Russia and Türkiye are on the path to progress in national anti-money laundering and counter-terrorism financing systems.

Koroleva Lyudmila Pavlovna ORCID: 0000-0002-8375-8524 PhD in Economics Associate Professor; Department of Economic Security and Risk Management; Financial University under the Government of the Russian Federation 125167, Russia, Moscow, Leningradsky ave., 49/2 korol.l@mail.ru Other publications by this author     Evseeva Yuliya Igorevna Graduate student; Department of Economic Security and Risk Management; Financial University under the Government of the Russian Federation 49/2 Leningradsky Ave., Moscow, 125167, Russia uliy-e@mail.ru

Bezrukov Egor Vladimirovich Graduate student; Department of Economic Security and Risk Management; Financial University under the Government of the Russian Federation 125167, Russia, Moscow, Leningradsky str., 49/2 evb2003@bk.ru

Introduction

Turkey is one of the key foreign policy and trade partners of the Russian Federation ^[1]. The trade turnover between Russia and Turkey expanded especially rapidly in 2022 in the context of a sharp increase in sanctions against Russia by a bloc of Western countries. Against the background of the risk of secondary sanctions against financial and other Turkish organizations in cooperation with Russian business, trade volumes decreased in 2023-2024. According to the latest data from TurkStat, by the end of April 2024, exports from Russia decreased by 40% compared to April 2022, while imports to Russia from Turkey still exceed the level of the beginning of 2022 and in April 2024 the volume of imports in April 2022 increased by 50% (Figure 1).

Figure 1 – Dynamics of indicators of foreign trade between Russia and Turkey, thousand US dollars

Source: according to the Turkish Statistical Institute. Ülke Gruplarına Göre Dış Ticaret. Access mode: https://data.tuik.gov.tr/Kategori/GetKategori?p=dis-ticaret-104&dil=1

Thus, despite the difficulties, the volume of trade between Russia and Turkey remains significant. Turkish financial institutions, at risk of secondary sanctions, are reviewing the processes in relation to clients from Russia, models for assessing sanctions risks. At the beginning of 2024, Russian business noted significant problems in financial settlements with counterparties from Turkey, including due to the refusal of a number of banks to carry out operations.

The problems of international relations between Russia and Turkey are of high interest among scientists, including economists. Despite modern threats, Russia and Turkey have strong historical foundations for cooperation, rely on stability and non-interference in each other's domestic political affairs ^[2]. Trade, economic, energy cooperation and the rapid development of tourism are the engines and factors for improving Russian-Turkish relations ^{[3, 4]}.

The topic of countering money laundering is quite popular in foreign scientific literature. There are studies on the national counteraction system of Turkey ^[5-8]. However, there are very few of them in international databases. The results of research on a number of other countries are presented ^[9-10].

The national system of countering the laundering of proceeds from crime, the financing of terrorism and the proliferation of weapons of mass destruction (AML/CFT/FRM/FRM) of Turkey in the Russian literature rarely becomes the subject of research. Turkey is not a member of the BRICS, the FATF regional groups with the presence of Russia, so the only platform for their interaction in the field of AML/CFT/FMT is the Organization of the Black Sea Economic Cooperation. As is known, historically the interests of the powers in this region overlap ^[11]. The mutual interests of Russia and Turkey in Afghanistan, Lebanon, Syria, and Iran determine the existence of motives for cooperation in the fight against international terrorism ^{[12, 13]}. Turkey is countering domestic terrorism ^[14]. However, at the same time, countries have discrepancies in assessing the manifestations of extremist and terrorist movements ^[15]. From the territory of Turkey, most of whose population preaches Islam ^[16], terrorist fighters can enter Russia, as well as financial flows to support them. In addition, Turkey remains a country attractive to criminals in the field of ML/FT from Russia in terms of integrating criminal proceeds through the purchase of expensive real estate, jewelry, and expensive tourist services.

This makes it relevant to analyze national AML/CFT/FMT systems in order to identify and share best practices, to increase the understanding of risks by all stakeholders and to expand international cooperation. The purpose of this study is to conduct a comparative analysis of the main provisions of the legislation of Russia and Turkey in the field of AML/CFT/FRM in order to identify the strengths and weaknesses of their national systems, which are necessary to take into account when interacting between economic entities of the countries, as well as opportunities for further improvement and expansion of interaction on AML/CFT/FRM.

