SHADE OF ECONOMICS

Amid increasing global risks associated with terrorism financing and money laundering, Azerbaijan is actively developing national and international control measures.

At an international conference in Baku on combating these challenges, local authorities outlined key problems and directions of reforms aimed at ensuring economic and public security in the country.

Hidden threat

According to the State Statistics Committee, the share of the non-observed economy in Azerbaijan is 7.7 per cent of GDP, of which 1.8 per cent is accounted for by the shadow economy. Rauf Salimov, the State Statistics Committee's deputy chairman, has highlighted that this under-representation in statistical records results in goods and services with a value of approximately ₼3.2bn remaining unrecorded, while ₼2.2bn of value added is not subject to registration.

Despite the oil and gas sector's reputation for transparency and accounting, it remains the primary driver of unobserved economic processes, contributing approximately 35% to the nation's GDP. Consequently, entrepreneurs often deliberately conceal part or all of the volume of goods and services they produce. The sale of hidden goods on the market generates income for the entrepreneur, but this activity is not registered by state authorities. This distorts macroeconomic indicators and makes it difficult to adequately assess the dynamics of GDP. Finally, it limits the effectiveness of economic planning.

Unobserved economy is not only a statistical problem, but also a source of more serious threats, creating an environment for laundering criminal proceeds and, as R. Salimov emphasised, can serve as a platform for financing terrorism.

Zaur Fatizade, Chairman of the Board of the Financial Monitoring Service, is in agreement with this position and believes that the fight against money laundering is an issue for a wider range of organisations to tackle than just law enforcement agencies. It is a strategic task, covering aspects of legal stability, economic security and the state's international reputation. It is important to note that money laundering and terrorist financing are not just hidden financial flows. The issues under discussion are of considerable complexity, and include corruption risks, the scale of the shadow economy and even security in regional conflicts.

According to Fatizade, the measures implemented by Azerbaijan in the area of combating money laundering and the financing of terrorism (AML/CFT) have already yielded notable outcomes, with a marked enhancement in coordination between state institutions. The Financial Monitoring Service employs a risk-based approach and has initiated an exchange of information within the framework of international cooperation.

Gaps and problems

Despite the efforts made, there are still vulnerabilities in the system of combating money laundering and terrorist financing in Azerbaijan, especially in terms of institutional understanding of risks and internal control mechanisms. The problem has implications for supervisory structures and financial market participants.

Fuad Isayev, Chief Director of the Central Bank of Azerbaijan, has stated that awareness levels among legal entities, especially in the financial sector, remain insufficient. In such cases, the Central Bank has increased its training initiatives, strengthened its requirements for internal control and is paying special attention to checking the legality of capital sources at the licensing stage.

"When licences are issued, a comprehensive analysis of the origin of the applicants' authorised capital is carried out, as well as verification of their beneficial owners and management staff. Furthermore, control is not limited to the licensing stage, but is maintained through regular monitoring," Isayev stated.

One of the most sophisticated schemes in the sphere of laundering of criminal proceeds is the so-called "cashless operations" - financial transactions that outwardly imitate legitimate business activities, but are not accompanied by actual turnover. These schemes are frequently employed for tax evasion, cashing out and the legalisation of "dirty money".

Such cases are becoming more frequent, according to Samira Musayeva, deputy head of the State Tax Service. She asserts that financial flows are sometimes disguised as business activities, without any real economic activity.

"These transactions include cash-in-transit, embezzlement, tax evasion and laundering of proceeds of criminal origin. In all such cases, the collected data and documents are handed over to the relevant criminal prosecution authorities," she said.

Musayeva also stated that the tax authorities' remit extends beyond the execution of control functions, encompassing the investigation of economic crimes. "We provide comprehensive services, encompassing business registration, tax audits, and the investigation of any violations. In recent years, we have established specialised financial monitoring and investigation units within our organisational structure. A centralised financial monitoring structure has been in operation for over two years, and a dedicated department has been established to investigate financial crimes within the investigative department.

Musayeva also reported that the tax service is playing an active role in the implementation of the National Action Plan on AML/CFT for 2023-2025. At present, 85 per cent of the planned tasks have been completed, and a further 5 per cent are nearing completion. The legislation, administrative procedures and achieved results are regularly analysed.

