Turkey Loopholes on Terror Finance Risk OECD Blacklist

Photographer: Kerem Uzel/Bloomberg

Piles of Turkish 100 lira bank notes are seen in this arranged photograph in Istanbul, Turkey. Close

Piles of Turkish 100 lira bank notes are seen in this arranged photograph in Istanbul, Turkey.

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Photographer: Kerem Uzel/Bloomberg

Piles of Turkish 100 lira bank notes are seen in this arranged photograph in Istanbul, Turkey.

Turkey has failed to tighten laws blocking financing of terrorist groups, and risks being put on a list of non-complying countries that includes Iran and North Korea, said academics and analysts from Istanbul to Washington.

The Financial Action Task Force sponsored by the Organization for Economic Cooperation and Development warned in June it would “call upon its members to apply countermeasures” against Turkey if rules weren’t tightened by October. Kenya and Myanmar are the other two countries at risk of joining the blacklist. The group meets in Paris today to address the issue.

OECD concerns include inadequate monitoring of bank transfers and unwillingness to freeze accounts. A terror financing bill drafted to address them is still held up in Turkey’s parliament. While the NATO member and European Union candidate isn’t likely to be assigned pariah status, a downgrading by the Task Force could impede transactions with Western banks.

That would be “damaging to all aspects of the Turkish economy including tourism, manufacturing and finance,” said Jack Smith, an anti-money laundering specialist and adjunct professor at the George Washington University Law School.

Parliament Busy

Hakki Koylu, deputy chairman of parliament’s Justice Committee, said Turkey is “already implementing measures against terrorist financing” and can freeze assets where needed under existing laws. He said the government backs the new rules required by the OECD, and the only reason they haven’t made it onto the statute books is that “parliament’s agenda is just busy.”

It’s likely that “friendly Western states’ regulators will be pragmatic” in applying any restrictions to Turkey, said Tim Ash, head of emerging market research at Standard Bank Group Ltd. Still, “some foreign banks, less actively involved in Turkey, might see Turkey’s possible position on the FATF blacklist as a reason to limit business,” he said.

Turkey needs financial inflows to balance its current account gap. Foreign investors were net buyers of almost $21 billion in Turkish equities and bonds in the past year.

There are signs some U.S. banks already limit transactions. An American tourist was unable to use a prepaid Visa TravelMoney card issued by South Dakota-based MetaBank during a recent trip to Turkey, because it’s on a list of “high-risk” countries where MetaBank blocks the use of prepaid cards due to government warnings about money laundering and the financing of terrorism, the Seattle Times reported on Sept. 29.

Non-Compliance

Turkey is non-compliant with 10 out of 40 Task Force recommendations, and only fully compliant with three, according to Safak Herdem, a partner at Istanbul law firm Herdem & Co. and author of a study on the issue.

Requirements for banks to identify parties in financial transactions are limited and may not apply at all for transfers below 12,000 liras ($6,600), Herdem said in the Oct. 5 report. There is no requirement to “establish the purpose and background of unusual transactions” and keep records of them, or for banks engaging in cross-border transactions to “assess the respondent institution’s anti-money laundering and terrorist financing controls.

Hiding Money

Transparency International backed the Task Force recommendation for Turkey to “review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism.”

“Better laws which enhance the transparency of organizations do more than just reduce the risk that an entity could be used to hide money for funding terrorist activities,” the Berlin-based anti-graft watchdog said in e-mailed comments late yesterday. “They reduce the risk of any illicit financial practices or activities within the organization or company.”

The Task Force rules require Turkey to freeze suspect bank accounts even without a judicial ruling. Turkey says it will only freeze assets of suspects listed by the United Nations, while applying reciprocity to individual requests from countries.

Turkey accuses some Western governments of failing to apply sanctions against fundraising by the Kurdistan Workers’ Party or PKK, which is fighting for autonomy in Turkey’s southeast and is listed as a terrorist group by the EU and U.S.

“We want all European countries to stop financing of the terrorist organization,” Egemen Bagis, Turkey’s EU minister and chief negotiator, said today in reference to the PKK. Bagis also called on Europe to stop broadcasts by Europe-based Kurdish television stations which he accused of “provoking the people against the government.”

Freezing Assets

“Foreigners are not considering whether they are complying with our requests,” Koylu said in an interview in parliament. “Never mind freezing assets of people who fund terrorists, they are not even freezing assets owned by terrorists themselves. They’re not prosecuting them, they’re not extraditing them.”

Turkey suspects at least 269 companies in Europe, including 147 in Germany and 49 in France, of ties with the PKK, Today’s Zaman said on Oct. 7, citing police intelligence.

Islamist groups linked to al-Qaeda have carried out attacks in Turkey. In 2003, suicide truck bombers attacked two synagogues, the U.K. Consulate and a branch of HSBC Holdings Plc in Istanbul, killing 58 people.

Koylu said it’s not clear when the terror finance bill will be voted in parliament. It was submitted in February 2011, and Prime Minister Recep Tayyip Erdogan asked for an update in October that year after opposition parties raised concerns about privacy and other issues.

The Task Force is not the only group to raise concerns about Turkish financial controls.

IMF Warning

The International Monetary Fund urged regulators to be more “intrusive” in monitoring banks, insurance companies and exchange offices. The U.S. State Department in a March report cited widespread money-laundering linked to narcotics.

After initial signs that Turkish authorities were “really worried” about a blacklisting by the OECD, the issue has dropped down the agenda, Ash said yesterday.

“It could be that they have been in contact with Western regulators and feel confident that countermeasures won’t be applied,” he said. Alternatively, preoccupied by the war in Syria and plans to rewrite the constitution, it may be that “they are simply not focused.”

To contact the reporter on this story: Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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