Courting 'financial pariah' status
by Avi Jorisch
This past February, Thailand was added to a high-risk blacklist by an international organization many people have never heard of. The Financial Action Task Force (FATF) was established by the Group of Seven (G7) in 1989 to combat money laundering and terrorism finance. Being added to the FATF "high-risk" country list may not sound terrible, but in many circles, it is akin to being labeled a financial pariah.
Thailand now joins the ranks of countries that include North Korea, Iran, Syria, Pakistan, and Myanmar, to name just a few. In most contexts, these are not countries people normally wish to be associated with.
The FATF's best practices, known as the "international standard," are meant to have universal application and to serve as a comprehensive framework against the movement of illicit money. FATF's principal contribution has been Forty Recommendations on Combating Money Laundering and the Financing of Terrorism & Proliferation. Countries are assessed and rated against this standard. In the case of Thailand, the country's financial regime was found to be woefully inadequate and in act, among the worst in the world.
As Thailand grapples with how to get off the list, it will be vital for its policymakers to understand how FATF operates. The organization's international standard rests on three principles. First, countries must improve their national infrastructure to combat money laundering and terrorism financing. Next, each country is obligated to strengthen its financial system. Both banking and nonbanking institutions must set up procedures to identify clients and detect suspicious transactions, as well as develop secure and modern transaction protocols. Finally, countries must strive to improve international cooperation by collecting, analyzing, and sharing financial-related information at the administrative and judicial levels. This includes sharing information on international currency flows and developing mutual judicial-assistance programs in order to investigate, freeze, and confiscate illicit funds.
FATF's official policy is to blacklist countries that either fail to comply with the international standard or refuse to have their financial system evaluated. Although there is no enforcement mechanism, the blacklist has been remarkably effective in changing the behavior of designated countries in the past. The reason for FATF's effectiveness is simple: many financial institutions and other good corporate citizens are reluctant to do business with or in countries shunned by the organization.
Blacklisted countries that refused to take remedial action have at times lost significant international investment as a result. In fact, the International Monetary Fund and World Bank have sometimes chosen to downgrade a blacklisted country's credit rating—a significant punishment in today's interconnected financial world. Other blowback Bangkok should expect as a result of its new-found "high-risk" status is reduction in foreign investment, international trade, and financial transactions, and less willingness in the international community to help Thailand grow economically.
There are immediate steps Bangkok should consider taking in order to rectify the situation. First, it is imperative that lawmakers adequately criminalize terrorism finance. In addition, the international community has made clear that each country must have an administrative process to identify, and if necessary, freeze the assets of all illicit actors, including terrorists. Thailand has yet to put in place a mechanism to ensure the proper supervision of an anti-money laundering activity and combating the financing of terrorism (AML/CFT) regime. Lastly, the FATF has made clear that the country must complete a risk assessment of its financial sector to see where other weaknesses lie.
While Thailand's Office of Anti-Money Laundering and Thai lawmakers attribute its lax financial regime to the floods that took place there last year, this claim does not hold water, and this systemic problem will affect the country's economic viability in both the short and long term if not rectified expeditiously. Thai lawmakers and policymakers should keep in mind that the steps the FATF is asking Bangkok to take are in their own best interest. Ensuring that the country's financial sector is not exposed to undue risk mitigates abuse on the part of illicit actors that include money launderers, terrorists, narco-traffickers, and weapons proliferators. It also gives the international community the confidence that Bangkok is serious about protecting the financial sector.
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