Research methodology

The comparative analysis was carried out using the methodology of the Group for the Development of Financial Measures to Combat Money Laundering Established Non—financial Enterprises and Professions - Financial Action Task Force (FATF), applied within the framework of the 4th round of mutual assessments, in the context of assessments of technical compliance with FATF Recommendations and the effectiveness of the AML/CFT/FMT system. Technical compliance requirements are assessed by FATF experts according to established criteria for each recommendation, which eventually receives one of four possible ratings: meets (C) — there are no shortcomings; largely meets (ZS) — there are minor shortcomings; partially meets (ES) — there are moderate shortcomings; does not meet (NS) – there are serious shortcomings; not applicable (NP) — due to the structural, institutional and other characteristics of the country.

To assess the effectiveness of national AML/CFT/FMT systems, FATF experts use 11 direct results to judge the effectiveness of counteraction. The level of effectiveness for each immediate result receives one of four ratings: high, significant, moderate, low.

The comparative analysis was carried out using the specified levels of assessments provided by FATF experts to the national AML/CFT/FMT systems of Russia and Turkey. Russia successfully passed the 4th round in 2019. In 2023, a report on the progress of the national AML/CFT/FML system of Russia was published on the resources of the EAG. Turkey also passed the 4th round of mutual assessments of the national AML/CFT/FML system in 2019, during which significant shortcomings were identified that threaten the integrity of the international the financial system. In this regard, in 2021, after repeated inspection, the FATF added Turkey to the gray list of countries under increased monitoring.

The information basis of the study was the laws of Russia (Federal Law No. 115-FZ dated 08/07/2001 (as amended on 03/11/2024) "On Countering the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism) and Turkey (Turkish Law on the Prevention of Laundering of Proceeds from Crime (Law No. 5549)) in the field of/FT/FROMU/FROMU, data from the official websites of the financial intelligence units of the countries, as well as reports on mutual assessments and progress by country, compiled according to the FATF methodology within the framework of the 4th round of mutual assessments.

Comparative analysis of the technical compliance of the national AML/CFT/FMT systems of Russia and Turkey with the FATF recommendations

In order to understand the strengths and weaknesses of the national AML/CFT/FMT systems of Russia and Turkey, a comparison of the technical compliance assessments obtained by them in the framework of the 4th round of mutual assessments was carried out (Table 1). If a country has been able to improve its assessment of a recommendation to date, table 1 shows two values for it (initial and achieved in the process of improvement), highlighted in bold, indicating the year of the change in the assessment.

Table 1. Assessment of technical compliance of national AML/CFT/FMT systems of Russia and Turkey with FATF recommendations, based on the results of 2023

Designations: P– FATF recommendation; conformity assessment: corresponds to (C), largely corresponds to (HS), partially corresponds to (emergency), does not correspond to (HC); not applicable (NP).

Source: compiled according to the data of the Russian Federation. 1st progress report (with ratings revision. December 2023 Access mode: https://www.fedsfm.ru/content/умс/отчет%20о%20прогрессе%20российской%20антиотмывочной%20системы .pdf; Turkey's progress in strengthening measures to combat ML/FT 2023 // URL: https://www.fatf-gafi.org/en/publications/Mutualevaluations/turkiye-fur-2023.html (date of application: 04/20/2023).

As can be seen from Table 1, in 2019, Russia's national AML/CFT/FMT system did not receive a single assessment of non-compliance, while Turkey's national system did not comply with recommendations 7 ("Targeted financial sanctions related to WMD proliferation"), 12 ("Public officials") and 15 ("New technologies"). Already in 2019, Russia received fairly high marks for most of the FATF recommendations. A high-quality legal and regulatory framework was demonstrated, especially in the field of national coordination and law enforcement. The strengths of the national AML/CFT/FMT system included effective supervision of the financial sector, centralized coordination of the activities of supervisory authorities by the financial intelligence unit. Nevertheless, some recommendations have been made to further strengthen the AML/CFT/FMT regime in Russia: improving the effectiveness of targeted financial sanctions, improving procedures for due diligence of clients and control of transactions involving public officials (PDL), transparency of information about beneficial owners, as well as accounting.

