Turkey is set to be “grey listed” by a global finance watchdog this week for failings in its approach to combating money laundering and terrorist financing, according to two western officials.
In a move that risks further denting Turkey’s already limited ability to attract crucial foreign capital, members of the Financial Action Task Force were likely to approve the decision during discussions in Paris on Thursday, the officials said.
They said an FATF review had recommended that Turkey should be subject to special monitoring by the taskforce’s International Co-operation Review Group — a process known as “grey listing” — joining 22 other 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 that approval was expected to be a mere formality. The decision is due to be formally announced on Thursday.
The move comes as foreign investment in Turkey is already close to the lowest level reached during President Recep Tayyip Erdogan’s almost 20 years at the helm.
Political instability and concerns over political interference in monetary policy and rule of law have served to scare away foreign money vital for financing the country’s chronic trade deficit and fuelling economic growth.
A grey listing could strike a further blow at a time when the Turkish lira, which has lost about 20 per cent of its value against the dollar this year, has hit a succession of record lows and could fall further on Thursday if, as markets expect, the country’s central bank cuts its benchmark interest rate again.
Turkey’s grey-listing will heap pressure on the EU to add the country to its own money-laundering list, which identifies high-risk non-EU jurisdictions that threaten the bloc’s financial system.
An IMF study published in May this year found that FATF grey listing had “a large, significant negative effect” on a country’s capital inflows.
Its authors estimated that it caused a reduction in portfolio flows — a form of short-term investment sometimes referred to as “hot money” — equivalent to 3 per cent of gross domestic product, plus a similar reduction in foreign direct investment. A 3 per cent decline would be equivalent to about $23bn in Turkey’s case.
The impact is likely to be limited, however, 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 $30.6bn at the start of August, according to central bank data. Foreign direct investment totalled $5.7bn last year, compared with more than $19bn at its peak in 2007.
But even small outflows could strike a blow to a country whose currency is under heavy pressure and whose foreign exchange reserves are already widely considered by analysts and investors to be too low. The sliding lira has led to spiralling inflation and an erosion of living standards that has sent public support for Erdogan’s ruling party to historic lows.
The FATF was founded in 1989 to combat money laundering, terror financing and other similar threats to the integrity of the international financial system.
Turkey was put on notice by the body in a report published in December 2019. While it said that Ankara understood “the risks it faces from money laundering and terrorist financing”, it found “serious shortcomings in the country’s framework to combat these crimes”.
The Turkish government introduced controversial new legislation, passed by parliament in December last year, that it said was a response to the FATF recommendations.
The move was criticised by opposition parties and civil society activists who said the FATF recommendations were being used by the Turkish authorities as an excuse to target the non-profit sector and further hamper freedom of expression and association.
A Turkish official said it was inappropriate to comment before Thursday’s vote, but added: “Despite full lockdown measures taken due to the [Covid-19] pandemic, Turkey has achieved significant progress in terms of compliance with FATF standards, and fulfilled its responsibilities regarding legislation.”
The FATF said that its plenary discussions, which began on Tuesday, were under way but that the talks were confidential.