Myanmar's financial blacklisting is worth the risks it brings

NIKKEI ASIA

Zachary Abuza
November 10, 2022

Disruption of fund flows will hit aid groups and opposition, alongside regime

The Myanmar kyat has lost 60% of its value, © AP

Zachary Abuza is a professor at the National War College in Washington. The views expressed here are his own and may not reflect those of the college or the U.S. government.

Last month, Myanmar took its place alongside North Korea and Iran on the blacklist of the Financial Action Task Force, a Paris-based international organization that combats money laundering, over its failure to regulate its banking system and financial markets.

This designation was well deserved. Myanmar's military government has repeatedly defied the international community as it has suppressed democracy since seizing power in February 2021.

The regime craves international legitimacy and has been peeved at its exclusion from ministerial meetings and summits of the Association of Southeast Asian Nations, like the gathering of national leaders taking place in Phnom Penh on Friday. The FATF designation is yet another diplomatic slight.

The military has run Myanmar's formal economy into the ground with gross mismanagement.

Exports of everything but oil and natural gas have collapsed, annual inflation is unofficially running about 55%, the Myanmar kyat has lost 60% of its value, currency controls have crippled businesses and the banking sector has imploded. The Myanmar Central Bank now exists to keep the junta propped up, not to create economic stability or foster broad-based economic growth.

As a result, the military regime has become more dependent on a growing illicit economy, including the unregulated export of gems, timber and other natural resources as well as of drugs like methamphetamines and heroin. The blind eye the military is turning to such activities underscores how it is benefiting from related money laundering.

Poppies on a hill in Lung Zar village, Myanmar: The military regime has become more dependent on a growing illicit economy, © AP

There are three things to understand about the FATF process.

First, it is a compliance system. FATF has been monitoring Myanmar since 2020 when the country made a high-level political commitment to meet the group's standards by October 2022 by addressing identified areas of improvement.

In October 2021, FATF said Myanmar would be subject to additional monitoring as a jurisdiction with "strategic deficiencies." This past August, FATF found that while Myanmar had made some progress, significant deficiencies remained and the country would be unlikely to meet the compliance deadline.

Rather than resolving such issues, the military-led government purged financial experts and technocrats who had the requisite skills and understanding of the regulatory and legal framework.

Second, the FATF process is run by technical, not political, officials from the finance ministries of its 39 member countries. Myanmar's blacklisting was a decision made by technocrats on its merits, not a political or diplomatic decision.

Indeed, FATF decision-making is intentionally kept away from policymakers as the goal is to keep markets functioning. Singapore, which has been highly resistant to sanctioning the junta, currently holds the group's rotating presidency.

Third, FATF's designation is not a sanction. It does not prevent companies from investing in Myanmar, as odious and economically incompetent as the military regime is.

But because of the identified concerns about money laundering, any company or entity that does business in Myanmar will now be required to do ample due diligence to ensure that their financial and business partners are not involved in money laundering or other aspects of the illicit economy. The compliance obligations for any company will be onerous.

So while Singapore, Australia, South Korea and Japan have so far eschewed imposing sanctions on the military government, their corporations may find that the cost of legal compliance is now a deterrent to any trade or investment as they will now be subject to regulatory oversight by their own ministries of finance.

The added due diligence requirements will make the movement of funds into, or the remittance of profits out of, the country slower and costlier. There are also reputational costs from doing business with a blacklisted country as foreign companies such as Hong Kong insurer AIA Group, Singapore's United Overseas Bank and Australia and New Zealand Banking Group were recently reminded when their continued business dealings with Myanmar's military-owned Innwa Bank were revealed. Foreign companies still expanding in Myanmar, like Toyota Motor, may also face new questioning.

However, there are also downsides to FATF's decision, in particular, legitimate concerns that blacklisting will hurt the people of Myanmar as international relief and development organizations will be subject to the same stringent reporting requirements as business. Under U.S. law, the FATF designation will severely restrict Washington's ability to provide funding for civil society organizations in Myanmar.

This could make desperately needed aid programs too costly to administer at a time when COVID-19 is spiking again in Myanmar and more than 1.3 million people are internally displaced due to fighting.

Aware of the potential humanitarian consequences, FATF has urged countries "to ensure that flow of funds for humanitarian assistance, legitimate NGO activity and remittances are not disrupted."

The blacklisting will also impact the opposition National Unity Government, which is trying to raise funds overseas and move them into Myanmar to help displaced people, establish shadow government agencies and support the civil disobedience movement.

While the costs will be felt by the people, the FATF action was a necessary step. The regime's Achilles' heel is the economy. Its mismanagement is what can move many business people who were making money and agnostic about the military regime to draw closer to the NUG's camp.

A unified and strong opposition can offer a positive and progressive vision of the country's economic future. The federal democracy the opposition envisages is the only realistic political solution that can bring an end to decades of conflict in the country.

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