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Armenia: The Challenges of Growth
Armenia: The Challenges of Growth

GOING TO THE CLEANERS?: PERCEPTION VS. REALITY REGARDING MONEY-LAUNDERING CLAIMS


by Richard Giragosian

Visitors to the Armenian capital Yerevan come away impressed with the city's outward signs of economic growth and activity. Further from the surface of facades and evidence of consumption, however, there is a deeply held belief that the display of economic growth and the phenomenal construction boom in Yerevan are built on corruption. In addition to this pervasive perception, there is also a widespread view that much of this development is tied to money laundering.

While the issue of Armenian corruption has garnered a significant degree of scrutiny and study, to what extent is the perception of money laundering in Armenia actually grounded in fact?

By definition, the term "money laundering" refers to a complex process of transforming, or "washing," money obtained from illegal or criminal acts. Such "dirty" money goes through a series of transactions, to either hide the source of the money or to transform it through a succession of transfers into appearing as legitimate income.

The most recent reference to money laundering in Armenia has been less about the crime as strictly defined, centering more on the charge of money laundering within a political context.

THE POLITICS OF MONEY LAUNDERING

Just days before the country's May parliamentary elections, Armenian police announced the arrests of former Minister of Foreign Affairs Alexander Arzumanian and former Deputy Minister of Defense Vahan Shirkhanian. In a dramatic, if not quite straightforward, case, the two were charged with "money laundering," purportedly related to a series of financial transactions linked to one or more Russian-based Armenians.

Although the financial transfers were arguably dubious and neither defendant seemed to be able to offer a verifiable explanation, the application of money-laundering charges was linked more to the possible use of the money for "political activities," than as part of any criminal act. With the case as yet unresolved, the exact money laundering-related aspects are unclear. But it does seem clear that the case constitutes an example of the "politicization" of money laundering.

Any example of the link between Armenian politics and money laundering in this case is far surpassed by events in neighboring Azerbaijan. In that case, Azerbaijani police arrested two former cabinet members - Economic Development Minister Farhad Aliyev and Health Minister Ali Insanov - in October 2005. A criminal case of money-laundering and corruption was assembled only after their arrests, however, tending to affirm that politics in Azerbaijan supersede the proper application of law. Even neighboring Georgia has been widely criticized for arbitrarily imposing money-laundering charges and using the tax police to intimidate political opponents.

THE LINGERING SUSPICION OF ARMENIAN MONEY LAUNDERING

Aside from politics, upon closer examination of Armenia, the mantra of money laundering resembles more of a myth than a monolith. And although there is obvious evidence of outright corruption in the country, money laundering itself is a specific and sophisticated crime. Money laundering necessitates three important prerequisites, all of which are notably lacking in the Armenian context.

First, while money laundering requires a complex series of financial and investment transactions, Armenia is neither a major financial center nor a sizable investment hub. And with no offshore banks and few non-banking financial institutions, Armenia does not offer the obscurity inherent in larger financial networks.

Returning to a regional perspective, neighboring Azerbaijan has long used its murky energy sector as a convenient vehicle for state corruption, often with international oil companies more than eager to contribute their fair share of bribery and graft to the Azerbaijani authorities. But this too has been largely more about corruption than money laundering in a strict sense. The few relatively minor cases of criminal money laundering in Azerbaijan have been limited to sporadic attempts by Chechen criminal groups operating in the country. Azerbaijani authorities have worked closely with Russian officials in combating this problem.

But in Armenia, despite suspicion, the lack of a clear nexus between money laundering and a criminal base is the second factor contradicting perception. Specifically, the criminal foundations of the country's sizable shadow economy stem more from tax evasion and commodity-based monopoly-like cartels than from real money laundering or outright organized crime.

The methods by which tax laws are averted bear similarities to money-laundering methodology - including the fabrication of business records and "creative" financial reporting. What may seem to be money laundering may, in fact, be other means by which to achieve the same illegally desired results. In other words, to say that there is no money laundering is not to suggest that Armenia is free of unscrupulous or illegal bookkeeping. To the contrary, a sort of evil ingenuity has found ways to break the law in a less conspicuous manner!

