FATF Grey Listing
(On the cover - a picture of the certificate awardees for FCAP - 'Fintelekt Certified AML/CFT Professional' - post the training session held in Bangkok, Thailand on October 26-27, 2023)
In this issue of AML Leadership - a conversation with Professor Louis De Koker , Associate Dean (Research & Industry Engagement) at La Trobe Law School, La Trobe University , Australia, and Extraordinary Professor, Department of Mercantile and Labour Law at the University of the Western Cape , South Africa
A law professor at La Trobe University in Australia, Louis De Koker has been studying the FATF standards and their implementation since 1991. During this period he has advised on and drafted regulations; advised on compliance structures and policies; facilitated crime risk assessments; and trained many law enforcement officials, regulators and compliance officers, mainly in developing economies, and often with bodies like the 世界银行 , Asian Development Bank (ADB) and CGAP .?(For more, see?https://scholars.latrobe.edu.au/ldekoker).
What are the specific criteria used by the FATF to include a country into the grey list?
This is how the Financial Action Task Force (FATF) explains it on their website: When a Mutual Evaluation Report (MER) identifies weaknesses in a country’s implementation of the standards, it may be referred to the FATF’s International Cooperation Review Group (ICRG) for review, in cases such as the following:
In addition, a country may be referred if it does not participate in a FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published in a timely manner; or of t is nominated by a FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation financing risks or threats coming to the attention of delegations.
A jurisdiction that enters the ICRG review process as a result of its mutual evaluation results has a one-year Observation Period to work with the FATF or its FATF-style regional body (FSRB) to address deficiencies before possible public identification and formal review by the FATF. The FATF then prioritises the review of those countries with more significant financial sectors – e.g. USD 5 billion or more in financial sector assets.
During the review process the FATF considers the strategic AML/CFT deficiencies identified both in terms of technical compliance and effectiveness of measures in place, and any relevant progress made by the jurisdiction. If the FATF deems the progress insufficient to address its strategic deficiencies, the FATF develops an action plan with the jurisdiction to address the remaining strategic deficiencies.
For all countries under ICRG review, the FATF requires a high-level political commitment that the jurisdiction will implement the legal, regulatory, and operational reforms required by the action plan.
By the time a country is greylisted it has therefore committed politically to a compliance with the FATF standards and often has already taken steps to implement improvements in response to the MER. The greylisting statement then announces the key elements of the action plan the country adopted to address the remaining deficiencies.
Is it fair to use the same set of parameters to evaluate different countries with varied economic and political situations (does any calibration of the criteria occur)?
The FATF’s challenge is that its goal is to ensure #AML #CFT #CPF consistency globally. That goal requires a measure of generalisation and the application of a standardised set of parameters. Is greylisting the best way to increase compliance? We are fast approaching the point where the FATF would have listed the majority of jurisdictions globally at some stage as non-compliant. The vast majority of these are smaller, developing economies. We are also seeing a trend of repeat listings.
In addition, we have not seen a single country, regardless of wealth, to be 100% compliant with the FATF standards. We are however also seeing relatively low levels of effectiveness, even for FATF members.
Technical compliance may benefit from a listing approach but for most smaller economies the effectiveness problem is linked to capacity and resources. That can only be addressed by a significant increase in development aid over a longer period until the country has reached a level of capacity and resourcing to sustain an effective AML/CFT/CPF system. And bear in mind that the aid must increase to keep pace with the continuous increase in the FATF standards to keep pace with changing trends in crime.
Our study (Louis de Koker, John Howell, and Nicholas Morris. 2023. "Economic Consequences of Greylisting by the Financial Action Task Force"?Risks?11(5): 8 shows evidence that greylisting may actually have a negative impact on overall aid to a listed country. That is of concern as negative impact on aid would not only undermine the UN Sustainable Development Goals but also the country’s ability to increase the effectiveness of its AML/CFT/CPF measures.
Has grey listing proven to be an effective step to measurably improve the maturity of the AML regime in those specific countries for the long term and in a sustained manner, and if so, why? If not, why not?!
Greylisting impacts differently on different countries. We do know that it does increase the technical compliance of a country to the level required to be delisted. It also increases some aspects of effectiveness of its AML/CFT/CPF system but overall effectiveness levels remain disappointing. The impact there is therefore much more modest.
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It is however not clear that it necessarily sets up a country for continuing success. FATF standards are now amended continuously. Consider the virtual asset standards of 2019; the proliferation financing risk management standards of 2020; and the new beneficial ownership and NPO standards of 2023.
Greylisting seem to help to get countries to comply with the standards at play during the mutual evaluation process but does not necessarily ensure sufficient capacity to get up to speed and stay in line with new standards. That in turn creates risk of re-listing.
Why is grey listing seen as negative for a country, when in fact that country has made a high level political commitment to improve its AML/CFT regime and the FATF does not impose enhanced due diligence after the country has been grey listed?
That is a good question. Before 2016 greylisting was also used against countries that had not committed to compliance with the FATF standards. Many compliance officers still think that that is what greylisting signals and view it as a list of higher risk countries. Few actually read the text of the FATF’s public listing statements and note the changes in language in recent years, as discussed in our paper.
Another reason may be that the EU and some national regulators use of the FATF’s greylisting to trigger rules that impose obligations on their institutions to adopt enhanced due diligence measures. They do go beyond the FATF’s own requirements and their motivation for doing so is not necessarily convincing.
The EU for example, argues that it is required to protect their system against risk stemming from the country. We pointed out in our paper that such an argument would be stronger if the EU responded to the initial MER results. Imposing enhanced due diligence later, especially after a country made improvements and lowered the risk poses, raises question marks about the actual objective of their requirements.
What is the tangible economic impact, if any, on the financial sector, after a country exits the grey list?
We undertook a few country studies to clarify specific economic impacts but it is actually challenging to point the finger to specific consequences. Many countries were listed during periods when they were affected by other factors too, including the global financial crisis, the pandemic and country-specific factors such as war, political instability nationally or regionally etc. The economic impacts for some countries with larger economies may be negligible or even positive. The general correlations however point to reduced GDP growth rates during the listing period and after delisting. And that of course, combined with the indications of negative impact on aid in different forms, is worrying.
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Professor of Law, La Trobe Law School
1 年It was a pleasure to discuss greylisting, Shirish!
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1 年Have read some of de Koker’s journals and have them used to cite in my thesis. Should be a very interesting read.