Myanmar people are rushing to withdraw their deposits from banks since the February 1, 2021 coup. Photo: AFP / Ye Aung Thu

YANGON – A global watchdog’s move to place Myanmar on a list of states perceived as prone to money laundering and terror financing has put renewed international pressure on State Counsellor Aung San Suu Kyi’s government to reform her nation’s opaque financial system.

The Financial Action Task Force (FATF), a Paris-based intergovernmental agency founded by G7 nations, said in a statement last month that Myanmar had “proactively made progress” on curbing money laundering through new legislation and stiffer regulations on its cash-based remittance system.

The FATF, however, also said that Myanmar still needs to improve its understanding of “money-laundering risks in key areas” and strengthen its governance of various financial entities.

Myanmar’s new “grey list” designation will inevitably increase the cost of doing business by complicating international financial transactions and bank transfers at a time Suu Kyi’s government seeks more foreign investment.

Risk-averse foreign banks will also likely shy from establishing presences in the country due to already significant reputation and other risks, executives and investors say.  

In 2018, the watchdog warned in a report that there are “extremely high levels of proceeds-generating crimes” which “exposed [the country] to a large number of very significant money laundering threats.”

Financial institutions and so-called Designated Non-Financial Businesses and Professions (DNFBPs), referring to entities such as casinos, real estate agents and gemstone dealers, lacked understanding of high-risk money laundering issues, the report said.

It also said that few Myanmar banks had adopted a risk-based approach to their businesses and expressed concerns over the state bodies designated to supervise DNFBPs.

Stacks of Myanmar kyat are seen on the counter before a client collects them, at a bank in Yangon, Myanmar October 19, 2015. REUTERS/Minzayar
Stacks of Myanmar kyat are seen on the counter before a client collects them at a bank in Yangon, October 19, 2015. Photo: Agencies

To be sure, important progress has been made on several fronts. For instance, the government has initiated key reforms in improving bank governance, tackling corruption and mandating greater corporate disclosure including over company ownership.

In response to its recent grey listing, Thuang Tun, Suu Kyi’s investment minister, tweeted after a meeting with FATF representatives that they “recognized Myanmar’s high-level political commitment to strengthening effectiveness of its anti-money laundering and financing of terrorism regime.”

The FATF, the minister wrote, acknowledged that Myanmar has proactively pursued a number of recommendations from the watchdog’s Asia Pacific Group on Money Laundering Mutual Evaluation Report (MER) to improve technical compliance and effectiveness.

Still, Myanmar’s grey listing reflects poorly on the Suu Kyi administration’s governance and reform, which foreign investors, executives and civil society groups have criticized for not being given sufficient priority, particularly in regard to implementation and enforcement.

“The Myanmar government’s last-ditch efforts to implement anti-money laundering regulations in recent months appear to have been too little, too late,” said Hanna Hindstrom, senior campaigner at Global Witness, a United Kingdom-based environmental watchdog.

“Myanmar has failed to show that it is serious about tackling the corruption and illicit activities greasing the economy for years of military rule,” she said, referring to Myanmar’s decades under direct junta rule. “Dismantling the crony-military nexus is an essential part of this process.”

At the same time, she said, legalizing the laundering of “undisclosed income” from illicit sources into the formal economy did not help efforts to combat money laundering.

Police officers stand next to seized drugs that will be burned at an event to mark International Day against Drug Abuse and Illicit Trafficking, outside Yangon, Myanmar  June 26, 2017.  REUTERS/Soe Zeya Tun
Myanmar police officers stand next to seized drugs to be burned at an International Day against Drug Abuse and Illicit Trafficking event outside Yangon, June 26, 2017. Photo: AFP

Suu Kyi’s government enforced a controversial tax amnesty last October to mobilize underground and hidden assets, both to stimulate the economy amid a slowdown and to support the troubled real estate and banking sectors.

Hindstrom points to companies with direct ties to criminal activities, including narcotics trafficking and jade extraction, as continuing to operate with impunity.

She also said the Myanmar military, known as the Tatmadaw and renowned for its extensive business interests, remains “above scrutiny.”

“This raises questions about the willingness of Suu Kyi’s government to tackle the underlying drivers of money laundering and illicit financial flows in Myanmar and to break the country’s links with the past,” Hindstrom said.

FATF removed Myanmar from its grey list in June 2016 as acknowledgement of progress made on criminalizing terrorist financing and coincident with the nation’s transition from quasi-military to quasi-democratic rule.

The Paris-based watchdog’s designations are often political, Myanmar-based economists and others suggest, with Myanmar rewarded in 2016 for its transition to democracy despite the fact it was still far from qualified to have its monitoring lifted.

Its recent return to the FATF’s watchlist was long foreseen by businesses and investors in Myanmar, with the International Monetary Fund (IMF), Myanmar Centre for Responsible Business (MCRB) and UN Office on Drugs and Crime (UNODC) cautioning in advance that last month’s grey listing was likely.

That likelihood did not deter the International Finance Corporation (IFC), the World Bank’s investment arm, or Singapore’s GIC sovereign wealth fund from recently taking substantive stakes in the Yangon-headquartered Yoma Bank, a major local commercial bank led by tycoon Serge Pun.

“Investors from abroad, overseas banks and multinationals looking at Myanmar had already priced the grey listing into the market as it was long expected given the significant number of action points that the Mutual Evaluation Report showed Myanmar would have to pursue,” said the MCRB’s Vicky Bowman.  

“They – anyway – subject Myanmar to a higher degree of due diligence than many other countries due to the legacy of military rule and the ongoing Rakhine crisis,” she observed.

Last November, Suu Kyi’s government initiated a new round of foreign bank licensing that allowed foreign banks to apply for either a branch license to conduct wholesale banking, or a subsidiary license which permits both wholesale and onshore retail services beginning in 2021.

The country conducted two rounds of such licensing under former president Thein Sein, with a total of 13 banking licenses awarded.

The grey listing may weigh on banking liberalization as new entrants will become more cautious primarily about reputation risks, said Nishant Choudhary, a Yangon-based partner at law firm DFDL.

Although the immediate impact Myanmar’s grey listing will have on the investment climate is not clear, Choudhary suggested that access to loans from foreign private commercial banks and development finance institutions, as well as inter-bank and offshore remittances, could be affected.

At the same time, the chief operating officer of a Myanmar bank who requested anonymity said the FATF’s grey listing judgement is “fair and well-observed.”

Myanmar’s ‘grey list’ designation will increase the cost of doing business in Myanmar. Photo: Facebook

While the designation will not have a big impact on local banks, he said, both regulators and banks will recognize the need to strengthen their institutional and corporate governance in anti-money laundering as well as their lending practices, credit assessment and IT capacity.

DFDL’s Choudhary also expects Myanmar’s grey listing to drive new anti-money laundering measures, but warns that new risks could arise from rushed and poorly designed policies.

“Therefore, the need of the hour is for the FATF and other international regulators to work hand-in-hand with Myanmar in effecting policies of change and extend their helping hand,” the lawyer said.