The most recent trending topic on social media was about the rumors that the International Monetary Fund (IMF) is conducting a financial investigation in Mongolia and will share private information of our people with foreign entities. In reality, it is nothing more than an exaggerated attempt of brainwashing spread to protect the interests of a small number of individuals who own commercial banks in Mongolia.
What is happening is that, unless it is determined how commercial banks have increased their equity capital and what financial sources were used, Mongolia is currently at risk of being added to the Grey list of the Financial Action Task Force (FATF, an intergovernmental organization that combats money laundering), which will potentially lead to suspending the IMF program to restore our economy.
If Mongolia is added to the grey list by the end of this year, international banks will freeze the checking account at Mongolian commercial banks, which means Mongolians won’t be able to use their credit cards abroad. If this happens, people will have no choice but to carry cash when traveling. When the demand for cash suddenly increases, it will significantly depreciate the MNT. This will lead to the exchange rate exceeding 7,000 MNT for 1 USD.
On top of that, if the IMF program stops, the Mongolian government will be unable to repay its debt of 3 billion USD starting from 2021 and will have no choice but to declare default on debt. It will then make international currencies even scarcer and USD will become as expensive as 20,000 MNT. As a result, our economy will lose its footing and fall off a cliff.
Re-entering the grey list
Mongolia joined the FATF’s Asia/Pacific Group (APG) on money laundering and terrorism financing in 2004. The FATF develops policy recommendations for its member countries, provides regular oversight, and cooperates with relevant international organizations.
As per our APG commitments, Mongolia passed a law on combating money laundering and terrorism financing in 2006. With the enactment of this law, Mongolia established an authority of financial information adjacent to Mongolbank and started overseeing and recording international financial transactions.
However, Mongolia hasn’t been doing a good enough job in implementing these laws and upholding accountability. There has been a total of 4,345 cases of potential money laundering in Mongolia since 2011, but only 46 of them have been investigated. Only 20 of those cases were prosecuted, and only 2 cases were given harsh sentences in the preliminary court proceedings. However, the higher level court deemed the law clauses were inadequately used and rendered both cases invalid. One of these cases was connected to three MIAT (Mongolian Airlines) senior executives embezzling 7.2 million USD when getting an aircraft insured. The other case involved four officers from the Civil Aviation Authority who allegedly embezzled 492,000 USD during a tender. The culprits had made a large number of international transactions via several banks.
In 2013, Mongolia re-entered the grey list, but was able to be removed from the list with specific conditions, because we were able to meet some of the requirements and made specific commitments.
In 2016, the FATF provided Mongolia with strong recommendations to enforce the laws. The recommendations included enhancing economic transparency, improving oversight on the financial market, and holding those who break laws accountable. In April 2017, the government established a National Council to Combat Money Laundering and Terrorism.
To date, these actions haven’t produced the desired outcomes, which is why Mongolia is currently under strong scrutiny from the FATF. It is going to be decided in October this year whether Mongolia will be added back to the grey list. As of 2018, this includes countries such as Serbia, Tunisia, Iraq, Syria, Yemen, Ethiopia, and Sri Lanka, while the black list includes Iran and North Korea.
Consequences of secret cases that are supposedly made transparent
Mongolia passed a law on pardons related to taxes in 2007. The law regulates a potential one-off pardoning of some individuals from tax or social insurance debts and repayments, administrational punishments, and criminal sentences.
Another law on pardoning was passed on 7 August 2015, under the name of ‘law on supporting economic transparency’. Using this law, the government made a promise to let businesses and individuals off from punishments and sentences if they voluntarily declared and paid their taxes in full within seven months. In addition to repayments related to taxes and social insurance, the law also included fixed and non-fixed assets, in contrast to the 2007 legislation. With the introduction of this transparency law, a total of 33.3 trillion MNT was revealed from 8,794 citizens and 25,000 businesses who didn’t previously declared their assets and taxes. Given this amount was bigger than Mongolia’s economy, this discovery generated a lot of attention from foreign and domestic experts and created a degree of allegations and frustrations among the public. Only a few months ago, when stepping down from the position of Head of the Independent Agency Against Corruption (IAAC), Kh. Enkhjargal claimed that this transparency law allowed the then authorities to walk away without being held accountable for wasting a large amount of funds raised by issuing international bonds.
In any case, international organizations now view that some of the capital, sources of which were kept undisclosed by law, might be connected to money laundering. Therefore, they are looking into all potential scenarios.
About how some commercial banks increased their equity capital
When Mongolia became unable to repay its debts, Ch. Saikhanbileg’s government sought help from the IMF in 2015. In order to revive the economy, the IMF required Mongolia to reduce its budget deficit and decrease the amount of bad loans at commercial banks. As a result of a quality assessment made on liabilities of commercial banks in late 2018, the IMF required the charter funds of commercial banks to be increased by 511 billion MNT. Mongolbank eventually declared that all banks have increased their equity capitals, but the IMF is currently requiring the sources of the additional capital checked.
Certain commercial banks have sent a formal notice to Mongolbank, stating that they won’t disclose the source of the additional capital that increased their equity capital. These banks have also seen a drastic increase in their bad loans since the beginning of this year. The public and the international community are suspecting that the increase in equity capitals may have been made possible with the money from senior government officials who were let off by the law on pardons. D.Erdenebileg, the owner of the Trade and Development Bank, must have given a statement about this, when he was detained for a month.
In any case, whether Mongolia is added into the FATF’s grey list and whether the IMF program will be suspended are now both dependent on the owners of these few commercial banks. The public is demanding the government, Mongolbank, and legal agencies to meet the requirements from international organizations and conduct an inquiry into the capital used to increase the equity capitals of these banks. It is also demanded that the government stops its lavish spending and retrieve the capital from those officials who stole from the public funds in the form of bonds.
If they didn’t take money from secret sources or from the pardoned capital, it remains unclear why these commercial banks are refraining from disclosing its sources of financing. Just because some individuals are extremely wealthy and hold senior government posts, Mongolia cannot follow Venezuela’s path. Banks can take capital hostage, but it is a crime for them to take the country hostage.
2019.06.26
Trans. by B.Amar