During the current reassessment of Azerbaijan by the MONEYVAL expert committee, there is a strong possibility that several indicators will show improvement. Please note that MONEYVAL is an expert body of the Council of Europe. Its remit is to assess the compliance of national systems of member states with standards on combating money laundering and terrorist financing. Azerbaijan has been a member of MONEYVAL since 2002 and has undergone five rounds of evaluation.

Digitalisation of controls

Small and medium-sized enterprises (SMEs) are a vital component of the economic system, yet they still face challenges when it comes to combating money laundering. A lack of awareness, limited resources for internal compliance, and insufficient digitalisation of processes can all contribute to entrepreneurs becoming potential participants in dirty money schemes.

Orkhan Mammadov, Chairman of the Board of the Small and Medium Business Development Agency (KOBIA), argues that SMEs are more likely than others to be involved in opaque financial schemes, often unknowingly. He emphasised the importance of a functional approach on the part of supervisory authorities, as well as compliance with international standards, including the recommendations of the Financial Action Task Force (FATF) and the Council of Europe.

According to the classical model, the process of laundering the proceeds of crime is divided into three stages: placement, layering and integration. Consequently, legalised funds enter the economy through formally legitimate mechanisms, such as investments, real estate transactions, services and production," explained O. Mammadov. "This practice has the potential to compromise the integrity of competition and establish inequitable standards for legitimate entrepreneurs."

According to the head of the agency, KOBIA intends to strengthen educational work among small businesses to raise their awareness of financial risks and prevent them from becoming part of shadow schemes.

In addition, in the context of the increasing international standards of financial control and digitalisation of supervisory processes, the issues of responsibility of auditing and accounting structures are becoming more important. They play a key role in identifying suspicious transactions. However, this function has not yet been fully realised in Azerbaijan.

Vahid Novruzov, Chairman of the Chamber of Auditors, has expressed concern that professional participants in the audit market are not always effective in detecting suspicious financial schemes. He asserts that the current level of responsibility, ethical violations and compliance with international standards is inadequate. This, he contends, results in legal consequences and undermines the reputation of the profession as a whole. "The application of ISA 240 (auditor's responsibility to review fraud) and ISA 250 (review of compliance with laws and regulations) should not be a formality, but a mandatory part of daily practice. Furthermore, the active implementation of digital solutions, including artificial intelligence, is recommended to enhance the effectiveness of audit controls. Novruzov also called for tougher legal liability in cases where financial transactions raise reasonable suspicion but are not recorded in audit reports.

Tural Velibeyov, who occupies the position of deputy head of the Expert Analysis Department of the Main Anti-Corruption Department under the General Prosecutor's Office of Azerbaijan, has drawn attention to the fact that illegal transactions through online betting platforms have increased in recent years, and that the use of cryptocurrencies has also risen.

"In the current climate, the majority of criminal cases in our proceedings are related to the use of digital technologies. They enable us to detect crimes through risk-oriented analysis and building digital profiles of suspects," he said.

In order to combat new types of crime more effectively, it is necessary to use not only technological equipment, but also to establish institutional cooperation, according to Velibeyov.

Despite the relatively small number of cases under investigation, money laundering is one of the most complex and dangerous forms of economic crime. The key characteristics of these schemes are their high degree of disguise, wide coverage and multi-level structure.

In 2023, eight criminal cases were initiated on the basis of materials provided by the Financial Monitoring Service. These cases were initiated under Article 193-1 of the Criminal Code of Azerbaijan, which deals with the legalisation of money or other property obtained by criminal means. In 2024, there were five additional cases of a similar nature. During the 2023-2024 period, a total of 24 criminal cases of this category were awaiting resolution.

The data above indicates an increase in the number of detected offences and in the AML/CFT capacity of law enforcement agencies. However, experts have indicated that the actual scale of the problem may significantly exceed the official figures due to the difficulty of detecting such offences and the use of digital and cross-border concealment mechanisms.

To summarise, combating financial crime is not just a matter of fulfilling formal obligations. It is also key to sustainable economic growth, investment attractiveness and social stability. In order to address the challenges of today, a systemic and coordinated approach is required, with digital solutions, international partnerships and institutional responsibility being key elements.