Armenia is potentially vulnerable to money laundering. The challenge of monitoring the ever-growing volume of money transfers and remittances into the country poses a serious task for the banking system, and provides a likely vehicle. But, despite the sheer size of these transactions (officially about 19 percent of the GDP last year - but believed to be much higher), they are predominantly made through official channels, making any attempt to obscure or misrepresent criminal funds as remittances more difficult.

The third factor discounting proof of money laundering relates to the Armenian government's active participation in the global fight against the crime. This commitment, expressed both through Armenia's adherence to international conventions and the adoption of strict legal measures, assumed an even greater urgency in the wake of the linkage between money laundering and so-called terrorism financing following the events of September 11, 2001. Armenia's pledge to fight money laundering is more than economic policy or political prudence, but one of necessity amid the broader war on terrorism. Armenia can ill afford to be seen as weak against terrorism by being lax in combating money laundering.

In December 2004, the parliament adopted a comprehensive anti-money laundering and terrorism financing law, which consolidated and updated more than a dozen existing laws covering the banking, insurance and gaming industries, added new regulatory structures, and specifically criminalized money laundering and the financing of terrorism.

That law also empowered a new special financial monitoring unit within Central Bank of Armenia as the main authorized body to coordinate anti-money laundering and counterterrorist financing activities in the country. The new group, known as the Financial Intelligence Unit (FIU), was granted authority to collect and analyze data from banks, non-banking financial institutions, and non-profit organizations, as well as from casinos or gambling enterprises. Although not a law enforcement body, the FIU was modeled on other leading international bodies, and is also empowered to monitor the requirement that all individuals must declare cash in excess of $10,000 that they transport in or out of the country.

In addition, Armenia is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and is a signatory to various international treaties and conventions related to fighting money laundering. It is also a member of the UN Convention against Transnational Organized Crime and, since 2004, the UN International Convention for the Suppression of the Financing of Terrorism, and the Council of Europe Convention on Laundering Search, Seizure and Confiscation of the Proceeds From Crime.

ARMENIA'S TWIN CHALLENGES OF CORRUPTION AND A SHADOW ECONOMY

Despite the relatively good news concerning Armenia's fight against money laundering, the core challenges of entrenched corruption and a persistent shadow economy remain unresolved. This raises other questions: Can the lessons of fighting money laundering be applied to combat corruption? And does Armenia have the political will necessary for such a fight?

Of course, the twin challenges of corruption and the shadow economy are interrelated. They are also mutually reinforcing, as the shadow economy promotes corruption within the tax system, while corruption tends to foster a permissive view of the shadow economy. Both problems are direct challenges to the country. While individual leaders of state bodies surely benefit from corruption and the shadow economy, the state itself is deprived of sizable tax and customs revenues. The end result is that the average citizen sees no reason to practice diligence himself, when faced with so many signs of a leadership that operates outside the law. Finally the state itself loses money that, in less corrupt societies, contributes to the common good; i.e, public utilities and services.

One obvious conclusion is that, like much of what is wrong with Armenia today, there is a lack of political will in confronting the demons of the Armenian reality. It is political will that is needed to reform and bolster the tax and customs services by ending the permissive and passive approach to tax evasion and avoidance. This permissiveness serves as a hothouse for a culture of impunity that has allowed both corruption and the shadow economy to flourish.

One effective lesson from the country's fight against money laundering may be applied against underground economic activities. The promotion of non-cash methods of payment within the economy may only serve to improve transparency and, with the recent expansion of the ArCa (Armenian Card) network, supported by Central Bank, there is a new method to improve and police the economic transactions, with a significant impact on the scale of corruption and the scope of the shadow economy. But again, such a move requires a political will that has been sadly lacking to date in Armenia.

Richard Girgosian is a Yerevan-based political and economic analyst, specializing in former Soviet countries. He writes for Radio Free Europe and Jane's, and is a consultant for various international organizations, including OSCE.

Originally published in the November 2007 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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