What is FATF and What is the Blacklist for This Group?
The International Financial Action Task Force “FATF” blacklists jurisdictions or high-risk countries due to deficiencies in its systems strategy to fight money laundering and terrorist financing and this list is being update always. It includes the countries which the Financial Action Task Force considered uncooperative in the global war against money laundering and terrorist financing and calls them “Non-Cooperative Countries or Territories“. Although it’s not appearing on the blacklist was seen as a sign of approval for offshore financial centers or ” Withholding Taxes” that are well enough regulated to meet all FATF standards.
Why was Iraq Placed on the FATF Blacklist?
CBI was included on the blacklist of FATF and is considered a kind of penalty or restrictions imposed on the country because it is considered one of the countries that have weak financial systems towards to fight money laundering and terrorist financing, Iraq was blacklisted in 2016. The reason for this decision is that the organization has some reservations about the financing resulted by the Islamic State Organization in Iraq (ISIS) and provided to it, and the purpose of this decision was to highlight the importance of the strict execution of the FATF standards to disrupt and prevent the organization (ISIS) in order to fight the threat posed by (the terrorist organization), as well as the subject of the currency auction may be another reason for the European ranking, because the banks participate in the currency auction and transfer of large funds outside Iraq, and this is a possibility for the issue of money laundering, especially since the banks involved in the currency auction does not provide banking services to the Iraqis and its activity is limited to profiting from the currency auction.
Additionally, the Central Bank of Iraq “CBI” did not shed light on money laundering and terrorist financing by companies, banks and exchange companies in the required manner by the regulatory authorities, and it was limited to certain procedures that were not sufficient for the FATF, after that the CBI worked in coordination with the relevant authorities to raising the level of work to implement all the requirements for lifting countries from the blacklist, and intensified the supervisory and regulatory efforts and procedures on Iraqi banks and foreign banks operating in Iraq, besides to exchange companies, which the CBI reclassified and merged to reduce its numbers and control it administratively and organizationally more than before.
The Effects of this Decision on Iraq
Iraq’s economy depends mainly on cash and its financial sector which is severely underdeveloped. There are about 2,000 financial institutions in Iraq, most of which are exchange companies. Although, the Iraqi law prohibits these entities from transferring money outside of Iraq, it is possible that some transfers will take place across borders. Despite the issuance of the Anti-Money Laundering Law in 2004 and 2015; however, the illegal use of some currency exchange networks and the weak compliance capabilities of the banking sector make the Iraqi financial sector vulnerable to abuse. The new restrictions mean that financial transfers to and and from Iraq continued with a series of auditing and request for legal evidence for the transfer, the source of funding and its purpose, which disrupts the flow of necessary funds for developing of investments in Iraq, which makes it difficult for Iraqi and European investors to work in the country that is already suffering from a financial crisis; therefore, financial transfers to Iraq will subject to severe and more bureaucratic conditions, which will raise the transfer costs and credit costs. Companies that want to invest in any country take financial and security information from their governments, and this means that investments in Iraq will be difficult and perhaps not possible if the governments of the European Union will inform Its companies are in the status of Iraq because, according to the laws of the European Union, banks, other financial companies, and tax companies, are obligated to more auditing towards their customers who have dealings with the countries included in the blacklist.
As a result of the inclusion of Iraq in the list, banks and companies of all types and other entities included by the European Union’s anti-money laundering rules will have to apply increased checks to financial operations that include clients and financial institutions from these “High Risk” countries in order to identify any “Suspicious Financial” flows.
Iraq’s Lifting from the Blacklist
In 2019, the CBI started working to strengthen the compliance system and the fight against money laundering and terrorist financing, as it started a joint evaluation process during 2012 to evaluate the anti-money laundering and terrorist financing system, which was operating in accordance with the provisions of the Anti-Money Laundering Law No. 93 of 2004 (in force at the time and currently canceled), and based on the results of the report submitted by the resident experts at the time, the Republic of Iraq was included in the gray list, as a result of identifying strategic deficiencies in that system; therefore, Iraq took a series of corrective measures for the system of fighting money laundering and financing of terrorism and proliferation to ensure its commitment to the international standards and recommendations, the most important of these measures were:
- The issuance of the Anti-Money Laundering and Terrorist Financing Law No. 39 of 2015, which is currently in force, and which is considered one of the most recent laws in the region that comply with international standards.
- Establishing a council and office to fight money laundering and terrorist financing and granting it full administrative and financial independence and the power to receive and analyze reports and refer them to the judiciary.
- Establishing a committee to freeze the funds of terrorists in 2016 and it will be in the General Secretariat of the Council of Ministers in accordance with Regulation No. 6 of 2016 under Security Council Resolutions No. 1267 and 1373 headed by the Deputy Governor of the CBI and with the membership of representatives of ministries.
- Joining and ratifying international conventions for the suppression of terrorism and money laundering.
- Held of bilateral agreements with countries to exchange information regarding the recovery of funds and persons.
