The Financial Action Task Force (FATF) stands as a formidable sentinel, setting the benchmark for anti-money laundering (AML), countering terrorist financing (CFT), and counter proliferation financing standards. With its recommendations serving as the cornerstone of national legal frameworks across the globe, FATF’s influence reverberates far beyond its headquarters. Yet, for countries falling short of these stringent standards, the consequences can be profound.

But what about the consequences for the countries on the Grey List? The economic fallout is tangible. Their decline in investor confidence translates into billions of dollars lost in potential capital inflows, hampering economic growth and development initiatives.

Moreover, the stigma associated with being on FATF’s Grey List can tarnish a country’s reputation, denting its standing in the global arena. This is why today we want to make you know more about this topic: we will delve deeper into the history of FATF lists, analyze the mechanisms behind these economic impacts, and explore avenues for countries to extricate themselves from this precarious designation.

What is FATF and its purpose?

The Financial Action Task Force (FATF) is an international organization established in 1989 under the leadership of the G7 nations, headquartered in Paris. Its primary objective is to develop and advocate policies and standards aimed at combating financial crimes such as money laundering, terrorist financing, and other threats to the integrity of the global financial system.

At the core of FATF’s mission is the continuous monitoring of how criminals and terrorist groups raise, use, and move illicit funds. As countries implement measures to disrupt these illegal financial flows, criminals adapt, necessitating ongoing vigilance and innovation in combating financial crimes.

FATF fulfills its mandate by regularly publishing reports that highlight emerging trends and techniques related to money laundering, terrorist financing, and proliferation financing. These reports serve to raise awareness among member countries and the private sector, enabling them to take proactive measures to mitigate associated risks.

By providing guidelines for authorities to track and seize illicit funds, including those associated with drug trafficking and human trafficking, FATF plays a pivotal role in safeguarding the integrity of the international financial system. Additionally, FATF’s efforts extend to preventing the financing of weapons of mass destruction, underscoring its commitment to global security.

As financial landscapes evolve, FATF remains adaptable, continually strengthening its standards to address emerging risks. This includes regulating virtual assets, a response to the proliferation of cryptocurrencies and other digital assets.

To ensure global compliance with its standards, FATF monitors the implementation of its recommendations by over 200 countries and jurisdictions. This oversight is conducted in collaboration with nine FATF Associate Member organizations and other strategic partners, including the International Monetary Fund (IMF) and the World Bank.

What are FATF grey and black lists?

Through triannual plenary meetings, FATF assesses countries’ compliance with its standards, ultimately categorizing them into two distinct lists:

  • The “Black List”: This roster comprises countries deemed to present a significant risk of money laundering, terrorist financing, and proliferation financing due to substantial strategic deficiencies in combating these illicit activities. FATF urges its members and other jurisdictions to exercise heightened due diligence with respect to transactions involving these countries. In severe cases, countermeasures may be implemented. The Black List, officially known as the “high-risk jurisdictions subject to a call for action“, underscores the urgent need for targeted interventions to mitigate financial risks.
  • The “Grey List”: Countries placed on the Grey List are designated as “jurisdictions under increased monitoring“. These nations have committed to addressing strategic deficiencies in combating money laundering, terrorist financing, and proliferation financing within an agreed-upon timeframe. Consequently, they undergo enhanced scrutiny and monitoring by FATF. While these countries have demonstrated a willingness to rectify deficiencies, their progress is closely monitored until satisfactory compliance is achieved. The Grey List serves as a signal for ongoing vigilance and support in bolstering anti-financial crime measures.

These categorizations are the culmination of meticulous evaluations conducted by legal and financial experts from peer countries, the FATF Secretariat, FATF-Style Regional Bodies, and collaborating organizations such as the International Monetary Fund (IMF) and the World Bank. The evaluations, renowned for their technical rigor, inform decisions made by market actors, governments, and international organizations regarding capital allocation and strategic partnerships.

The History of the FATF Lists

Since its inception in 1989, the scope of FATF’s mandate has undergone significant expansion. Initially established to address money laundering, FATF’s purview expanded in 2001 following the 9/11 terrorist attacks in the United States, encompassing the realm of terrorist financing. Subsequently, in 2012, FATF further broadened its mandate to include proliferation financing, issuing recommendations pertaining to weapons of mass destruction.

