The deal between Turkey and FATCA

Turkey’s ruling Justice and Development Party (AKP) government, in power for 13 years, has been notoriously lax and often late when it comes to implementing stringent rules controlling money in order to ensure better transparency in financial movements, halt tax evasion, prevent illicit funding and disrupt money laundering activities.

That pattern of behavior has irked first and foremost the Unites States, the key ally of Turkey that has to resort to pressure and blackmail from time to time in order to nudge the Turkish government into action. At the crunch time, the AKP had to scramble its lawmakers into adopting urgently required bills that were put off for years for political reasons. For example, in 2013, Ankara came forward at the 11th hour under pressure to approve a bill that addressed major shortcomings in the Turkish criminal code in combatting the financing of terrorists and anti-money laundering activities, known by the acronym AML/CFT by the US-led Financial Action Task Force (FATF), a unit of the Organisation for Economic Co-operation and Development (OECD).

Although Turkey agreed in principle to implement a series of recommendations made by the FATF in 2007 after the mutual review, the AKP government nevertheless delayed the crucial draft bill from getting pushed through the rubberstamping Parliament for five years. In the end, the FATF had to issue a final ultimatum, threatening the suspension of Turkish membership unless the country acted by February 2013. Finally the bill was approved in the nick of time to avoid the specter of Turkey being shut out from the global financial system. Even then, the final version of the bill included some serious loopholes and the implementing circular for the bill incorporated some workarounds to beat the spirit of the bill. What is more, the bill was used to punish government critics and opponents in politically motivated witch hunt operations instead of cracking down on the assets of terrorist groups such as the Islamic State of Iraq and the Levant (ISIL).

In a more recent example, the Turkish government again belatedly concluded an agreement with Washington to help the US’s efforts to address tax evasion for its own citizens as part of the US Foreign Account Tax Compliance Act (FATCA) that was approved in March 2010. FATCA requires banks outside the US to give Washington details of foreign accounts held by US citizens or permanent residents. Non-compliant institutions could be frozen out of US markets, dealing a potentially lethal blow to foreign economies, including Turkey. The US started lobbying Turkish leaders to convince them to comply with FATCA requirements and the negotiations were conducted between the US Internal Revenue Service (IRS) and Turkish Finance Ministry. The Turkish Foreign Ministry also joined in the deliberations starting from September 2012. The talks lingered on despite the fact that FATCA became effective on July 1, 2014. Only a month after the deadline, Turkey reached a deal with the US in principle, although the official intergovernmental agreement was not signed until July 2015.

The agreement, titled the “Memorandum of Understanding on Improving International Tax Compliance between Turkey and the US through Enhanced Exchange of Information,” was inked on July 29, 2015 in Ankara by US Ambassador to Turkey John Bass and Revenues Administration (GİB) President Adnan Ertürk. It was supposed to be submitted by the transitional government to the new Parliament that was composed after June 7 elections in which the AKP lost its majority. However, it was not done. On Oct. 10, 2015, only four days before the snap polls on Nov. 1, the interim government led by caretaker Prime Minister Ahmet Davutoğlu decided to send the agreement to Parliament. The Office of the Parliament Speaker registered the Cabinet request about the agreement on Nov. 19. The speaker tasked on Dec. 4 the Foreign Affairs Commission as the main committee to review the agreement with the Planning and Budget Commission as the subsidiary committee.

Taha Özhan, the new chairman of the Foreign Affairs Commission, put the draft up for a debate on the Dec. 10 meeting of the commission. It was approved without much debate and forwarded to the General Assembly for a debate and vote. The Planning and Budget Commission has not reviewed the deal but its review was not necessary for the deliberations to be launched on the Parliament floor. The original agreement envisaged the approval process done by September 2015. But it was not and the Turkish Foreign Ministry communicated the delay in a diplomatic note to the US Treasury, citing snap polls as the reason for the postponement in putting the deal to a vote. The new deadline set by the US is September 2016, according to Ali Kemal Aydın, the deputy undersecretary of the Turkish Foreign Ministry, but reporting requirements for US account holders for the years 2014 and 2015 are still in place.

Even if the agreement is approved by Parliament and published in the Official Gazette, which seems very likely, there are dozens of domestic laws and regulations that may potentially hamper the implementation of the FATCA agreement. US negotiators highlighted some of these problematic issues during the negotiations. The assessment of the functioning of the FATCA agreement will be done by the year’s end in 2016, providing an opportunity for both sides to take a look at how the implementation is being done.

Another issue of contention was Turkey’s insistence on reciprocity in exchanging the financial data of Turkish citizens who hold accounts in US financial institutions. Washington said it sees no problem in disclosing the information to Turkey as part of the deal but underlined that it will be conditional on whether “the appropriate safeguards and infrastructure for an effective exchange relationship are in place.” One of the worries on the part of the US is that Turkey may abuse the deal to obtain private data on critics and opponents in a political vendetta. The US concern is justified given the track record of the current government, which has often been criticized by the political opposition for divulging confidential private data in pro-government media outlets to discredit opponents. Finance Minister Naci Ağbal reportedly made a name for himself as an undersecretary at the ministry by cracking down on opposition companies via abuse of the tax code, targeted auditing and discriminatory inspections while writing off back taxes for pro-government firms.

The FATCA deal is a landmark agreement for Turkey in complying with automatic reporting of financial data, something it has already committed to as part of its membership in the OECD and the G-20. So far, Ankara and Washington have been relying on the 1996 agreement on the “Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income” to share financial data. The FATCA is a step forward on that and, if implemented in good faith and sincerity, may help Turkey better prepare for a more transparent global financial system. In the end, Turkey’s finance system may benefit from all these new norms and requirements.

However, the current leaders of Turkey, already stained with massive corruption scandals in December 2013, are not very fond of transparency and accountability. They only act at the last minute and under immense pressure to placate mounting concerns. Their track record does not give much confidence that the AKP leaders are truly committed to ensuring the integrity of the global financial system and cut back on ways and means to enrich themselves through clandestine schemes. Therefore more vigilance is required to check the greedy behavior of the political Islamist rulers in Turkey.