, Financial institutions should, in relation to cross-border correspondent banking and other similar relationships, gather sufficient information about a respondent institution and assess the respondent institution's anti-money laundering and terrorist financing controls.
Turkey is non-compliant with this recommendation for the following reason:
i) There is no law, regulation or enforceable guidance, outside of the securities' sector, on the use of third parties to perform CDD under Turkish law.
e) Recommendation Eleven
Recommendation eleven requires financial institutions to maintain all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.
Turkey is non-compliant with this recommendation for the following reasons:
i) Turkey has not implement Recommendation eleven as there is no requirement to establish the purpose and background of unusual transactions or to maintain this information in writing and keep records which will be accessible by authorities.
f) Recommendation Twelve
Recommendation twelve requires designated non-financial businesses and professions to pay attention to money laundering and terrorist financing transactions.
Turkey is non-compliant with this recommendation because of the following reasons:
i) Lawyers, accountants and other legal professionals are not obliged parties.
ii) Turkey's general shortcomings in implementation of Recommendations 5, 6 and 8-11 also apply to designated non-financial businesses and professions.
iii) There are questions about the effectiveness of implementation of customer identification and record keeping requirements in obliged designated non-financial businesses and professions.
g) Recommendation Sixteen
Recommendation sixteen aims to provide suspicious transaction reporting (STR) by designated non-financial businesses and professions.
Turkey is non-compliant for the following reasons:
i) Accountants, lawyers and other legal professionals are not required to submit STRs and are not subject to other measures covered by Recommendations 14, 15 and 21.
ii) Designated non-financial businesses and professions are not obliged to have compliance officers or internal control programmes.
iii) Designated non-financial businesses and professions are not required to conduct in-house training or screen potential employees.
iv) Limited training has been provided to designated non-financial businesses and professions.
v) Designated non-financial businesses and professions are not required to pay special attention to transactions with countries which do not or do not adequately implement the FATF
vi) No STRs have been submitted by designated non-financial businesses and professions, which calls into question the effectiveness of implementation of Recommendation 13 in this sector.
g) Recommendation Twenty-One
Recommendation twenty-one prohibits financial institutions, their directors, officers and employees from disclosing the fact that an STR or related information is being reported to the financial intelligence unit (FIU).
Turkey is non-compliant for not implementing the Recommendation twenty-one.
g) Recommendation Twenty-Two
Recommendation twenty-two requires financial institutions to ensure that the principles applicable to financial institutions, which are mentioned above are also applied to branches and majority owned subsidiaries located abroad, especially in countries which do not or insufficiently apply the FATF.
Turkey is non-compliant for the following reasons:
i) Article 4 of the Regulation Regarding Implementation of the Law 4208 providing for application of customer identification requirements to overseas branches and subsidiaries has not been implemented.
ii) Internal control provisions for overseas branches and subsidiaries only exist for banks, not for any other obliged parties.
iii) There is no requirement to pay particular attention where branches and subsidiaries are in countries which do not or insufficiently apply the FATF Recommendations.
iv) There is no requirement to apply the higher of the two countries' standards.
v) There is no requirement to inform supervisors when a foreign branch or subsidiary is unable to observe appropriate AML/CFT measures due to host country restrictions.
g) Recommendation Twenty-Four
Recommendation twenty-four requires designated non-financial businesses and professions should be subject to regulatory and supervisory measures, for example Casinos should be subject to a comprehensive regulatory and supervisory regime that
ensures that they have effectively implemented the necessary anti-money laundering and terrorist-financing measures.
Turkey is non-compliant for the following reasons:
i) No systems exist for monitoring and ensuring compliance of designated non-financial businesses and professions with AML/CFT requirements.
2) Nine Special Recommendations
The FATF outlines nine special recommendations for countries to comply with to further anti-terrorist financing goals. Of the nine special recommendations, Turkey is currently largely compliant with one and partially compliant with eight special recommendations.
C. INCSR Rating
Every year the International Narcotics Control and Strategy Report compiles a list of countries of concern for money laundering. The list is based on the countries that are vulnerable to money laundering or terrorist financing. The International Narcotics Control and Strategy Report of 2012 placed Turkey on the list of countries/jurisdictions of primary concern for money laundering and terrorist financing.
Turkey is on the list of countries/jurisdictions of primary concern for the following reasons:
i) In "All serious crimes" approach or "list" approach to predicate crimes, all serious crimes and legal persons are covered by criminally and civilly.
ii) It should ensure the enhanced due diligence procedures.
iii) It should increase the STRs requirements
iv) The non-profit sector is vulnerable to terrorist financing. Turkey's investigative powers, law enforcement capability, and supervisory oversight are weak and lacking in all the necessary tools and expertise to effectively counter this threat through a comprehensive approach; all these areas need to be strengthened.
v) The nonprofit sector is not audited on a regular basis for terrorist finance vulnerabilities and does not receive adequate AML/CFT outreach or guidance from the
vi) The General Director of Foundations issues licenses for charitable foundations and oversees them. However, there are a limited number of auditors to cover more than 70,000 institutions.
vii) Turkey should insure any new legislation meets the FATF standards.
II. Anti-Money Laundering and Terrorist Financing
A. Hierarchy of Turkey's Law
Turkish laws are based on continental European Law. The first constitution was signed in 1921 which is called Texkilat Esasiye Kanunu and ratified by Turkish Grand National Assembly. It was replaced entirely by the constitution of 1924. The principal laws such as criminal law, civil law, commercial law are mostly modified versions of some European countries' laws. The constitutional court has function of supervising the conformity of laws to the constitution. The country is based on separation of powers and the judiciary is independent. The military and civilian judiciary is separated.
The executive branch is comprised of the President and the Council of Ministers. The President represents the Turkish Nation's unity and responsible for ensuring the harmonious manner of state organs. He/she does not have to be a member of the parliament. The Council of Ministers is comprised of the ministers and headed by the prime minister. The prime minister is appointed by the President and responsible for coordination of ministers.
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