End to “Dodgy Investments” as Cambodia Exits FATF’s Grey List

The removal by FATF from its increased supervision sees Cambodia restore its image, sullied by money laundering and illicit funds flow for decades. Even as crackdowns take place, checks and balances are being implemented to regulate the payment services and financial sectors, ensuring transparency
Central Market in Phnom Penh. Kiripost/Siv Channa
Central Market in Phnom Penh. Kiripost/Siv Channa

Efforts by Cambodia to respond to 40 recommendations contained in Asia-Pacific Group on Money Laundering (APG)’s mutual evaluation report to gain “compliant” ratings started over two decades ago, though not so intensely until two years ago, as records would show.

Early this year, after being placed in Financial Action Taskforce Framework’s (FATF) grey list in 2019, amid incidents of thousands of dollars smuggled in bags and alleged illicit fund inflows, Cambodia was finally removed from being subject to its increased monitoring.

According to Patrick Smith, partner and head of banking and finance practice group of Phnom Penh-based legal firm HBS Law, Cambodia has fully complied with the commitments issued by APG, which is an associate member of FATF.

On why it took Cambodia some years to meet the requirements, Smith said the country faced similar challenges that exist in other countries.

“It takes time to convince the FATF that relevant reforms have been implemented. The Covid-19 pandemic led to some delays in the onsite visit required,” he added.

Most of the recommendations, which date back to 2003, were in relation to tightening banking and payment structures, widening taxation and monitoring NGO funds by way of policies, laws and regulations to stamp out money laundering and terrorism financing.

Some of the laws and regulations that have been passed include the Law on Anti-Money Laundering and Combating the Financing of Terrorism 2020, a host of casino and gaming laws, Correspondent Banking Directive 2022, the Remittance Directive 2022 and the Directive on Internal Controls 2022.

A lot of the banking regulations and payment activities are closely monitored by National Bank of Cambodia (NBC)’s Cambodia Financial Intelligence Unit (CAFIU), which has also drawn up risk-based supervision tools for financial institutions.

In that, CAFIU keeps a close tab on Designated Non-Financial Businesses and Professionals, consisting of real estate agents, casino owners and shareholders, lawyers, notaries and dealers in precious metals and stones.

“The government has once again demonstrated that it is committed to putting in place the relevant regulatory structures, to capacity building and to enforcement of relevant laws so that foreign investors can feel safe investing in Cambodia,” Smith said via email.

Continued raids

However, although Cambodia has exited the list, police raids on drugs, illegal casinos and online scams, and illegal pawnbrokers continue robustly nationwide, with some way to go yet.

The situation is seemingly dire, as Interior Minister Sar Kheng and General Department of Taxation director-general Kong Vibol last week sounded the laggard improvements in drug busts and tax crimes, which have tenuous links to money laundering.

While Smith denied the ongoing crackdowns are connected to Cambodia’s continued commitment to FATF, adjunct professor Dr Heidi Dahles, who is with the School of Social Sciences at University of Tasmania, strongly believes otherwise.

Though moot, her opinion is shared by Sokchea Lim, associate professor of economics and a Mulwick Scholar with John Carroll University in Ohio, noting that significant improvements had been made in six key areas by Cambodia, as indicated by FATF last October.

These include legal frameworks on preventive measures and conducting outreach to the casino, real estate and money transfer services sectors, said Lim.

‘Wooed by the West’

Meanwhile, Dahles, who identifies herself as an economic anthropologist, said the police crackdowns also tie in with Cambodia's chairing of the ASEAN Summit last year, which has brought new political confidence to the country.

She said Prime Minister Hun Sen enjoyed the “international limelight” and appreciated showing his statesmanship, playing a leadership role in the international arena and “being taken seriously” by foreign political leaders.

“All this reflected positively on his country's international standing. Cambodia has clearly gained international confidence. This is rather timely if we consider Hun Sen stepping down soon as his son is about to step up,” she mused.

Still, Dahles, whose research interest and expertise covers the social dimension of economic transactions, particularly local livelihoods, resilience and social enterprise in the Asia Pacific, said the “international community has taken notice”.

She reminded that Cambodia is an Asian nation that is “of interest in the current atmosphere of increasing tensions between China and the West”.

Cambodia is being “wooed” by Western nations, reflected by German President Frank-Walter Steinmeier’s recent visit and his public praise for Hun Sen “not going unnoticed”, she added.

“The country – firmly rooted in Asia; on extremely friendly terms with China and culturally proficient in dealing with the West due its colonial past – may see an important role for itself to mediate and in the process benefit economically from its position between the world powers.”

Improved sovereign credit rating

Now, although FATF recognised Cambodia’s progress in improving technical deficiencies in anti-money laundering and combating the financing of terrorism (AML/CFT) action plan, it still has to work with FATF style regional bodies, like APG, to strengthen its AML/CFT regime.

This is to ensure it does not return to the grey list (or worse), the black list, as financial crimes are prone to interminable evolution, said National Bank of Cambodia (NBC) economist Oudom Cheng.

The delisting is “very good news”, he said, as it shows the international community how Cambodia’s regulatory regime has improved to a “certain level”, and is able to strictly guard against the exploitation of money laundering, terrorism financing and the proliferation of weapons of mass destruction.

Technically, what FATF is doing is encouraging the international community to consider grey list jurisdictions as having a certain level of risk in their financial system when conducting financial transactions with them.