- Evaluation and periodic reports that banks are subject to.
- Specialized training courses for employees in financial institutions
The New Role of the CBI to Comply with the Rules of FATF
The Central Bank of Iraq issued a set of instructions for financial institutions, which are: rules of due diligence, following the reporting policy, issuing the government guide, following the mechanism for classifying customers on the basis of risks, indicative work guide, sources of funds for purchasing foreign currencies, issuing circulars prohibiting dealing with some internationally banned banks and the application of the law in Kurdistan to fight money laundering and terrorist financing in Kurdistan region.
CBI also issued regulatory controls based on the recommendations of the FATF and directed banks to acquire electronic systems for banks in particular to fight money laundering and terrorist financing, preparing a guide for inspection procedures for the employees of the CBI to be guided by it when conducting inspections of banking and non-banking financial institutions, issuing the guide 1 of 2017 related to money
declaration when entering and leaving it across the Iraqi borders and issuing a form for unified and specific accounts that includes the borders, issuing a unified and specific account form which includes special clause related to customers with high risks, such as politicians and others, according to the specified
classifications.
Anti-Money Laundering and Terrorist Financing Office
The Anti-Money Laundering and Terrorist Financing Office was established in 2007 within the structure of the Central Bank of Iraq and was reconfigured in 2015 after the issuance of Anti-Money Laundering and Terrorist Financing Law No. (39) of 2015. Among the tasks of this office is drawing up control policies and programs, developing and following up on their execution, proposing draft laws and regulations and instructions, developing means and standards for detecting money laundering and terrorist financing methods, following up and generalizing it, issuing regulations that include limits for cash amounts and negotiable instruments for the purpose of including it in monitoring money laundering and terrorist financing operations and to be published in the Official Gazette.
Terrorist Funds Freezing Committee
This committee is formed in the General Secretariat of the Council of Ministers, where it is responsible for freezing the funds of terrorists or other assets of persons identified by the United Nations Sanctions Committee established according to Security Council resolutions if they operate under Chapter VII of the Charter of the United Nations or who have been classified at the national level, or based on at the request of another country based on the official letters received. These lists are published and updated continuously to comply with the rules of FATF.
Encouraging Foreign Investment in Iraq
Reclassifying Iraq among the countries that can pay off debts and have no suspicions of corruption, money laundering, or changing the gender of money, will contribute to increasing the level of positive perception of the international investor towards the Iraqi environment, as the banking system is currently required to increase its ability to be part of the international financial system through the infrastructure at the applied level of information systems or through the accounting system and the adoption of international reporting standards so that the Iraqi banks can quickly become part of the international financial system, this decision is an important factor to facilitate the transfer of capitals and financial transfers between Iraq and the European Union, and this affects positively in encouraging the flow of foreign direct investment from Europe, provided that the other facilities are available, such as facilitating procedures and granting entry visas.
Opportunities for Iraqi Banks to Expand in Europe
The process of a positive view of the Iraqi economy will improve with lifting Iraq from the black list, as the Iraqi banks currently managed by the CBI can open the windows for them through the European Union to facilitate the task of following up the movement of funds, as well as the process of reducing the opening of credits documentary and the accuracy of the process of tracking money and goods.
The process of Iraq’s lift from the blacklist indicates that the compliance procedures followed by the CBI were able during the current period to transform Iraq from a view tainted by part of the risks to a positive view, because Iraq’s banks are now in compliance with the transactions of the CBI by tracking the movement of money. What we lack is the movement of tracking goods entering Iraqi territory. Thus, these banks will help open a window for the process of direct dealing with importers, and we will have a recognized financial system, and international investment will be encouraged to come to Iraqi territory.
Conclusions
Since the formation of the Anti-Money Laundering and Terrorist Financing Office and the Committee for Freezing Terrorist Funds and following up with the issuance of regulations regarding companies, banks and countries prohibited to deal with, modernizing electronic systems and the banking process and following up on international standards in this field, which led to Iraq being lifted from the list of high-risk countries for meeting all the required and specified standards by FATF.
Thus, Iraq has overcome many challenges and looks forward to constructive cooperation with the European Union in all fields, and overcoming all obstacles that prevent it, especially those related to lifting its name from the European list of high-risk countries. The decision to lift the name of Iraq from the list of high-risk countries in money laundering and terrorist financing will lead to the stability and encouragement of banking transactions between the parties to deal from within the country to abroad. Thus, the banking and financial system of Iraq will avoid the costs, risks and restrictions it was exposed to with its correspondents in the world, especially European Union banks, in conducting regular banking and financial transactions.
In addition to generating positive repercussions on the credit classification of Iraq and the possibility of there being international recognition of the banking financial system and allowing banks to open branches in those countries, which leads to an increase in the accuracy of tracking funds outside the Iraqi environment, and this is reflected in reducing import costs.
For more details, contact
Zahraa Diyaa
Associate