Julian Gary, World
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Causes and Consequences of Turkey’s Grey Listing

Image Source: bbc.com

By Julian Gary

On October 21, the Financial Action Task Force (FATF) announced that Turkey would be added to its “grey list” for failing to adequately address money laundering and terrorist financing. This new development makes Turkey the largest economy to receive the designation to date. The move generated significant international attention, delivering another blow to Turkey’s already troubled economy.

FATF is a G7 initiative founded in 1989 to combat money laundering and terrorist financing (ML/TF). The organization monitors countries’ adherence to ML/TF standards and provides action plans to countries who fail to adequately address illegal activity. FATF categorizes countries into two categories based on their oversight structures: countries that are deemed “high-risk,” informally known as the “black list,” and countries that are “subject to increased monitoring,” known as the “grey list.” Currently, there are 23 countries on the grey list and two countries on the black list: Iran and North Korea.

Turkey’s listing comes in response to a 2019 FATF report that highlighted deficiencies in Turkey’s ML/TF oversight, including Turkey’s failure to address non-profits’ involvement in terrorist financing and the lack of targeted financial sanctions relating to terrorism. In a press conference discussing Turkey’s induction, FATF President Marcus Pleyer stated, “Turkey needs to show it is effectively tackling complex money laundering cases and show it is pursuing terrorist financing prosecutions in line with its risks and prioritizing cases of UN-designated terrorist organizations such as ISIL and al Qaeda.” 

The risks highlighted in the 2019 FATF report are supported by years of exposed terrorist connections within Turkey. In September, five individuals residing in Turkey were sanctioned for aiding al Qaeda, one of whom was a former leader within the Egypt-based terrorist organization Islamic Jihad and served as a financial courier for al Qaeda’s network in Turkey.

Placement on the grey list will have significant effects on Turkey’s international investment. According to IMF research, on average, grey listings result in a decrease of capital inflow of 7.6% of GDP and a decrease in foreign direct investment of 3% of GDP. Given that 3% of Turkey’s 2020 GDP is $21.6 billion, the listing could exacerbate the already severe exodus of foreign capital from the country. From 2007 to 2020, foreign direct investment declined from $19 billion to $5.7 billion. Because foreign direct investment plays an important role in promoting innovation and stimulating local economies, the decline in capital inflow is likely to have long-term effects on GDP growth.

This phenomenon was demonstrated when Pakistan was placed on the grey list in 2008. In a paper titled “Bearing the Cost of Global Politics – the Impact of FATF Grey-Listing on Pakistan’s Economy,” Dr. Naafey Sardar estimated that Pakistan lost $38 billion in GDP and $3.6 billion in foreign direct investment from 2008 to 2019.

Along with decreasing foreign capital inflows, the listing is likely to negatively impact bank access for Turkish people. According to a review done by FATF, banks become more risk averse and narrow access to banking services in response to receiving grey list status. Given that 31% of Turkey’s population is unbanked, a relatively high number compared to other developed nations, decreased access to banking services may further inhibit economic activity when the economy has already been hit hard by the pandemic.

Together, the decline in foreign investment and economic activity will further exacerbate Turkey’s dire currency crisis and high inflation. Under pressure from Turkish President Recep Erdogan, Turkey’s central bank cut interest rates by 2% in October, causing the value of the Turkish Lira to fall to new lows after already shedding 20% of its value in 2021. The rate cuts have also sent inflation skyrocketing to a high of 19.89%. The high inflation has contributed to an erosion of living standards and will continue to perpetuate the withdrawal of foreign capital.

The listing’s effect on the Turkish economy exemplifies the possible unintended consequences of the grey list, which have prompted criticism of FATF. In his study, Dr. Sardar criticizes the FATF for its use of the grey list as a “policy instrument,” given the listing process’s political nature. Other alleged non-economic effects of the grey list include empowering authoritarian governments to act against NPOs and political dissidents. For example, in Uganda, the government froze the bank accounts of three NPOs and arrested one leader. In Serbia, following the country’s grey listing, the government requested private client data from banks containing information on 50 NGOs and media outlets, many of which were critics of the Serbian President.

Despite these negative consequences, the grey list serves as a powerful incentive for countries to prevent money laundering and terrorism financing. Grey listed countries work closely with the FATF to develop action plans that address the structural issues. After Turkey’s grey listing, Turkey’s treasury issued a statement assuring that the country would take all necessary measures to be removed from the list as soon as possible. Thus, despite the economic implications of Turkey’s addition to the grey list, the resulting structural changes will be net-positive to the Turkish economy. □

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