Mutual Interests: Why Myanmar Embraced FATF Regulations

In 2000, the Financial Action Task Force (FATF), an ad-hoc commission created to consolidate information on suspicious firms and individuals and to freeze criminal funds, developed 25 criteria to determine uncooperative jurisdictions. These criteria were then used to evaluate countries and determine the effectiveness of their financial regulatory policies. From 2000 to 2001, the FATF issued a blacklist of 23 Non-Cooperative Countries and Territories (NCCTs). Being blacklisted did not bring about actual sanctions, but the FATF recommended that financial transactions through non-cooperative regimes must undergo heavy scrutiny.

As a result, blacklisted jurisdictions suffered greatly. Many large international banks cut ties rather than be tainted by association with “deviant” jurisdictions, and the financial institutions that did not exit the non-cooperative markets charged higher interest rates to compensate for greater financial risk. The FATF declared the blacklist to be a success, as other countries quickly self-regulated their financial regulations. In 2006, the FATF announced that there were no more non-cooperative countries or territories.

However, a new case study on the implementation of anti-money laundering regulations suggests that, instead of wielding hierarchical powers, the FATF’s recommendations instead coordinate domestic agencies to manage a transnational problem. Shahar Hamieri and Lee Jones describe the implementation of anti-money laundering legislation in Myanmar, a country placed on the 2001 list of NCCTs. They contend that Myanmar’s removal from the blacklist in 2006 was the result of regulatory regionalism, as the country had joined the Asia/Pacific Group on Money Laundering (APG), a regional organization established to monitor the implementation of FATF regulations. These regulations included the creation of Financial Intelligence Units, national agencies dedicated to investigating financial crime.

Importantly, the authors determine that a key motive behind Myanmar’s legislative changes was a local power struggle. According to Hamieri and Jones, Myanmar’s central government believed implementing anti-laundering legislation would undermine opposition groups and strengthen the power of the central government. This would satisfy the interests of the central government, as well as the international financial community.

Hamieri and Jones describe regulatory regionalism as the transformation of statehood, such that states implement regional governance initiatives domestically. In Asia, instances of regulatory regionalism have expanded to include the Chiang Mai Initiative Multilateralization (CMIM), a liquidity pool created to prevent rapid currency depreciation, and the Asian Bond Markets Initiative (ABMI). Both the CMIM and ABM require regional governments to institute changes to domestic agencies in line with regional goals. However, the authors emphasize that national governments do not cede sovereignty but instead use the changes to achieve their own policy goals.

Hamieri and Jones argue that Myanmar’s rejection of other international norms suggests that regulatory regionalism in the anti-laundering sphere converged with domestic policy goals to control periphery opposition groups. Ethnic minority groups on the country’s borders control the drug trade. Revenues from the trade, estimated at $2 billion, provide ample cash for laundering operations. The national government, controlled by the majority Burman group, embraced the integration of former rebels into the “legal fold.” As a result, a 25 percent “whitening tax” was levied on drug money funneled through state banks.

A crackdown on money laundering was essential to further reduce drug exports, and the structure of Myanmar’s implementation of FATF regulations supported this goal. Resistance from the junta’s generals narrowed the scope of financial crime investigations to exclude the vast patronage and terrorist finance networks, and contraband trafficking. Only those outside of the regime’s protection were vulnerable to anti-laundering legislation. A former general admitted in 2012 that the banks had nothing to fear because the “banks were pre-warned about money laundering … [only] after giving them the time to clean their accounts, we cracked down on the banks.”

Accordingly, the implementation of anti-money laundering legislation in Myanmar is largely ineffective, as any well connected person is unlikely to trigger an investigation. Private banks, comprising 45 percent of the financial sector, are responsible for only one percent of suspicious transaction reports. Moreover, the country’s Financial Intelligence Unit only investigated 24 cases from 2004 through 2008, and secured one conviction in 2007. Tellingly, the sole defendant, Tin Sein, had recently fallen from grace because of links to the Shan, a rival ethnic group.

Overall, Hamieri and Jones’ findings suggest that, for the FATF and other anti-laundering organizations to improve the efficacy of financial regulations, they must understand the influence of local politics and ethnic ties on the implementation of financial policy. Myanmar’s implementation of FATF regulations was not the result of international pressure but the belief that instituting state-centered reforms would help rein in political rivals. Developing nations lose approximately $50 billion annually to financial crimes, meaning that continuing to ignore the convergence of local politics and financial crime could prove to be devastating for developing economies.

 

Article Source: Regulatory regionalism and anti-money-laundering governance in Asia.  Shahar Hameiri and Lee Jones, Australian Journal of International Affairs, Volume 69, Issue 2, 2015.

Featured Photo: cc/(Asian Development Bank)