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The money wash

Ankara’s asset amnesty brings home the dirty cash

by Executive Staff

In the wake of the financial crisis, governments have been considering ways to bolster foreign investment and shore up the financial system. Turkey hit on the idea of an ‘asset amnesty’ to attract deposits from wealthy expatriates and return money to the banking sector. 

Starting last November, the scheme was extended in June, and looks like it will be extended again in September when the current deadline ends. The scheme may be novel, but it has proved controversial.

“The Turkish government has instituted a policy for Turks to bring back their money no questions asked — a few million dollars to come home, they say no problem, we’ll take 2 to 3 percent tax,” said an investment banker in Istanbul who wanted to remain anonymous. “It has not been completely welcomed around the world, as dirty money is going to be cleaned in Turkey, but for Ankara it’s a stop-gap method to boost foreign direct investment.”

Economists are skeptical about how successful the amnesty has been in attracting capital, arguing it can only be a temporary measure and that the amnesty’s attraction has been eroded by the first amnesty period being sold as a ‘one off chance,’ only for it then to be extended. Ankara’s extension of the amnesty has also sent a clear message to the International Monetary Fund that Turkey is not keen on implementing a $25 billion loan agreement with the fund to stabilize its $700 billion economy, which is expected to contract 5.9 percent this year, according to the Organization of Economic Cooperation and Development (OECD).

Additionally, the asset amnesty has been met with displeasure by the European Union, which wants Turkey to tighten financial regulations in line with EU accession requirements, as well as curb money laundering and the flow of narcotics into Europe. The OECD’s Financial Action Task Force (FATF), a Brussels-based body set up to combat money laundering and terrorist financing globally, has also voiced its concerns, coming at a time when FATF has been exceedingly critical of Ankara’s efforts to rein in anti-money laundering and counter terrorist financing.

Boosting foreign direct investment?

On paper, the asset amnesty has boosted assets, with the declared amount of the first amnesty amounting to 14.8 billion Turkish Lira ($9.6 billion), but the reported inflow has been limited to $3.9 billion, according to research firm YF Securities. According to an economist who was not authorized to speak with the media at an Istanbul brokerage house, the amnesty has not been as successful as the government hoped.

“The amount declared may be much less,” he said. “The government said there was to be only one asset amnesty in November, but [that] turned out not to be the case, and people remember these things, so it is not good for fiscal quality. If you are going to do it, do it only once.” 

“It is not a sustainable financing source, for any economy, not just Turkey,” he added.

The economist said the government wants to see if the asset amnesty extension will bring more deposits.  He said the “government wants to keep this card in its hands, as the new decree gave them the possibility to extend it for three months beyond September.”

Economists have pointed out that the people most likely to utilize the amnesty would have done so in the first few months, making the extension unnecessary, and that the amount raised from the second asset amnesty round will be significantly less than the first. And while the money that has flowed in has bolstered banks’ assets, allowing for more credit, inflows are not expected to enter the stock market or other asset classes.

“Most of the people that wanted to benefit have already reported their holdings abroad, and the government intends to [make] additional legal arrangements to make it more attractive,” the economist said. “I am not too optimistic on that due to macroeconomic fundamentals. The good thing is that the current account deficit is in decline due to falling oil prices, but Turkey needs external sources to finance the capital account deficit, as the rollover of the private and public sector for foreign borrowing is up to just below 100 percent.”

Turkey’s public debt is projected to reach $50 billion this year, and the continuation of the amnesty has thrown doubt on Ankara’s ongoing talks with the IMF for a loan between $25 billion to $40 billion. If inked in September, the IMF would require structural reforms and stricter controls on government spending.

“The [amnesty] extension being introduced in such a manner is another signal that the IMF is not part of the government’s game plan, as the fund would have a say on amnesties, at least in the way they are implemented,” the economist said.

Dirty laundry

It’s unknown how much of the declared $9.6 billion repatriated during the asset amnesty is dirty money. But the amnesty has not put Ankara in the OECD’s Financial Action Task Force good books, with Turkey, positioned as it is as a crossroads between the East and West, serving as a transit hub for narcotics trafficking and organized crime.

In 2007, Turkey was heavily criticized by the FATF for failing to enact 33 out of the task force’s 40 recommendations on anti-money laundering and combating terrorist financing. Criticism included the lack of a precise definition in the law on money laundering, and the low number of suspicious transaction reports.

A 130-page report submitted by Turkey’s financial intelligence unit, ‘Mali Suclari Arastirma Kurulue’, or MASAK, to the task force’s general assembly in February, stated that since 2007, Turkey had adopted a bill on the prevention of money laundering that required financial institutions to issue suspicious transactions reports and have compliance units. According to MASAK, there has been a huge rise in suspicious transaction reports year-on-year, from 180 in 2003 to 4,318 in 2008.

But while the report highlighted Turkey’s more active role in curbing money laundering, MASAK noted there has been a dramatic rise in proceeds from the illicit drug trade within Turkey, which it estimated at $5 billion a year. Reports related to fraud and fraudulent bankruptcies had also increased significantly, attributed to the financial crisis in late 2008.

Tight financial regulations on market trades have also boosted money laundering, with Turks seeking to evade a 10 percent capital gains tax paid out to play the markets, resulting in the use of intermediaries to get around taxation.

“We’d have ‘mustachioed [disguised] Turks’  to get money out to say Geneva, or get a prime brokerage account with a big London firm to do the trading,” said the former investment banker. “As this is technically illegal in Turkey, it is always being looked out for and is very tightly regulated.”

Providing further regulatory challenges to the Turkish authorities is the country’s low banking penetration rate, estimated at just 40 percent of the population.

“Turkish people have huge under-the-mattress savings; penetration of the banking system is not like Western economies,” said the economist. “People tend to keep foreign currency or gold.”

Penetration rates are, however, likely to increase this year following the introduction of a new finance ministry regulation requiring rent to be paid via bank accounts. The asset amnesty could also help.

The European Union connection

While the EU is critical of the asset amnesty and Turkey’s anti-money laundering and combating terrorist financing regime, counter terrorism experts say that the EU is not doing enough to assist Ankara in combating the narcotics trade and groups like the Kurdistan Workers Party (PKK).

“Despite the PKK being a banned organization by the EU, many member states are ambivalent about cracking down on its sophisticated networks and infrastructure within the Kurdish diaspora communities around Europe,” said John Solomon, global head of terrorism research at World-Check, a British company that maintains a database on high risk individuals and entities. “This lack of political will has afforded the PKK a safe haven to raise funds, plan attacks and disseminate propaganda.”

A Turkish study has claimed that the PKK has controlled an estimated 80 percent of the European narcotics trade on and off for decades, with the group earning an estimated $140 million a year. According to Interpol, at one time nearly 200 PKK front organizations in Europe were suspected of involvement in the narcotics trade.

“Due to the surge in poppy production in Afghanistan post-2001, and Turkey’s strategic position relative to lucrative western markets for refined heroin in Europe, it is quite possible that the PKK’s involvement in the trade has intensified,” Solomon said.

Some of that drug money could have been cleaned since the November asset amnesty, and the extension would give ample opportunity to clean further funds. In order to boost deposits, Turkey has shown a willingness to take in the good as well as the bad.

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