Turkey received technical compliance ratings below Russian ones for fifteen of the forty recommendations established: 2 "National cooperation and coordination", 7 "Targeted financial sanctions related to the proliferation of WMD", 8 "Non-profit organizations (NGOs)", 12 "PDL", 15 "New Technologies", 16 "Electronic money transfers", 18 "Internal Control and foreign branches and subsidiaries", 22 "Established non—financial Enterprises and Professions (DNFBPs) — due diligence of clients", 23 "DNFBPS- other measures", 24 "Transparency and beneficial owners of legal entities", 26 "Regulation and supervision of financial institutions", 28 "Regulation and supervision of the DNFBP", 31 "Powers of law enforcement and investigative agencies", 33 "Statistics", 35 "Sanctions". These areas required immediate attention to strengthen the AML/CFT/FMT regime in Turkey. The strengths of the Turkish AML/CFT/FROMU system in 2019 were the practice of applying property confiscation measures, protecting the secrecy of financial institutions, storing information about customer activities, reporting suspicious activity, as well as international cooperation in the field of AML/CFT/FROMU/FROMU.

Over the past five years since 2019, countries have significantly improved their national AML/CFT/FRM/FRM systems. In 2023, the Russian Federation eliminated the shortcomings associated with the urgent application of targeted financial sanctions (CFS) related to terrorism and the financing of terrorism, based on the UN Security Council sanctions lists (Recommendation 6). Federal Law No. 115-FZ ^[4] was amended to ensure that notifications are sent to accountable organizations within four hours after changes are made to the UN Security Council sanctions lists. Private sector entities are required to verify customer data with the sanctions list and freeze assets immediately, but no later than twenty hours after receiving the relevant notification. They are responsible for non-compliance with these requirements.

The Russian Federation has also made progress in addressing shortcomings related to the timely application of targeted financial sanctions (Recommendation 7. Targeted financial sanctions related to the proliferation of weapons of mass destruction (WMD)). Federal Law 115 increases the requirements for conducting due diligence of transactions by financial institutions in order to identify and reduce the risks associated with financing the proliferation of WMD. Federal Law No. 281-FZ has been amended to include provisions on coercive measures provided for by UN Security Council resolutions. The remaining minor shortcomings mainly relate to the timing of the application of sanctions and the use of the CFS during non-working hours. Overall, these changes significantly improve compliance with Recommendation 7.

However, the assessment of compliance with recommendation 15 has been lowered. Recognizing the importance of regulating new and emerging technologies, Russia has adopted legislation on digital financial assets (CFAs) and virtual currencies. Federal Law No. 259-FZ defines the procedure for the activities of service providers in the field of digital financial assets, ensuring that they comply with AML/CFT/FMT requirements. But the FATF's updated requirements for recommendation 15 in 2023 set higher criteria for its assessment. Currently, digital currency service providers have not been identified in the Russian Federation, and therefore they are not accountable entities, which was recognized as a moderate disadvantage against the background of a lot of work done in the field of digital financial assets circulation.

Russia's progress was noted in accordance with Recommendation 25 "Transparency and beneficial ownership". In particular, legal entities are required to keep accurate and up-to-date records of their beneficial owners and are responsible for violating the requirements under Article 14.25.1 of the Administrative Code of the Russian Federation. Trust managers of foreign legal entities are included in the number of accountable persons, are obliged to comply with the rules of internal control, in case of violation of which they are held accountable in accordance with Article 15.27 of the Administrative Code of the Russian Federation. However, the penalties imposed in this case are assessed as too low to be considered deterrent.

Thus, in 2023, the Russian Federation demonstrated significant progress in improving the national AML/CFT/FMT system: only three FATF recommendations received partial compliance ratings (12 "Public Officials", 15 "New Technologies", 16 "Electronic money transfers"), for the rest of the recommendations— full or significant compliance was achieved.

Turkey has taken even more intensive measures to improve its national AML/CFT system by increasing technical compliance assessments for most of the recommendations.

In 2021, the scope of obligations for the DNFBP was expanded. Lawyers have been included in the number of accountable entities (Anti-Money Laundering Law No. 5549, article 2), which has allowed to expand coverage and improve assessments on recommendations 22 and 23. DNFBPs, including lawyers, now adhere to strict internal control requirements, bringing Turkish AML/CFT/FMT legislation in line with international standards standards.

