money laundering

Despite high corruption ratings, Cambodia could escape global money laundering ‘grey list’

With the FATF’s on-site inspection concluded, Cambodia’s reputation as a destination for foreign investment hangs in the balance, but deeply rooted corruption could undermine whatever progress the international watchdog finds

Written By:
January 24, 2023
Despite high corruption ratings, Cambodia could escape global money laundering ‘grey list’
Pedestrians walking past a casino building previously shut down by the police, in Sihanoukville in Preah Sihanouk province. Photo: STR/AFP

Cambodia may be known to international watchdog organisations as one of the world’s most corrupt countries, but at least one major observer seems poised to recognise the state’s anti-money-laundering efforts.

The Financial Action Task Force (FATF) is generally seen as the global standard-setter for tackling the financial crimes of money laundering and terror financing. In 2019, the group placed Cambodia on its grey list, an undesirable label that brands the country as one of several deemed to have strategic failures in addressing financial crimes.

But the FATF also presented a way out for Cambodia, providing a general action plan that could get the kingdom off the list and back into its good graces. 

On 13 January, the group completed an on-site inspection of the government’s progress on the plan. Officials, policy experts and business leaders alike are now waiting for the decision on Cambodia’s potential delisting – and the image boost that would bring, especially after reputational hits due to the country’s cyberscams industry.

“As the FATF documents demonstrated, Cambodia fulfilled all the Action Plan items as of October 2022,” said Kateryna Boguslavska, project manager at the anti-corruption non-profit Basel Institute of Governance. “If the results [of an inspection] are positive and developments are verified, delisting may happen in the subsequent few sessions – in March or June 2023.”

When FATF senior policy analyst Mei-lin Wang arrived in Phnom Penh earlier this month for the inspection, she sat down with Prime Minister Hun Sen and Interior Minister Sar Kheng over the course of a two-day visit. 

During their meeting, Kheng emphasised Cambodia’s commitment to working with the FATF to fight money laundering and terror financing, pointing to the establishment of legislative processes and law enforcement training that account for the bulk of action plan recommendations. However, the results of the inspection remain uncertain, and with the FATF’s next meeting taking place in March, the fate of the nation’s status could well be determined in the coming months.

But the completion of the FATF action plan in October also coincided with a long-delayed crackdown on the country’s then-bustling cyberscams sector that same month. Rooted mainly in Sihanoukville – the site of earlier runaway investment that had likely factored into the FATF grey listing in 2019 – the scams industry had enjoyed ties to government and business elites who had denied its very existence for more than a year prior.

The FATF has yet to mention the cyberscams industry – itself connected to money laundering – in its assessment of Cambodia’s progress. And while it may still clear the country from the grey list, it’s unclear if the watchdog’s prescribed reforms have touched on the underlying issues that enabled the scams industry to thrive in plain sight. 

“For Cambodia, it is an uneasy choice to make whether to genuinely crackdown on online gambling and other shadowy business activities, as the country witnesses the slowdown of the economy resulting from pandemic and the potential global economic crash,” explained Pisey Pech, executive director at Transparency International Cambodia. “The FATF may have to reassess the situation.”

At the same time, given the importance of foreign investment in the nation’s economy, the delisting could signal a much-needed step toward some improved transparency in the nation’s financial landscape. 

Men ride a motorcycle past a casino in Sihanoukville on 18 February, 2020. Photo: Tang Chhin Sothy/AFP

Cambodia’s coastal city of Sihanoukville was transformed from a sleepy beach town to a bustling hive of under-construction casinos, clubs and hotels catering to an influx of foreign nationals starting in 2015. In 2019 – amidst a surge of Chinese investment focused on the city and drawn by a largely unregulated investment climate – the FATF placed Cambodia on its grey list.

“I suspect it was a range of factors that led to this decision,” explained Stephen Higgins, co-founder of the investment and advisory firm Mekong Strategic Capital. “The proliferation in online gambling, what was happening in Sihanoukville more generally, and the fact that it is such a dollarised economy meant it was more exposed to AML risks.”

Under this international pressure, the Cambodian government’s 2020 ban on online and arcade gambling followed its “high-level political commitment” to work with the FATF to combat money laundering and terror financing. 

Along with measures in 2020 to restrict the online gambling industry that had fed Sihaounkville’s casino boom, a special ad-hoc working group was created to implement the watchdog’s recommendations, focusing on facilitating cooperation between government agencies and disseminating information and training. In subsequent FATF statements, establishing this legal framework, the associated training for law enforcement as well as regulatory outreach to the casino and real estate sectors were areas of considerable progress. 

