The Financial Action Task Force ("FATF") has placed Turkey onto its list of countries subject to increased monitoring, the so-called "grey list". Turkey was added alongside 22 other jurisdictions, for strategic deficiencies in its regime to counter money laundering, terrorist financing, and proliferation financing.
What Is the FATF? What Do They Do?
The FATF is the global money laundering and terrorist financing watchdog, established in July 1989 by the G7 group of advanced economies to protect the global financial system. The FATF now has 39 member countries, including Turkey, which has been a member since 1991. The FATF sets international standards to implement legal, regulatory, and operational measures to prevent organized crime, corruption and terrorism, and other threats to the integrity of the international financial system and aims to prevent the harm they cause to global society.
The FATF developed the International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the "FATF Recommendations") in February 2012, which consist of internationally endorsed global standards against money laundering and terrorist financing. They set a framework of measures that countries should implement in order to combat money laundering and terrorist financing, and the financing of proliferation of weapons of mass destruction. The FATF recognizes the diversity in countries' legal, administrative, operational frameworks and financial systems; therefore, it does not expect all countries to take the same actions. Instead, it sets international standards and expects countries to implement these standards through different measurement methods and techniques.
The FATF monitors countries' progress in complying with the FATF Recommendations and the measures they take to combat money laundering and terrorist financing, and reviews how countries adapt their regulatory and operational frameworks, as well as their de facto implementation of the FATF Recommendations.
How Does Being Grey Listed Affect a Country?
The FATF's country-monitoring and periodic evaluations of involvement in money laundering, terrorist and proliferation financing addresses jurisdictions that have strategic deficiencies in combatting these illegal activities. The grey list is a warning given to countries that are in a doubtful position about their involvement in terror funding, money laundering and other threats that damage the integrity of the international financial system. It is applied to countries in an effort to prevent them from being placed on the blacklist. If a country fails to act on the deficiencies that are of concern to the FATF, then they are put on the blacklist.
When the FATF puts a jurisdiction onto the grey list, it means that the listed country has committed to resolve its deficiencies within an agreed timeframe and is subject to increased monitoring. Jurisdictions under increased monitoring work with the FATF to remediate the notified strategic deficiencies.
Turkey's History With the FATF
The FATF first put Turkey on its grey list in 2011 and removed it in 2014 after the Turkish government made various amendments to Turkey's regulatory framework. In December 2019, the FATF warned that unless it improved its "serious shortcomings," Turkey ran the risk of being added to the grey list again. In Turkey's mutual evaluation report in 2019, the FATF highlighted Turkey's "need to improve measures for freezing assets linked to terrorism and proliferation of weapons of mass destruction."
In the FATF's fifth plenary, which was convened on 19-20 October, among other issues discussed, the FATF updated its country-specific statements and added some new jurisdictions to its grey list which will be subject to increased monitoring due to some strategic deficiencies in applying the FATF Standards. The grey-listed jurisdictions include Turkey, owing to the FATF's updated statements on the deficiencies in Turkey's anti-money laundering and combatting terrorist financing regime ("AML - CFT").
Turkey is expected to implement its action plan through a set of measures stated under the FATF review. These actions generally include:
- dedicating more resources to the financial intelligence unit for the supervision of AML - CFT compliance by high-risk sectors and increasing on-site inspections overall;
- applying dissuasive sanctions for AML - CFT breaches, in particular for unregistered money transfer services and exchange offices, and in relation to the requirements of adequate, accurate, and up-to-date beneficial ownership information;
- enhancing the use of financial intelligence to support money laundering investigations and increasing proactive dissemination by the financial intelligence unit;
- undertaking more complex money laundering investigations and prosecutions;
- setting out clear responsibilities and measurable performance objectives and metrics for the authorities responsible for recovering criminal assets and pursuing terrorism financing cases and using statistics to update risk assessments and inform policy;
- conducting more financial investigations in terrorism cases, prioritizing terrorism financing investigations and prosecutions related to UN-designated groups and ensuring terrorism financing investigations are extended to identify financing and support networks;
- fully implementing a risk-based approach for the supervision of non-profit organizations to prevent their abuse for terrorist financing, ensuring that sanctions applied are proportionate to any violations, and taking steps to ensure that supervision does not disrupt or discourage legitimate NPO activity, such as fundraising.1
Additionally, the FATF especially underlined that it will monitor Turkey's oversight of the NPO sector and warned Turkey to apply a risk-based approach in the regulation and supervision of NPOs, in order not to imperil legitimate activity.
What Are the Potential Consequences of Being "Grey Listed"?
When a country is placed onto the grey list, it means that it represents a higher risk of money laundering and terrorism financing but has formally committed to work with the FATF to develop an action plan, to be under increased monitoring and reporting liability to resolve its AML and CFT deficiencies.
Grey listing can have harmful effects on a country's national economy, status and reputation in the global environment and international business relations. This negative impact and monitoring may also vary depending on the reasons for inclusion on the grey list. For example, if the reason is terrorist financing, the consequences will be greater.
A country placed on the grey list faces several problems, such as:
- downgrade of ratings,
- economic constriction due to lack of investment opportunities,
- negative effect on the country's borrowing capacity from the IMF and other global bodies,
- negative impact on the relationship with international funders, banks and financial institutions that consider the FATF rankings,
- negative effect on potential foreign investments,
- potential of being exposed to country-based or regional boycotts or sanctions,
- lack of trade opportunities with other countries, due to the negative reputation of the grey list,
- being labeled as a "high-risk country" in the global business environment, thus being subject to less favorable commercial terms, higher compliance, and monitoring measures,
- other economic pressures such as degrading currency value, trade deficit, and inflation rises; negative impact on the bond market.
According to IMF research, an FATF grey listing reduces capital inflow by an estimated 7.6% of gross domestic product, and also lowers foreign direct investment and portfolio flow.2
Besides these negative consequences of grey listing, FATF involvement may help a country to tackle illegal activities and to take necessary measures in a timely manner to prevent being placed onto the blacklist, where the regulations and penalties are more repressive.
Grey listing must be considered as a warning and a chance given to countries for remediation in AML - CFT regulations and strategies. In this step, it is crucial for the Turkish government to fully comply with and implement the FATF's Recommendations. If Turkey does not implement the FATF Recommendations within the defined timeframe, the watchdog may move Turkey from the grey list to the blacklist.
1 Jurisdictions under Increased Monitoring - October 2021, Turkey Review, FATF
2 The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning, International Monetary Fund, May 27, 2021
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