An assessment of the risks of NPOs' activities was carried out, according to which 115 of them were classified as high-risk FT/FRM, and 1011 - as medium-risk. The maximum fine for collecting donations sent to the FT/FRM has been increased from 32 to 4,679 euros, and for collecting funds via the Internet — to 9,319 euros.

In accordance with Recommendation 12, Turkey has taken special measures to ensure that appropriate requirements are met for beneficial owners of exchange offices, such as criminal record checks for certain crimes, including ML/FT.

As part of Recommendation 15, Turkey expanded the scope of new technology obligations for DNFBPs, which are required to take into account the risks associated with new technologies, products, delivery channels and business applications related to ML/FT. Some comments on this recommendation, as well as in Russia, are related to virtual asset service providers (VMS), in respect of which control should be strengthened. In January 2022, based on the risk analysis conducted, all high- and medium-risk PUVA were supervised under the 2022 Program "Supervision of compliance with obligations". As a result of these inspections, the PUVA were brought to administrative responsibility for violations in the amount of 7,721,700 euros (347,476 euros) and in the amount of 7,778,100 euros (350,014 euros). As a result, according to this recommendation, Turkey, like Russia, was rated "Partially compliant".

Turkey's efforts to improve regulation and supervision of financial institutions were also highly appreciated (Recommendation 26. Regulation and supervision of financial institutions). A risk—based approach to supervision was introduced, and in 2020, the Turkish Financial Intelligence unit - MASAK prepared a policy and methodology document. This document provides the basis for the application of a risk-based approach to supervision, defines its principles and procedures. Every year MASAK conducts an analysis of ML/FT risks in the activities of financial institutions and their categorization by risk level. The Turkish Financial Intelligence Unit maintains an interdepartmental system of supervision of financial institutions, which includes tax inspectors, treasury experts and others in accordance with article 11 of the AML Law. The Agency for Banking Regulation and Supervision (BRSA) and the Capital Market Council (CMB) continue to regulate the activities of banks and intermediaries in the capital market, and the Agency for Regulation and Supervision of Insurance and Pension Provision (IPRSA) has been established to oversee insurance companies. Supervision of exchange offices has also been strengthened, including their beneficiaries — individuals with a participation rate of more than 10% and persons holding senior positions.

Turkey has taken significant steps to improve compliance with Recommendation 28 "Regulation and supervision of DNFBPS". Compliance and appropriate conduct criteria agreed with other professional sectors are now applied to lawyers. Monetary sanctions for AML/CFT/FMT violations have been tightened and are now considered proportionate and dissuasive, although there remains a small drawback related to the statute of limitations. In addition, risk-based methodologies have been introduced to determine the frequency and intensity of supervision of DNFBPs in the AML/CFT/FMT area. Since 2021, MASAK has been applying a risk-based approach to DNFBP supervision, conducting an annual ML/FT risk analysis and classifying them based on risk indicators. Industry risk assessments have been conducted in high-risk sectors such as real estate agents and dealers in precious metals and stones. As minor drawbacks of compliance with recommendation 28, the non-extension of measures to accomplices of criminals and the problem with the statute of limitations are indicated.

Thus, in modern times, Turkey does not have a single recommendation with a low rating — a discrepancy. According to eleven recommendations, Turkey has higher ratings than Russia: She demonstrated a strong commitment to improving the national AML/CFT/FMT system, eliminating the shortcomings identified in 2019 and bringing regulations into line with international standards.

Comparative analysis of the effectiveness of national AML/CFT/FMT/FMT systems in Russia and Turkey

Technical compliance with the FATF recommendations gives an idea only about the presence or absence of certain AML/CFT/FRM measures in the country's legislation. How effectively it is used and whether it allows to reduce the risks of ML/FT/FRM can be judged by the effectiveness estimates, which are given in the context of eleven immediate results in a certain area. However, only technical compliance is subject to revision as part of the progress assessment, therefore, the effectiveness estimates of the systems of Russia and Turkey are presented for 2019 (Table 2).

Table 2. Ratings of the effectiveness of national AML/CFT/FMT systems in Russia and Turkey, based on the results of 2019

Designations: HP – the immediate result; UE – the level of efficiency.

