Mongolia’s potential inclusion in FATF grey list postponed by a year

...It is a signal for the country to quickly adapt to the changes or face the

consequences...

By B.CHINTUSHIG

Mongolia’s potential inclusion on the grey list of the Financial Action Task Force’s (FATF) was postponed by 12 months at the Asia Pacific Group on Money Laundering (APG) annual meeting held in Kathmandu, Nepal in July. The grey list refers to countries that have a strategic deficiency in complying with the global fight against money laundering and terrorist financing.

The FATF is an intergovernmental organization originally founded in 1989 to combat money laundering and later was mandated to expand its operations to combat terrorism funding. The organization has a blacklist, or officially referred to as non-cooperative countries or territories, in which non-compliant countries are placed and imposed sanctions on.

In Mongolia’s case, it is not in danger of being included in the blacklist but it is under pressure to undertake major legal reform in compliance with the 40 recommendations set by the FATF. With the most recent postponement of the decision to include Mongolia on the grey list, it is a signal for the country to quickly adapt to the changes or face the consequences.

The Asia Pacific Group on Money Laundering (APG), an autonomous and collaborative international organization founded in 1997 in Bangkok, consists of 41 members, including most Asian countries and several key international organizations including the FATF. It is essentially a FATF-style regional body for the Asia Pacific region.

A large delegation of Mongolian officials including representatives from the Bank of Mongolia, Financial Regulatory Commission, Ministry of Finance, Ministry of Justice and Internal Affairs, General Prosecutor’s Office, Independent Authority Against Corruption and General Police Department took part in the APG’s annual meeting in Kathmandu. The purpose of the delegation was to report on the implementation of the recommendations provided under the Mutual Evaluation on Mongolia’s anti-money laundering/ counter terrorism financing (AML/CFT) system in 2017.

While the delegation was not able to convince APG members that Mongolia had done enough in terms of implementing the recommendations, postponement was the best outcome outside of not being considered for a potential grey-listing. Being named on the FATF grey list can have some significant consequences including but not limited to economic sanctions on a banking system, instability leading to plummet in foreign direct investment, issues in obtaining loans from international organizations like IMF and World Bank, and a potential downgrade in credit rating.

For a country like Mongolia that has only recently recovered from a mining bust cycle and begun to attract foreign investment that had been driven out of the country, inclusion in the grey list could be disastrous.

Director of the Financial Information Unit of Mongol Bank, Kh.Batchuluun has underlined how inclusion in the grey list might pose substantial risks to the entire financials system of Mongolia.

Before potential inclusion is discussed again at the APG’s annual meeting in 2019, Mongolia must first report on its legal reform in connection with the FATF’s 40 recommendations on October 2018. It was reported in March that Mongolia had only implemented five of the 40 recommendations. The FATF requires that a country fulfill all 40 recommendations.

“Being named in the grey list poses some serious risks to the financial system, this includes a halt in all international bank transfers in Mongolia. Any suspensions in the operations of the financial system will be immediately felt in the economy, making it harder for businesses to find any funding. Even if a business was able to find funding, it will be very expensive, which drives up the cost of products, ultimately leading to the general public to shoulder most of the burden,” said Kh.Batchuluun.

Faced with the potential for significant consequences of being included in the grey list, several agencies and ministries including Mongol Bank and the Ministry of Justice and Internal Affairs set up working groups to draft legal reform in compliance with the recommendations. Some of the draft bills have already been discussed and passed in Parliament during the spring session. The Law on Combating Money Laundering and Terrorism Financing was approved in April and came into effect on July 1, 2018.

But legal reform alone will not be enough to avert inclusion in the grey list. The mutual evaluation report conducted in 2016 by the FATF reported on how Mongolia is exposed to a range of money laundering threats and vulnerabilities. This includes fraud, environmental crimes, tax evasion, and corruption as high-risk predicate offences. Moderate money laundering risks included drug offences; smuggling; organized crimes; crime against banking regulations; theft and burglary; and risk from foreign proceeds.

“The proceeds generated from these predicate crimes are laundered in Mongolia and abroad. Within Mongolia, proceeds are mainly used to purchase real estate, vehicles/ machinery, and other consumer items, and are also laundered using legal persons including in the construction industry. In relation to corruption, bank accounts of family members are mainly used for the receipt of monies, which are then transferred to foreign bank accounts and offshore accounts/ financial institutions and funds are used to establish companies abroad. In some money laundering cases these funds have been returned to Mongolia using the banking system,” the report said.

One of the underlying messages of the mutual evaluation report was that compliance with Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework was nearly not enough in terms of scope. This includes examples such as how only notaries are required to comply with the AML/CFT framework while real estate agents are not required to do so.

Another example was how dealers in precious metals and stones are not included in Mongolia’s AML/CFT framework. As above, environmental crimes including violations of the rules for exploration and extraction of minerals are identified as higher-risk offences. Artisanal small-scale miners and an illegal miners sector, which sell their raw gold to informal dealers, fuels the shadow economy and smuggling, the report underlined.

Most of the risk in Mongolia’s case was realted to money laundering. In contrast, terrorism financing threats were limited, as highlighted in the report. Based on available open source information, Mongolia has no reported or identified instances of Al Qaeda, Taliban or ISIL related activities and Mongolia has not been identified as a major source or route jurisdiction for terrorism financing.

As of 2018, the grey list of the FATF included Serbia, Tunisia, Iraq, Syria, Yemen, Ethiopia, Sri Lanka, and Pakistan. The blacklist included Iran and North Korea.