From grey list to growing economies - closing the door on money laundering and terrorist financing

By Elisa de Anda Madrazo , FATF President

The Financial Action Task Force (FATF) sets international Standards that are a global benchmark for preventing, detecting, investigating, and prosecuting financial crimes—in particular money laundering, and the financing of terrorism and the proliferation of weapons of mass destruction.

Today, the FATF Standards,?including its ‘40 Recommendations ’, are endorsed by nearly every country in the world: more than 200 jurisdictions compose the Global Network .

Why is this important? A 2023 IMF review underscored the macroeconomic impact of money laundering and terrorist financing, noting that dirty money flows are a "barrier to sustainable and inclusive economic growth, benefiting narrow elites, widening inequality, promoting informality, and undermining social cohesion and trust in governments.”???

The FATF’s influence is far-reaching, largely because countries?face tangible consequences for failing to implement its Recommendations. Over 200 jurisdictions are regularly reviewed by the FATF or one of the nine regional bodies?to assess their effectiveness in protecting their financial systems from illicit flows. Based on these assessments, countries may find themselves on the FATF’s "grey list" for jurisdictions with strategic deficiencies, or its “black list” for those with particularly severe shortcomings.?

A more risks focused approach – important changes to the FATF grey?listing process

The objective of the grey listing process is to work together with the country concerned to develop a plan of action?to close the loopholes that allow illegal financial flows to thrive.??? These illicit flows fuel crime, terrorism, and corruption; divert resources away from essential services like schools and hospitals; and impede sustainable development.

A concern for the FATF is that lower-capacity jurisdictions often struggle more with implementing effective measures to tackle illicit finance, making them more likely to end up on the “grey list”.? Over a third of the UN’s least developed countries have appeared on this list.?Recognising the disproportionate burden this places on these countries, the FATF has recently reformed its listing criteria.

Starting from the next assessment?round, the grey listing criteria will prioritise higher-income countries and those with large financial sectors, acknowledging that shortcomings in these jurisdictions pose a greater risk to the international financial system.

Lower-capacity countries will now have more time to address deficiencies before being listed, and those with limited financial sectors will not be listed unless they pose a significant risk.

These reforms could lead to nearly half as many low-capacity countries being listed in the upcoming evaluation cycle.

Supporting inclusive sustainable economic development

The FATF’s listing process is often misunderstood and frequently perceived as punitive—a punishment for underperforming countries. This is not the case. While the process is rigorous, it is intended to be cooperative. Countries on the grey list are assessed by and collaborate closely with experts?from around the world – it is a peer-led process. These experts offer guidance on where the country should focus its limited resources to make the most significant impact to prevent illicit financial flows. The shared goal is to address the jurisdiction’s strategic deficiencies and consequently remove the country from the grey list.? Countries exit the list better able to combat tax evasion, corruption, and organised crime, which in turn frees up resources for essential infrastructure and makes the country more attractive for public and private investment.

This cooperative process can yield substantial benefits. In just a few years, countries can move from having fundamental weaknesses in their systems to having in place measures that are in line with, or even exceeding, global good practice. Many countries that successfully exit the grey list go on to provide expertise to other listed countries, sharing the knowledge and experience they gained throughout the process.

Preventing unintended consequences

These reforms are part of a broader cultural shift within the FATF, which has been working to ensure that its processes do not unintentionally harm those it aims to protect. Non-profit organisations (NPOs) have faced challenges due to the misapplication of FATF Standards. While a small number of NPOs are vulnerable to abuse for terrorist financing, the misapplication of FATF measures has led to some legitimate NPOs losing access to critical financial channels. In response, the FATF has revised its Recommendations, as well as developing guidance and training, to ensure that countries do not disrupt or discourage legitimate charitable activities.

Efforts are also underway to contribute more strongly to financial inclusion and prevent the FATF Recommendations from creating barriers to accessing the financial system. This initiative seeks to combat ‘gold-plating,’ where countries and institutions impose overly stringent requirements regardless of the actual risk. By encouraging simplified and less burdensome measures in low-risk scenarios, it should make financial services more accessible, particularly for marginalised and under-served populations, while keeping them safe.

?Looking ahead: a global solution for a global problem

Illicit finance erodes the integrity and stability of the international financial system and robs countries of much needed domestic revenue. It is an obstacle to sustainable economic and social developments and to the well-being of people and societies.

As the FATF embarks on its next round of assessments,?its recent reforms underscore the Task Force’s?commitment to fighting a global problem through a strong Global Network, while taking a risk-based approach that supports inclusive sustainable development.

More on:

• FATF Procedures
• FATF Mutual Evaluations
• Assesment calendar
• FATF President Elisa de Anda Madrazo