Source: compiled according to the data of Russia's Measures to combat ML/FT: Report on mutual assessment of Russia 2019 // URL: www.eurasiangroup.org (date of reference: 04.04.2023); Turkish measures to combat ML/FT: Turkey Mutual Assessment Report 2019 // URL: https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-turkey-2019.html (date of application: 04.04.2023).

The FATF methodology for assessing the effectiveness of national AML/CFT/FMT systems has a number of drawbacks ^[17], but still allows us to judge the progress made by countries.

As can be seen from Table 2, in 2019, Turkey was inferior to Russia in terms of the effectiveness of direct results 5 "Legal entities and entities", 6 "Financial Intelligence", 8 "Confiscation", 9 "Investigation and prosecution of FT", 10 "Preventive measures and financial sanctions for FT" and 11 "Financial sanctions for FROMA."

Since 2013, Russia has been conducting a comprehensive assessment of the risks of money laundering/terrorist financing with the involvement of stakeholders at the national and sectoral levels. This indicates active cooperation between the authorities and all interested parties. Turkey has also developed a national system and in 2021-2022 carried out a comprehensive risk assessment of ML/FT/FMT. AML/CFT/FMT cooperation policies and mechanisms are currently being developed. Nevertheless, the country faces problems related to the statistical base, especially with regard to the risks of terrorist financing for non-profit organizations.

Both countries are actively cooperating internationally in the fight against ML/FT. In 2018, Russia reduced the response time to requests for legal assistance from 66 days to 30 days. It also actively exchanges information on financial crimes and terrorist financing with other countries. Turkey also shows significant effectiveness of international cooperation, responding to 66% of requests received between 2013 and 2017, but has problems leading to the rejection or postponement of requests related to terrorism.

Both countries maintain a sound regulatory framework and effective oversight systems that have been assessed at a moderate level. Both in Turkey and in Russia, the list of regulatory and supervisory authorities interacting with the financial intelligence unit is quite wide.

Both countries are making progress in implementing preventive measures. The Turkish banking sector actively reports suspicious transactions, although there are problems related to the risk-based approach and unlicensed money transfers. In Russia, commercial banks receive about 90% of the total number of suspicious transaction reports. However, small financial institutions and some sectors need to further improve their understanding and implementation of anti-money laundering measures.

Although MASAK receives a significant number of suspicious transaction reports, it faces difficulties analyzing these messages. Unlike Rosfinmonitoring, which annually processes a large number of suspicious transaction reports, requests from law enforcement agencies and has a reliable infrastructure and analytical systems.

Turkey has difficulty effectively confiscating assets compared to Russia, which places particular emphasis on coordination, restitution and close international cooperation to achieve results in asset confiscation efforts.

Turkey faces difficulties in conducting effective investigations and prosecutions, while Russia demonstrates a higher level of knowledge and effectiveness in combating the financing of terrorism.

Progress in improving AML/CFT/FMT systems, which countries demonstrated in 2023, should lead to a significant increase in their effectiveness.

Comparative analysis of key AML/CFT/FRMU/FRMU measures in Russia and Turkey

The most important AML/CFT/FMT measures are operations subject to mandatory control; requirements for the organization of internal control and targeted financial sanctions against FT and FMT. Let's compare these measures in Russia and Turkey.

In Russia, fixed thresholds have been established for most transactions subject to mandatory control (regulated minimum values of a financial transaction, legally established and expressed in monetary terms). The amounts of such thresholds are quite different from 50 thousand rubles for transactions of foreign citizens who have been identified in foreign financial organizations, 10 million rubles for a state defense order. A threshold amount of 1 million rubles is applied to most transactions.

In addition, Russia has introduced the obligation to inform Rosfinmonitoring about suspicious transactions identified by private sector entities, regardless of their amount. So, if suspicions arise, it is necessary to send a message within three working days. This legal obligation also includes reporting suspicious transactions, even if the suspicions are based on a broad definition of the crime of money laundering or on business practices. It is also necessary to report transactions interrupted at the initiative of the client, but raising suspicions of money laundering, within the established time frame ^[18].

Internal control is mandatory for all private sector entities: both financial institutions and DNFBPs ^[19]. Internal control programs should contain criteria for identifying suspicious transactions and taking measures to prevent ML/FT/FRM. Violation of this obligation may result in administrative liability.

