Turkey slacking on combating terrorism financing

What would it take for the governing Justice and Development Party (AK Party) to give a real push in Parliament for a draft bill that criminalizes the financing of terrorism and combats money laundering? Considering that this draft has been recycled in each legislative session in recent years, only to be resubmitted to Parliament by the government with no real action on it, there is no magic answer as to what can actually prompt the AK Party government to take swift action into turning this bill into law.

It even looks like the US-led Financial Action Task Force (FATF), a unit of the Organization for Economic Cooperation and Development (OECD), is about to throw the towel in on Turkey after repeated warnings of non-compliance from the FATF fell on deaf ears in the Turkish capital. In the plenary meeting, the FATF’s decision-making body, held in Paris on Oct. 17-19 under the Norwegian presidency, the FATF decided to suspend Turkish membership as of Feb. 22, 2013, barring that Turkey adopt this draft and establish a mechanism for identifying and freezing terrorist assets in line with earlier FATF recommendations.

Can it be done by this deadline? Well, certainly if the government has a real intention to do so. Considering that Prime Minister Recep Tayyip Erdoğan hastily rallied his deputies for the adoption of an amendment to the intelligence law within a week to save a political appointee and close confidante from ongoing legal troubles, it is quite possible that he may do the same for the FATF bill in Parliament as well. Whether he will do it or even has an appetite to do so begs further questions, though. The government may take a defensive position, saying that there are many laws in the criminal code that are enough to combat the financing of terrorists and anti-money laundering activities, known by acronym as AML/CFT.

That will not fly with the FATF, the principal standard-setting agency in these matters, after waiting five years for the government to act upon recommendations that have already been agreed to by the Turkish side in 2007. It will certainly invite the wrath of our closest ally, the US, which has been putting pressure on the AK Party government to enact AML/CFT laws in Turkey. This means the Turkish financial and banking industry may be exposed to further risks and even sanctions considering that the country has serious shortcomings in counterterrorism financing. It may eventually lead to a situation in which Turkey will face higher risk premiums, loss of competitiveness and possible scaring away of foreign investment.

It would also look cynical for outspoken Prime Minister Erdoğan, who loves to bash the EU, especially Germany — and rightly so, to turn a blind eye to the fundraising activities of the terrorist Kurdistan Workers’ Party (PKK) in Europe. Ankara will lose significant clout in that argument when the country itself lacks the mechanism to fight money-laundering and terror-financing activities.

Not only that, Turkey’s shortcoming in this field does not look good on the standing of the country as a member of the G-20, a group of the largest economies in the world, because FATF was tasked by the G-20 in April 2009 to report on compliance with AML/CFT standards. As Turkey seeks bigger clout in world financial structures like the International Monetary Fund (IMF) and the World Bank and lobbies to that effect in the G-20, its weaknesses in the AML/CFT framework may hurt Turkish efforts to play a larger role in world financial structures.

I suppose many in the government, including Finance Minister Mehmet Şimşek, are very much aware of the dangers of not complying with the FATF. But that does not explain the critical question of why the Turkish government is slacking on fulfilling reasonable recommendations issued by the FATF after a series of close consultations with government officials. Has this government cultivated special ties in recent years to protect Hamas? Do some in the government fear that they need to go after some foundations and non-profit organizations that have links to Hamas, very much like Germany did when it confiscated the assets of a number of non-profit organizations that raise funds for Hamas, listed as a terrorist organization by the US and the EU?

Is it because the AK Party government does not want to hamper its trade relations with Iran, a top state-sponsor of terrorism that is already blacklisted by the FATF? Frankly, it does not make any sense to pursue this path considering the huge cost of engaging with Iran at the expense of our major trading partners in the West. But then again, how should we explain the anomaly that the number of Iranian-funded foreign companies established in Turkey has been steadily climbing since 2010 and that there is no serious effort on the part of the AK Party government to curb their activities. Even though Iran is not in the top tier of Turkey’s foreign trade partners in terms of volume, why is it that the number of Iranian-owned companies in Turkey is mushrooming? According to the latest official data released by the Turkish Union of Chambers and Commodity Exchanges (TOBB), the number of new Iranian firms established in Turkey rose in September for the ninth consecutive month this year.

According to the TOBB, 651 Iranian-funded foreign companies were established in Turkey in the first nine months of the year, amounting to 23 percent of all foreign firms that started operating in Turkey this year. As a result, the number of companies financed by Iranian nationals totaled 2,791 as of September. The TOBB previously announced that 590 foreign companies had Iranian financing in 2011, which was an increase of 41 percent over the previous year. There are serious concerns that some of these businesses may just be front companies set up to circumvent UN-sponsored sanctions or unilateral ones imposed by the US or the EU on Iran.

As Iran has started experiencing more difficulties in completing financial transactions because of sanctions, it is very likely that Tehran is targeting the finance and banking sector in Turkey using these companies. There are reports that a significant amount of cash is being smuggled into Turkey from Iran through carriers and laundered in Turkey using these front companies. In addition to that, Iran has turned to buying Turkish gold as Western sanctions tighten. In the first seven months of this year, Turkey’s gold exports to Iran skyrocketed to $6 billion, making up 75 percent of the total value of goods Turkey sold to this country in the given period. When the news attracted a lot of national and global media attention, Iran switched to front companies set up in the UAE to procure gold from Turkey. Only in the paperwork did the UAE replace Iran as a destination for Turkish gold exports, as many believe they were re-exported to Iran from Dubai.

I know that people in the Financial Crimes Investigation Board (MASAK), the body equivalent to an economic intelligence unit that controls and investigates the movement of cash and financial transactions in Turkey, are not comfortable with the government’s position on the FATF recommendations. As MASAK has been doing some serious work in tracking funds that may run afoul of UN sanctions on Iran and other countries, they feel they lack rigorous tools to make their work more efficient, better and faster. They look to the draft bill in Parliament for a new mandate and new tools.

I just hope the Turkish government realizes the risks associated with the suspension as Austria did in 2000 after the FATF issued a suspension deadline for Vienna unless the government there took appropriate steps in four months to meet the conditions required by the FATF. Austria got the message, adopted the necessary measures and averted suspension. I do not think many in Turkey would be happy to see their country listed along with Iran and North Korea.

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