FATF GREY LISTINGS A GOOD THING? NOT FOR AFRICA, NOT FOR THE POOREST.

FATF UNFAIR

Over three decades, the FATF standards have emerged as a cornerstone in protecting global financial integrity. However, it is argued that its current practice of “grey-listing” countries based on standardised criteria is inherently unfair.

FATF fails to account for the significant disparities between established financial systems in the Global North and emerging economies in the Global South, perpetuating an unjust system that hampers the development of these economies.

Regarding strategically important regions that act as conduits for global illicit financial flows, recent studies highlight other areas, such as the Americas and Asia-Pacific, requiring greater scrutiny.

The FATF Standardised approach challenges countries in prioritising agendas vital to their development. Its uniform technique of evaluation creates a clear disadvantage for low-income countries, which prioritise combating issues that are central concerns for society, such as human trafficking, rape, murder, and house-breakings.

FATF should prioritise strategically important countries rather than punishing poor or developing countries for small breaches that represent a minimal threat to the international financial system.

These issues, among many others, raise questions about the FATF listing criteria's fairness and efficacy in strengthening national anti-money laundering (AML) and counter-terrorist financing (CTF) regimes, particularly for under-resourced countries.

GREYLISTING IMPACT

Grey-listing, a practice often resulting in serious economic and reputational impacts for the listed country, is not just theoretical. It affects everything from a country's GDP to the amount of international aid it receives.

In Africa, the world's poorest continent, greylisting deprives the region of necessary foreign investment. It increases administrative, financing and transaction costs, potentially worsening financial exclusion in a continent where less than half of the population has a bank account.

These are real-world consequences that demand immediate attention.

LATEST UPDATE

In February, the Financial Action Task Force (FATF) held its first plenary of the year, adding two further African countries to the so-called ‘grey list’ of jurisdictions under increased monitoring for their financial crime-fighting deficiencies.

• https://www.fatf-gafi.org/en/the-fatf/outcomes-of-meetings.html

With the addition of Kenya and Namibia, Sub-Saharan African countries now make up 12 of 21 grey-listed jurisdictions (nearly 60%).

WHY DO AFRICAN COUNTRIES KEEP BEING GREY-LISTED?

The primary cause for this trend is Africa's distinctive features. According to a study, the poorest countries are most likely to be grey-listed.

• https://www.cgdev.org/impact-anti-money-laundering-SWIFT-data

With limited resources, authorities often prioritise more vital national issues, such as providing access to food, health and shelter and ensuring basic security. Compliance with the FATF’s Recommendations must often compete with these fundamental necessities.

These economies have different structures and different sectors are prioritised, so they face different types of illicit finance threats compared with FATF members – mostly developed countries – such as 

• illegal wildlife trafficking, https://www.fatf-gafi.org/en/publications/Environmentalcrime/Money-laundering-wildlife-trade.html
• gold trafficking,  https://www.aljazeera.com/news/2023/3/23/gold-mafia-looting-southern-africa
• corruption https://www.transparency.org/en/publications/risks-of-illicit-financial-flows-in-africa
• illegal arms trade. https://news.un.org/en/story/2023/06/1137542

These issues underscore the need for a nuanced approach to address the challenges posed to cash-based economies effectively.

Moreover, corruption and insecurity remain fundamental factors in many African countries' challenges.

• https://rusi.org/explore-our-research/publications/commentary/tackling-corruption-improving-financial-inclusion-nigeria
• https://www.transparency.org/en/gcb/africa/africa-9th-edition

South Sudan, for example,

• Has just entered the second year of a civil war. The country was grey-listed three years ago, and the deadline for the action plan has passed.
• However, given the country's current fragile security situation, there is no chance of the country being removed from the grey list in the short term.
• South Sudan will, therefore, continue to suffer the consequences of grey-listing while facing ongoing violence and a humanitarian crisis.

Meeting the FATF's requirements of establishing and effectively executing an anti-financial crime regime is exceptionally challenging without a stable security environment, credible public authorities, and an impartial court system.

NAVIGATING GREYLISTING AND UNINTENDED CONSEQUENCES

Going to the grey list is one thing; getting off it is another.

The economic repercussions of the process are well-studied, consistently revealing a cascade of adverse effects, from a decrease in GDP to a loss of foreign investment, a negative impact on international trade and a decline in official development assistance, even after being de-listed.

Considering that 60% of African countries rank among the least developed globally, the implications of these economic setbacks are profound. These economies often have limited fiscal resources to pursue development plans, and any disruption to the flow of foreign funds, in effect, cuts off the lifeblood of their economies.

• https://www.u4.no/publications/the-impact-of-grey-listing-by-the-financial-action-task-force-fatf
• https://www.imf.org/en/Publications/WP/Issues/2021/05/27/The-Impact-of-Gray-Listing-on-Capital-Flows-An-Analysis-Using-Machine-Learning-50289
• https://www.u4.no/publications/the-impact-of-grey-listing-by-the-financial-action-task-force-fatf.pdf
• https://unctad.org/publication/least-developed-countries-report-2023

However, the consequences of greylisting extend beyond the impact on the economy.

Despite the FATF's best intentions to mitigate the impact of greylisting, financial and non-financial institutions often respond by imposing increased scrutiny and restrictions on financial transactions involving the listed jurisdiction and its citizens.

• https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-february-2024.html#:~:text=When%20the%20FATF%20places%20a,as%20the%20%E2%80%9Cgrey%20list%E2%80%9D.

This could mean de-banking or restricted access to foreign currency, increased transaction fees and slower remittances for Africa's developing and impoverished countries.

Greylisting may also impact financial inclusion within a country.