Turkish legislation does not provide for the establishment of any threshold amounts for transactions subject to mandatory control or suspicious transactions. If there is any information, suspicion or reasonable grounds to suspect that an asset that is the subject of transactions carried out or attempted to be carried out internally or through obligated persons has been acquired illegally or used for illegal purposes, obligated parties must inform MASAK about these transactions. (Article 4 of Turkish Law No. 5549). According to the Turkish CFT Law, if assets are suspected of being used for terrorist activities or by terrorist organizations, terrorists or those who finance terrorism (ROM, Article 27), a notification must be submitted within 10 days from the moment of suspicion (ROM, Article 28(1)). Any new information regarding the reported transactions should be immediately sent to MASAK (ROM, article 28(3)).

In Turkey, private sector organizations, including banks, brokerage firms, insurance companies, pension funds, the General Directorate of Postal Communications (in relation to cash transactions), are required to develop internal control programs to comply with legislation in order to combat ML/FT/FRAUD. They include rules and procedures for the appointment of compliance specialists, employee training, and annual internal audits.

In 2023, the Russian Federation significantly ensured compliance with the requirements of the urgency of the application of the CFS on the basis of the UN Security Council sanctions lists. In 2021-2022, Turkey also made appropriate amendments to the legislation on combating FT. However, there are still some minor shortcomings that need to be addressed, such as the absence of a ban on providing services to these individuals. Turkey has also adopted a law on preventing the financing of the proliferation of weapons of Mass Destruction, which covers all relevant UN Security Council resolutions and ensures that payments related to the proliferation of WMD will not be made. In addition, notification systems and enforcement measures have been strengthened in the country, including the establishment of a Commission for Supervision and Cooperation.

To summarize, it can be noted that the thresholds established in Russia for mandatory control operations, combined with broad internal control requirements and the prompt introduction of targeted financial sanctions in accordance with UN resolutions, provide a reliable AML/CFT/FMT mechanism. Meanwhile, the broad definition of controlled suspicious transactions in Turkey provides comprehensive coverage, and legislative amendments in recent years have significantly improved compliance standards and indicate significant progress in the national AML/CFT/FMT system.

Conclusion

Despite the significant progress made by Russia and Turkey in combating money laundering and terrorist financing by 2023, further improvements are still needed. Continued commitment to international cooperation and best practices will be crucial to improving the effectiveness of their national systems. Addressing the identified shortcomings, especially in the fight against CFT/FMT, ensuring compliance with sanctions and transparency of beneficial ownership, are important for both countries in creating a reliable and comprehensive AML/CFT/FMT system that meets international standards ^[20].

Russia can use Turkey's experience to improve its national system.

First, according to recommendation 4, Turkey's imposition of tougher monetary sanctions for AML/CFT/FMT violations serves as an example for Russia of strengthening measures to deter financial crimes. By imposing more proportionate penalties, Russia can improve the effectiveness of its AML/CFT/FMT system.

Secondly, recommendation 12 emphasizes that Turkey pays special attention to improving the identification and monitoring of PD through a risk-based approach. Russia could benefit from adopting similar criteria and stricter due diligence requirements for PDL.

Thirdly, recommendation 17 emphasizes that Turkey allows financial institutions to rely on third parties to conduct due diligence on clients under certain conditions, while maintaining their ultimate responsibility for compliance. Russia has also now adopted a number of amendments allowing foreign financial institutions to identify customers. In this regard, Turkey's experience is of interest to Russia.

The current national AML/CFT/FMT systems in Russia and Turkey have a significant level of efficiency. The FATF announced the planned exclusion of Turkey from the gray list in 2024. It is necessary to expand international cooperation between Russia and Turkey in the field of AML/CFT/FMT and, taking into account existing measures, not to burden business transactions with additional control, creating difficulties in trade and economic relations and financial transactions. Strengthening cooperation between countries in the field of anti-terrorist activities should become a top priority, despite the desire of the Western bloc to exclude Russia from the global dialogue. The expansion of cooperation between Russia and Turkey, including in the field of AML/CFT/FMT, is possible on the BRICS platform, of which Turkey openly declares its readiness to become a member. Turkey can become not only a key foreign policy and trade partner for Russia, but also a reliable assistant in AML/CFT/FMT.