Established at the 1989 G-7 Summit to produce a globally recognised framework to address these financial crimes, the FATF works with similarly aligned regional bodies such as the Asia Pacific Group on Money Laundering (APG) to analyse threats to financial integrity, recommend ways to combat such threats and measure their effects. While the watchdog group doesn’t have the teeth to enforce these recommendations, the stigma around greylisting can have major effects on a nation’s status on the global stage. 

Following the FATF’s 2019 greylisting announcement, Cambodia found itself on the European Union’s own list of 12 “high-risk” countries, released in May 2020. 

“We need to put an end to dirty money infiltrating our financial system,” said executive vice-president Valdis Dombrovskis in a statement from the European Commission. “Today we are further bolstering our defences to fight money laundering and terrorist financing… There should be no weak links in our rules and their implementation.” 

As more international groups align with the FATF’s actions, snowballing damage to a nation’s reputation can lead to direct economic consequences.

This picture taken on 14 February, 2020 shows a general view of Chinese restaurants in Sihanoukville. Photo: Tang Chhin Sothy/AFP

Grey listing has a significant negative impact, affecting as much as 7.6% of GDP on a country’s capital flows, according to a 2021 study from the International Monetary Fund. 

Hard numbers on the specific economic impacts of Cambodia’s greylisting are hard to come by, especially considering the relegation coincided with the global economic downturn of the Covid-19 pandemic. However, those within affected industries have felt the sting of the FATF’s international influence. 

For Rithy Sear, founder and chairman of Phnom Penh’s WorldBridge Group, the difference in investor attitudes before and after the greylisting could not be more clear. 

“When people are looking where to invest [in Southeast Asia], they are often looking at Cambodia,” he said. “But then they check and see we are on the grey list, they have to reconsider: ‘Will I go to Cambodia, or will I got to Vietnam or Indonesia?’” 

Rithy holds the status of oknha in Cambodia, an official designation granted by royal decree to those who donate a minimum of $500,000 to the government. He attended last year’s Davos conference in Switzerland with Prime Minister Hun Sen, announcing then that WorldBridge had become the first Cambodian company to gain membership to the World Economic Forum at the level of associate partner.

Rithy said it’s not just the speculative damage of investor hesitancy that has impacted his firm, a conglomerate that focuses on logistics but operates in industries ranging from healthcare to major real estate. Reliant in large part on overseas funding and investment for areas of his business, the FATF’s ongoing attention has hurt his bottom line in more concrete and quantifiable ways. 

“For our logistics business we need international investors, for example, from Hong Kong,” he explained. “Before the greylisting, they gave us very low interest rates on loans but after, they came back with a higher rate. This has impacted our profits, losses and total revenue.”

Rithy Sear, founder and chairman of Phnom Penh’s WorldBridge Group. Photo: supplied

Rithy said near-monthly meetings of policy disseminations and regulatory training at the National Bank of Cambodia (NBC) and Ministry of Economy and Finance have been central to government efforts to comply with FATF recommendations. By October 2022, the group judged that Cambodia had addressed the group’s concerns sufficiently to warrant an on-site visit.

However, the action plan’s emphasis on legislation does not necessarily translate to progress on the ground.

“Generally our assessment revealed that there is a significant gap between the existing legal frameworks and the actual implementation,” said Pisey. “Poor law enforcement remains the biggest challenge to overcome in Cambodia.”

Despite the fulfilment of FATF requirements, evidence of widespread corruption is not hard to find. In 2022, the country dropped from 11th to seventh on the Basel Institute’s money laundering index and on 10 January, just a day before the group’s inspector arrived, the former deputy director of the Finance and Supply Department under the Ministry of Social Affairs, Veterans and Youth Rehabilitation, was arrested for allegedly embezzling nearly $400,000. 

With the inspection complete, government officials and businesses await the FATF’s decision. While the delisting would be a step in the right direction and undoubtedly boost the nation’s international reputation, Cambodia’s systemic corruption requires solutions beyond what international watchdogs can provide.  

“To effectively tackle money laundering issues, a holistic approach must be deployed,” explained Pisey. “That requires the government to seriously look into reducing corruption at its grand and petty scales including political corruption, nepotism, conflict of interest and the patronage system that protects the criminal networks and undermines rule of law. The question is, ‘Can the authorities afford to do this?’”

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