• https://www.rusi.org/explore-our-research/projects/financial-inclusion

More stringent AML/CTF regulation, such as requiring stricter customer due diligence procedures when someone seeks to open a bank account, may make it more difficult for people to access the formal financial system or push them towards higher use of digital platforms and cryptocurrency which have proved popular partly due to continued greylisting.

• https://www.bakermckenzie.com/-/media/files/insight/publications/2019/02/report_blockchainandcryptocurrencyreg_feb2019.pdf

While a growing crypto market has the potential to reduce the impact of financial exclusion, the risks of crypto assets are clear, and Africa requires well-planned regulation to reap the benefits. With more than half of the population in Sub-Saharan Africa unbanked, greylisting is hindering access to essential financial services and exacerbating existing inequalities.

• https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf.coredownload.pdf
• https://www.imf.org/en/Blogs/Articles/2022/11/22/africas-growing-crypto-market-needs-better-regulations
• https://www.imf.org/en/Publications/REO/SSA/Issues/2023/10/16/regional-economic-outlook-for-sub-saharan-africa-october-2023

THE FATF SYSTEM IS UNFAIR

As highlighted in a previous commentary, the FATF's standardised approach potentially creates challenges for countries in prioritising agendas vital to their development that are not always aligned with the FATF's priorities.

• https://rusi.org/podcasts/suspicious-transaction-report/episode-12-financial-crime-view-africa

Indeed, the watchdog reviews over 200 countries, each with different resources, capacity and priorities.

Its uniform technique of evaluation creates a clear disadvantage for low-income countries, which prioritise combating issues that are central concerns for society, such as human trafficking, rape, murder and house-breakings.

Another issue is that only one African country, South Africa, is a member of FATF.

All other African countries are members of the various FATF-Style Regional Bodies (FSRBs) that cover the region. This means there needs to be more African representation at the FATF table, but African countries must implement decisions made by the FATF members.

This disconnect underscores a fundamental flaw in the FATF framework, wherein countries with divergent needs and challenges are held to a uniform standard. For African countries, it is a never-ending cycle; several countries, such as Kenya and Nigeria, have been added to the grey list twice since 2011.

When countries are grey-listed, they must agree to an action plan to address the deficiencies found by the FATF. Meeting the requirements of an action plan can be resource and cost-intensive for a country and have potential adverse impacts, such as on financial inclusion.

The 2023 grey-listing of South Africa, the only FATF member in the region, clearly demonstrates that all countries on the continent are at risk, leaving less-developed countries with no hope that they might avoid the same fate and undermining the FATF's relevance in the region.

IMPROVING THE NEXT ROUND: A CRUCIAL STEP FOR AFRICA AND THE GLOBAL FINANCIAL SYSTEM

It is time for the FATF to hold transparent and honest discussions with countries and the FSRBs that represent them about Africa's critical needs, the role of the FATF, and its evaluations. At the same time, it is vital to prevent third countries from leveraging this narrative to politicise the FATF and infiltrate FSRBs to promote their interests.

• https://www.moneylaundering.com/news/exclusive-despite-suspension-russia-still-wields-power-inside-fatf/

As the FATF encourages countries to comprehensively assess and prioritise illicit finance risks with a risk-based approach, it might be beneficial to apply this concept to its own evaluation and listing process, prioritising strategically important countries over punishing poor or developing countries for small breaches that represent a minimal threat to the international financial system.

Regarding strategically important regions that act as conduits for global illicit financial flows, recent studies highlight other areas, such as the Americas and Asia-Pacific, requiring greater scrutiny.

• https://www.fatf-gafi.org/en/topics/high-risk-and-other-monitored-jurisdictions.html

There are also some other models that the FATF may integrate into its processes. Such models exhibit the risk-based approach. For example,

• The IMF’s Financial Sector Assessment Program conducts peer reviews like the FATF.
• It performs more frequent assessments of 25 countries with systemically important financial sectors to reflect their significance to the global economic system.

Similarly, the EU maintains a list of ‘high-risk third countries’, omitting the least developed countries unless they are specifically identified as posing a threat to the EU financial system or are designated as offshore financial centres.

• https://finance.ec.europa.eu/financial-crime/high-risk-third-countries-and-international-context-content-anti-money-laundering-and-countering_en

The present FATF review procedure prioritises grey-listed countries with significant financial sectors with $5 billion or more in financial assets, applying more demanding and frequent follow-up measures – but this approach does not apply during the initial evaluation.

• https://www.fatf-gafi.org/en/topics/high-risk-and-other-monitored-jurisdictions.html

This month, the most recent biennial ministerial-level meeting recognised that the existing approach has created an unfair race for low-capacity states.

• https://www.fatf-gafi.org/en/publications/Fatfgeneral/FATF-Ministers-commit-to-step-up-AML-CFT-CPF.html#:~:text=Washington%2C%20D.C.%2C%2018%20April%202024,the%20financing%20of%20the%20proliferation

Ministers pledged to enhance risk-based criteria for identifying countries that pose a higher threat to the global financial system. While encouraging, this commitment must be translated into action before the next round of assessments. Strengthening the global network and enhancing the capacity of FSRBs is crucial. Particularly for the least developed countries, addressing their needs through financial and technical assistance should supersede punitive measures.

These steps represent the primary way the watchdog can help Africa break free from this seemingly unbreakable cycle and focus more of its time on scrutinising the actual ‘high-risk’ countries that threaten global financial integrity.

CONCLUSION

As the next round of FATF evaluations looms, the urgency of addressing the issue of grey-listing becomes even more apparent. This is a crucial moment to advocate for a more equitable and practical approach to these evaluations.

SOURCE

https://www.rusi.org/explore-our-research/publications/commentary/fatf-gains-momentum-breaking-africas-cycle-grey-listing