Turkey threatened with “gray list” by global finance watchdog

Turkey is expected to appear this week on the “gray list” of a global financial watchdog for failures in its approach to combating money laundering and terrorist financing, according to two Western officials.

In a move that risks further undermining Turkey’s already limited ability to attract crucial foreign capital, members of the Financial Action Task Force are expected to endorse the decision during talks in Paris on Thursday, officials said.

They said a FATF review had recommended that Turkey be placed under special oversight by the working group’s International Cooperation Review Group – a process known as a “gray list” – joining 22 others. States, including Albania, Morocco, Syria, South Sudan and Yemen.

The 39-member plenary was “very likely” to endorse the recommendation, according to one of the officials. The other said the approval was meant to be just a formality. The decision is expected to be officially announced on Thursday.

The move comes as foreign investment in Turkey is already close to its lowest level in nearly 20 years as President Recep Tayyip Erdogan.

Political instability and concerns about political interference in monetary policy and the rule of law have served to scare away vital foreign money to finance the country’s chronic trade deficit and fuel economic growth.

A gray listing could deal another blow at a time when the Turkish lira, which has lost around 20% of its value against the dollar this year, has hit a succession of record lows and could fall further on Thursday if, as the markets expect, the country’s central bank is again lowering its key rate.

Turkey’s gray list will increase pressure on the EU to add the country to its own money laundering list, which identifies high-risk non-European jurisdictions that threaten the bloc’s financial system.

An IMF study released in May this year found that the FATF gray list had “a large and significant negative effect” on a country’s capital inflows.

Its authors estimated that it resulted in a reduction in portfolio flows – a form of short-term investment sometimes referred to as “hot money” – equivalent to 3% of gross domestic product, plus a similar reduction in foreign direct investment. A 3% drop would equate to around $ 23 billion in Turkey’s case.

The impact risks being overshadowed by the exodus of foreign capital that the country has already suffered in recent years. Total foreign investment in stocks and bonds stood at just $ 30.6 billion in early August, according to central bank data. Foreign direct investment totaled $ 5.7 billion last year, up from over $ 19 billion at its peak in 2007.

But even small exits could deal a blow to a country whose currency is under severe pressure and whose foreign exchange reserves are already widely viewed by analysts and investors as too low. The fall of the lira led to rampant inflation and an erosion of living standards that took public support for Erdogan’s ruling party to historically low levels.

The FATF was founded in 1989 to combat money laundering, terrorist financing and other similar threats to the integrity of the international financial system.

Turkey was warned by the body in a report released in December 2019. While it said Ankara understood “the risks it faces in money laundering and terrorist financing”, she noted “serious shortcomings within the framework of the country to fight against these crimes”.

The Turkish government introduced controversial new legislation, passed by parliament in December last year, which it said was a response to FATF recommendations.

The move was criticized by opposition parties and civil society activists who said the FATF recommendations were being used by Turkish authorities as an excuse to target the nonprofit sector and further hamper freedom of expression. and association.

A Turkish official said it was inappropriate to comment ahead of Thursday’s vote, but added: “Despite the full lockdown measures taken due to the [Covid-19] pandemic, Turkey has made significant progress in complying with FATF standards and fulfilling its legislative responsibilities.

The FATF said its plenary discussions, which began on Tuesday, were underway but discussions were confidential.

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