REALITY CHECK | How FATF Grey Listing Affects a Country’s Financial and Economic Environment

According to a PwC report, investors consider grey-listing as a key factor when evaluating the risk of conducting business. In this article, we take a look at the possible implications that the affected nations will be facing, including the impacts to the business and financial environments.

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In February 2024, the Financial Action Task Force (FATF) added Kenya and Namibia to its global list of countries with strategic deficiencies in combating money laundering, terrorism financing, and proliferation financing.

The two became just the latest African countries, in a long list that captures several African countries, including:

  • Burkina Faso
  • Cameroon
  • Democratic Republic of Congo (DRC)
  • Mali
  • Mozambique
  • Nigeria
  • Senegal
  • South Africa
  • South Sudan
  • Tanzania
  • Uganda
  • Kenya
  • Namibia

The grey list, also referred to as the ‘Jurisdictions under Increased Monitoring,’ encompasses countries that are evaluated as having strategic deficiencies in their AML, CFT, and CPF regimes and are committed to addressing these deficiencies. FATF subjects countries in the grey list to increased monitoring.

The areas the aforementioned countries were found to have deficiencies in, in terms of government regulations, includes:

  • AML: Anti-money laundering (AML) is a set of regulations that prevent criminals from hiding illegally obtained funds as legitimate income
  • CFT: Combating the Financing of Terrorism (CFT)  involves efforts to prevent individuals or groups from providing financial support or resources to terrorist organizations or activities
  • CPF: Combating Proliferation Financing (CPF) refers to the actions taken to prevent the financing of weapons of mass destruction (WMD) proliferation

But what exactly are the implications of this designation for the countries involved?

 

In this article, we take a look at the possible implications that the affected nations will be facing, including the impacts to the business and financial environments.

 

Implications of Grey-Listing

According to a report by PriceWaterhouseCoopers (PwC), grey-listing adversely impacts a country’s:

  • International reputation
  • Trade relations
  • Investment opportunities, and
  • Diplomatic ties

among others.

This has a snowball effect on a country’s ability to raise capital, attract aid, access international finance, engage in international trade, and sustain diplomatic relationships.

According to a 2021 International Monetary Fund (IMF) study, 89 of the emerging and developing countries grey-listed between 2000 and 2017 experienced a drop in capital flows equal to 7.6% of GDP. According to the study, financial institutions tend to adopt a risk-based approach which results in derisking and terminating relationships with customers from high-risk countries.

Additionally, investors consider grey-listing as a key factor when evaluating the risk of conducting business. This could result in the diversion and re-allocation of investor resources in a bid to minimize their risk exposure.

 

Practical Implications of Grey-Listing

According to PwC, financial institutions and businesses need to brace themselves for substantial shifts in the business environment characterized by regulatory changes, heightened scrutiny when conducting business, and increased emphasis on compliance, amongst other shifts.

For banks, insurance companies, and other financial entities, grey-listing heralds a period of heightened vigilance and regulatory scrutiny that involves:

  • Compliance requirements are expected to become more stringent
  • Enhanced AML, CFT, and CPF measures
  • There may be stricter due diligence measures for customer onboarding
  • Enhanced reporting obligations for suspicious transactions
  • Greater scrutiny of international transactions

Businesses outside the financial institutions also need to prepare for a challenging business environment. With uncertainties surrounding regulatory changes and potential reputational risks, investors, and business partners may approach the affected countries with caution, said PwC.

Additionally, heightened compliance costs and potential delays in financial processes may pose challenges, especially for businesses engaged in global trade and financial activities.

 

 

 

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