When that happens, it could increase the time and cost of processing financial transactions that are related to Cambodia.

By being on the grey list, in particular, contributes to a higher risk weight for investing in Cambodia and a higher interest rate, treating other factors as constant, Oudom said.

Therefore, the removal means that financial transactions from Cambodia will be subjected to lower risk weight and risk analysis procedures.

“This result, I believe, would improve the sovereign credit rating for Cambodia and thus, lower the risk premium on Cambodia, which is a component of interest rate consideration.

“The reduction in risk premium could, therefore, contribute to lower interest rates on financing to Cambodia,” he said, in response to the implications on loans and aid in view of FATF’s decision on Cambodia.

‘Dodgy reputation’

Previously, Dahles, the economic anthropologist, said the grey list might have prevented countries and businesses from trading or cooperating with Cambodia for its alleged image as a “dodgy trade or business partner”.

Being removed from the list, means Cambodia receives international recognition for its efforts to control money laundering and “other shady financial practices”.

“New investors and trading partners may pop up, and existing economic partners may widen the scope of their dealings with Cambodia, while more donors might be willing to support projects,” she said.

Though in line with Cambodia's economic diversification strategy, with a possible boost in gross domestic product (GDP), thanks to increased FDI, Dahles said the foresight is hypothetical.

She explained that there had been no shortage of foreign investors in the recent past, therefore the exit might not result in a significant boost to FDI and GDP growth.

Dahles pointed out that many countries on the grey list are actually the recipients of substantial foreign investment because of their “dodgy reputation”.

“In this respect, I think that being grey-listed has brought quite some income into Cambodia – think of the gambling industry – which will not be available anymore,” she said.

On the bright side though, what Cambodia needs is “not just any form of FDI”. “Certainly those investors that come for the cheap labour and lackadaisical rule or enforcement can happily be missed.

“Cambodia wants to be a middle-income country and for that purpose it needs high quality FDI, such as investment in new technologies and business innovation. In this respect, losing its ‘grey status’ may be conducive to the much needed economic innovation,” she said.

Disparate issues

Weighing in, NBC economist Oudom said the improved status of Cambodia in terms of the better institution will provide indirect benefit to the economy through improved reputational effects and competitiveness.

The achievement also shows that the financial sector has become more efficient, transparent and trustworthy, which could lead to investors’ confidence and trust in Cambodia, encouraging more FDI or financing from developing partners, but with lower risk premiums on interest rates.

The NBC economist added that the status indicates an improvement in the ease of doing business within the country.

Citing various research findings, Oudom said, good business regulations are associated with higher economic growth since it improves the business environment which can stimulate firms to change their behaviour, enhance investment and encourage innovation.

When asked if there was any correlation between Cambodia’s haste to meet APG’s commitments and the impending move out of the Least Developed Country (LDC) status, he personally viewed them as disparate issues.

“Moving out of the grey list is an obligation to the international community because Cambodia needs to show others that it is committed to maintaining a fair and safe financial system that can integrate with others and does not function as a breeding ground for financial crimes.

“In that way, Cambodia would also benefit from higher capital flows and more efficient financial transactions. Nonetheless, the benefits from being delisted would also offset the possible higher interest rates on concessional loans in future once Cambodia graduates from the LDC status,” he explained.

Any impact on investment?

Sokchea Lim does not think that there might be an immediate impact on investments, rather it is about ensuring transparency in the country’s financial system, he said, in agreement with experts such as Dahles and Ky Sereyvath, an economist with the Royal Academy of Cambodia.

The meeting of FATF’s commitments is the right thing to do “politically and socially”, and the economic benefits would “eventually come along”, Lim said.

“It ensures investors of the country’s transparent financial system. It means Cambodia welcomes good funds to benefit the people and the economy. Bad funds, on the other hand, only fuel volatility in the markets,” he added.

Like Sereyvath, who stressed that high quality investments is determinant on high productivity workers and a strong rule of law, which promotes fair competition, Dahles said the overall trade balance “might not be impacted much”.

“It could even work out to Cambodia's disadvantage in the short-term, like the loss of dodgy investments. Also, GDP may not get the immediate boost from new investors arriving. However, in the longer term, this will certainly benefit the country's economic development,” she added.

Trust in the riel

Likewise, Oudom said the improved FATF status is just a step closer towards making Cambodia a more competitive country, which is attractive to investors.

Thus, it is important to stay out of the grey list, he stressed, though he noted that the “magnitude of attractiveness is imperceptible”.

“If we look at the determinants of competitiveness defined by the World Economic Forum, it comprises not only institutional quality and financial market development, which is relevant to the change in AML/CFT regime, but also infrastructures, macroeconomic policies, human capital, market efficiencies, technological readiness, market size, and innovation.

“Therefore, there is more to be done to attract more or a substantial magnitude of investment inflows,” he said.

In the meantime, the improved trust in Cambodia’s banking sector will mean that not only foreign but also local investors will be more willing to keep or retain their assets or capital (money in simple terms) in the domestic banks, he said.

It also means more confidence in holding domestic assets and in the Khmer riel, enabling Cambodia to accumulate wealth and capital, which will in turn provide a further boost for development and economic growth.

“Just to highlight, one of the root causes of Cambodia’s dollarisation at the beginning was the lack of trust in holding assets and local currency. Therefore, having stronger institutions that raise confidence in Cambodia could increase people’s willingness to save and use the local currency as well,” he asserted.