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“Grey Listing” by FATF: The impact on a Country

24 June 2021

John Caruana


24 June 2021

The scope of this article is to provide a non-political and professional explanation of the impact of a “Grey listing” by FATF on a Country’s various industries which rely directly or indirectly on the financial and banking industries, which are directly impacted by such Country Risk Classification.

Who are FATF?

FATF is an inter-governmental body which has been established since 1989 by a number of member countries. The main aim of FATF is to set standards across the industry in relation to combating Money Laundering and funding of terrorism.

What are the main FATF recommendations?

In 1990, the FATF published 40 recommendations which would achieve the following:

> Identify the risk and develop policies and domestic coordination
> pursue money laundering, terrorist financing and the financing of proliferation;
> apply preventive measures for the financial sector and other designated sectors;
> establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures;
> enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and
> facilitate international cooperation

Those interested to go through all 40 recommendations in detail, may refer to the below link:

What is the ‘Grey List’?

The FATF holds 3 plenary meetings during the year, in which certain gaps and issues in relation to Money Laundering and Funding of Terrorism (amongst other matters) are discussed. At the end of each plenary meeting, the FATF issues a list of countries having identified strategic weaknesses in their AML regime. Such list of Countries is informally known as the Grey list.

Currently, the official Grey list which was published by the FATF last February 2021, contains the following Countries:

> Albania
> Barbados
> Botswana
> Burkina Faso
> Cambodia
> Cayman Islands
> Ghana
> Jamaica
> Mauritius
> Morocco
> Myanmar
> Nicaragua
> Pakistan
> Panama
> Senegal
> Syria
> Uganda
> Yemen
> Zimbabwe

Media reports are stating that Malta and Romania are likely to be added to the Grey List, however, at the time of writing of this report, such list has not been officially published by FATF since it needs confirmations by various FATF associate members.

How would a Country be impacted by being on the ‘Grey List’?

In line with the 4th Anti Money Laundering Directive and national AML/CFT Regulations, entities falling in scope of such regulations, also known as ‘subject persons’, are required to apply a ‘Risk Based Approach’ to their internal due diligence processes.

Essentially, this means, that for each customer, entities would need to examine the customer’s ML/FT risk. Such risk is based on at least 4 main pillars, being:

> Customer Risk Pillar
> Channel Risk Pillar
> Service Risk Pillar
> Country Risk Pillar

Focusing on the last pillar, that is, the Country Risk Pillar, takes us to the issue being derived from the ‘Grey Listing’ of a Country by FATF. When designing AML Risk Models, professionals would take into consideration various factors, including those published by Governments, such as the National Risk Assessment and Supra-National Risk Assessment, together with guidance from various regulations and implementing procedures as published by Authorities and the FIAU. In relation to the Country Risk Pillar, professionals usually take into account various factors which are analysed within a separate ‘Country Risk Report’ that identifies any strategic weaknesses with a particular Country. An example of these ‘factors’ are:

> Identification of the Country’s ranking within the Basel Index
> Identification of the Country’s rating within the Transparency International Corruption Index
> Identification of the Country’s rating within the World Governance Indicator
> Identification on whether the Country’s is Sanctioned by various bodies such as the United Nations
> Identification on whether the Country is on the EU Commission’s list of AML/CFT deficient Countries
> Identification on whether the Country is on the FATF’s list of Countries having strategic deficiencies in the AML/CFT regime
> Other matters, such as the type of economic activity, likelihood of crime within such Country, and whether the Country is war-torn or hosts known terrorist activities.

Entities have a level of flexibility to establish a Country’s Risk Classification, with some limitations as will be noted below.
The usual Country Risk Classifications are:

i. Low Risk Countries
ii. Medium Risk Countries
iii. High Risk Countries
iv. Non-Reputable Countries
v. Black-Listed Countries

Whilst flexibility is allowed when classifying a Country’s risk, there are certain limitations as imposed by regulation. The main limitations are that Countries which are on the European Commission’s list of Countries having AML/CFT deficiencies, together with Countries listed on the FATF’s list of Countries having Strategic Deficiencies in their AML Regime (The Grey List), are automatically classified as ‘Non-Reputable’ jurisdictions and hence ‘Enhanced Due Diligence’ would be required.
Therefore, a customer or its Ultimate Beneficial Owners, which or who are directly or indirectly exposed to a ‘non-reputable jurisdiction’ would automatically result in a ‘high risk’ of ML/FT classification by the entity. This would result in ‘Enhanced Due Diligence’ being performed at onboarding stage, and during the business relationship with the customer.
In addition to this, certain entities, especially banks and financial institutions, may have a risk appetite which does not allow them to deal with customers exposed to a non-reputable jurisdiction. Therefore, for a Country being on such ‘Grey List’ is expected to experience a number of issues, especially in the long term, being:

> A decrease in Direct Foreign Investment as investors would not want to be exposed to such Countries which may have an indirect impact on their personal risk rating on other investments they may have;
> Issues for local banks to find corresponding banks abroad;
> Issues for local businesses having foreign banking relationships as these may terminate such business relationship due to the Country being on the Grey List;
> Issues for certain industries which depend on international trade;
> Issues for reputation-sensitive industries such as remote gaming which rely on reputation and licensing within a Country in order to expand their business internationally;
> Diplomatic repercussions; and
> Other issues related to the reputational damage of the Country, especially when promoting the Country abroad.

The way forward

When a Country is placed on the Grey List, it will surely start feeling an impact on its economic activity, especially if these are derived from financial, banking and gaming services. These services rely heavily on reputation in order to grow, and hence, are expected to find difficulties in such a scenario.
Stakeholders within the Grey Listing Country are to ensure that the issues identified by FATF are tackled as a Country. It would not be beneficial if such process is made political. It is in our opinion that many factors would contribute towards a Country being Grey Listed. Whilst some of these factors would point towards political and strategic decisions taken throughout the years, others also point to ‘Gate Keepers’ which failed to contribute towards ensuring a Country has in place a strong AML/CFT defence mechanisms. Therefore, it is recommended that ‘People living in Glass Houses should stop throwing stones at each other’ and focus on the source of the problem to arrive at the desired solution for the Country.

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