The process of Black- and Grey-Listing countries has evolved over time, reflecting FATF’s commitment to enhancing global financial integrity. While FATF primarily focuses on recommending measures and facilitating mutual evaluations among member countries, it does not prioritize enforcement capacity maximization. In 2000, FATF introduced the ‘Non-Cooperative Countries and Territories’ process, which initially listed 13 countries. However, this approach was discontinued in 2002, with only Myanmar remaining on the list by 2006. Nonetheless, in 2010, FATF reintroduced the process, signaling a renewed emphasis on addressing financial crime vulnerabilities.

In addition to FATF’s listings, the European Union maintains its own roster of third-country jurisdictions with strategic deficiencies in their national anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes. Known as the “EU High-Risk Third Countries List,” this compilation is mandated by the Fourth Anti-Money Laundering Directive, enacted in 2015. Notably, there is significant overlap between the FATF Black and Grey Lists and the EU High-Risk Third Countries List, with 88% of countries listed by FATF also included in the EU’s roster.

This historical trajectory underscores the dynamic nature of international efforts to combat financial crime, with FATF and the European Union playing pivotal roles in identifying and addressing vulnerabilities within the global financial system. As financial landscapes evolve and threats evolve, these listings serve as critical tools for promoting transparency, integrity, and security in the international financial arena.

The huge economic impact of FATF Grey List

Both Black and Grey Listings carry significant economic ramifications for countries, impacting their financial systems and overall economies. These designations can impede cross-border transactions, hinder access to credit, and deter foreign investment

Moreover, being listed tarnishes a country’s reputation and diminishes its international stature. Notably, the three countries on the Black List—Iran, the Democratic People’s Republic of Korea, and Myanmar—are subject to international sanctions.

The economic consequences of Grey Listing have been extensively studied, revealing substantial damage to affected jurisdictions:

  • Foreign Direct Investment (FDI) to Gross Domestic Product (GDP) ratio decreases by an average of 2% when countries have low FATF scores. This reduction can escalate to an average of 5% if a country is Black Listed.
  • Analysis of SWIFT data from 2004 to 2014 indicates a potential reduction of up to 10% in payments received by Grey-Listed countries from the rest of the world, signifying significant losses.
  • Between 2010 and 2015, Grey Listing led to a statistically significant decrease of approximately 16% in cross-border liabilities in affected countries.
  • Recent machine learning studies reveal a considerable decline in capital inflows, averaging 7.6% of GDP upon Grey Listing. Foreign direct investment, portfolio inflows, and other investment inflows also exhibit notable declines.

A key driver of this economic fallout is the response of regulated entities, such as banks, required to consider a country’s Black or Grey-Listed status in their anti-money laundering (AML) and countering the financing of terrorism (CFT) policies. 

Compliance obligations necessitate heightened due diligence on transactions involving parties from listed countries, resulting in increased costs and resource allocation. This can even lead to the termination of certain relationships, a phenomenon known as “de-risking.”

How to get off a FATF list

To achieve removal from either the Black List or Grey List, countries must embark on a comprehensive remediation journey, addressing the deficiencies identified by FATF in their anti-money laundering (AML), countering the financing of terrorism (CFT), and proliferation financing frameworks, including legal aspects.

Encouragingly, many listed countries have successfully achieved removal from FATF Lists. As of October 2023, out of the 98 countries previously listed, 76 have been successfully removed, indicating a promising track record of remediation efforts.

In this endeavor, it is increasingly common for countries, typically through their Ministry of Finance, to seek external advisory support. Some firms have played pivotal roles in guiding states through the intricacies of engaging with FATF processes, providing expertise and strategic guidance throughout the remediation process.

In essence, to secure removal from FATF Lists, countries must demonstrate to FATF that they have effectively addressed the identified weaknesses in their AML, CFT, and proliferation financing controls

This involves implementing robust measures, enhancing regulatory frameworks, and demonstrating sustained commitment to combating financial crimes. Ultimately, successful remediation efforts pave the way for reinstating trust and confidence in the integrity of a country’s financial system, fostering economic stability and prosperity.

Ready to navigate the path to removal from FATF lists and safeguard your country’s economic and reputational standing? Contact us today to embark on your journey toward reinstating trust and confidence in your nation’s financial integrity.