Being on the grey list is a red signal to the economy

B.Tugsbilegt

As if we do not already have enough economic worries, comes the announcement on 18 October that The Financial Action Task Force (FATF) has identified Mongolia as a “jurisdiction with strategic AML/CFT (anti-money laundering/combating the financing of terrorism) deficiencies”, a move that is commonly called grey listing. FATF is an intergovernmental organization to develop policies to combat money laundering and terrorism financing. 
Being on the grey list is not as bad as being blacklisted; the two can be compared to being shown a yellow card and a red  card respectively in a football match, and FATF did say Mongolia has already developed an action plan to address the most serious deficiencies and has shown high-level political commitment to it. But until we come off the list, it has the potential to pose serious challenges to our economic growth.

This is not the first time that Mongolia has been put on the FATF grey list but compared to 2013, this time the outrage in the country has been stronger and far more widely expressed. This shows how our understanding of international norms has improved. Another factor can be that on the earlier occasion people’s attention was deflected by the Rio Tinto announcement that it would halt further development of Oyu Tolgoi.

The economy is in relatively good health and mining revenue has been piling up. Still, the IMF is not 100% happy with how the government is using the Extended Fund Facility. Interestingly, Prime Minister U.Khurelsukh was in Japan after the “grey list” announcement, and the formal joint statement by him and his counterpart Shinzo Abe included the sentence, “The Japanese government is ready to render second phase fiscal assistance after Mongolia makes proper changes in its monetary policy and resolves some banking and financial difficulties.” Add the FATF move to this and you see a certain degree of international dissatisfaction with how the government is moving in the economic sphere.

The FATF action is inconvenient but not totally unexpected. The regional body of FATF -- The Asia/Pacific Group on Money Laundering – had issued a critical Mutual Evaluation Report in 2017 on Mongolia. Mongolia asked for some time to put its act together but apparently not enough was done to satisfy FATF, though not being blacklisted shows some success. Parliament was aware of the need to show progress and passed some laws to strengthen oversight of potential means of money laundering and financing of terrorism. 

Parliament Speaker G.Zandanshatar sent a letter detailing the steps taken to the FATF  President, Xiangmin Liu, on 7 October. This was discussed at the FATF meeting in Paris on 16-18 October, which then made the announcement. The Speaker has blamed Mongolbank and the Financial Regulatory Commission for their failure to enforce laws and regulations. Mongolbank has promised a more convincing performance, with the increased cooperation of other state administrative organizations, and expressed confidence that FATF would not take any further penal action and would also take Mongolia off the list next year, after going through the two “action taken” reports that Mongolia would submit in December and then February 2020. 

The FATF review of a country’s performance basically checks on technical compliance with 40 recommendations and evaluates results in 11 areas. Before this month’s decision, Mongolia’s case was reviewed in August 2019, where its compliance with 35 of the 40 recommendations was found acceptable. Of these, Mongolia was “compliant” with seven, “largely compliant” with 28, but only “partially compliant” with the remaining five. Altogether, Mongolia had progressed much since 2017. 

Among the recommendations where Mongolia’s progress did not satisfy FATF are:

•    Assessing Risks and Applying a Risk-Based Approach to AML/CFT Policies and Coordination , where “moderate shortcomings” were noted;
•    Oversight of Non-profit Organisations for Terrorist Financing and Financing of Proliferation;
•    Preventive Measures on money or value transfer services; and
•    Powers and Responsibilities of Competent Authorities and Other Institutional Measures to impose sanctions.

FATF also reviews every country’s performance to achieve results or Immediate Outcomes in 11 areas. Mongolia had been rated poorly in all of them in 2017, but this time FATF noted that it had made good progress in seven, and was required to make more improvements in the other four, according to Mongolbank.

FATF says Mongolia will work to implement its action plan by

(1)    improving sectoral ML/TF risk understanding by DNFBP supervisors, applying a risk-based approach to supervision and applying proportionate and dissuasive sanctions for breaches of AML/CFT obligations /anti-money laundering/counter terrorism financing/;
(2)    demonstrating increased investigations and prosecutions of different types of ML activity in line with identified risks;
(3) demonstrating further seizure and confiscation of falsely/non-declared currency and applying effective, proportionate and dissuasive sanctions;
(4) demonstrating cooperation and coordination between authorities to prevent sanctions evasion; and monitoring compliance by financial institutions and DNFBPs with their PF-related TFS obligations, including the application of proportionate and dissuasive sanctions.

Note: DNFBP or Designated Non-Financial Business or Profession includes real estate agents, dealers in precious metals/stones, lawyers, notaries etc.

So Mongolia has passed the right laws and adopted the right regulations for combating money laundering and financing of terrorism but has failed in their effective implementation. It should be possible to rectify this if there is better coordination among state related administrative organizations. 

Rapid economic growth always has the risk that black money enters the market. In its 2017 report, The Asia/Pacific Group on Money Laundering said Mongolia’s exposure to TF threats seems to be limited but it is exposed to a range of ML threats and vulnerabilities. “Based on available open source information… (w)thin Mongolia, proceeds are mainly used to purchase real estate, vehicles/machinery, and other consumer items, and 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. In some cases, these funds have been returned to Mongolia using the banking system.”

A country in the grey list could face problems like economic sanctions and getting loans from international institutions like the IMF, the World Bank, the ADB etc. and also individual countries, and could suffer overall reduction in its international trade. That is not a happy prospect for Mongolia. Oyu Tolgoi CEO Armando Torres has said that the listing has as yet not had any effect on the financing of his company’s project but he did not rule out that it could increase the cost of external funds raising for other private entities.

That could very well mean a brake on foreign investment in mining and could make Mongolia a country with no exploration licence. We can only hope that the government will not let the country down by failing to take the right steps to meet the challenge.