The FATF Gains Momentum in Breaking Africa's Cycle of Grey Listing

In February, the Financial Action Task Force (FATF) held its first plenary of the year adding two further African countries to the so-called ‘grey list’ of jurisdictions under increased monitoring for their financial crime-fighting deficiencies. With the addition of Kenya and Namibia, Sub-Saharan African countries now make up 12 of 21 grey-listed jurisdictions (nearly 60%).

Being grey listed can often result in serious economic and reputational impacts for the listed country, affecting everything from the country’s GDP to the amount of international aid it receives. In Africa, the world's poorest continent, grey listing not only deprives the region of necessary foreign investment but also increases administrative, financing and transaction costs potentially worsening financial exclusion in a continent where less than half of the population has a bank account.

Over more than three decades, the FATF standards have emerged as a cornerstone in protecting global financial integrity. However, the practice of grey listing countries based on standardised criteria fails to account for inherent disparities between established financial systems in the Global North and emerging economies in the Global South. This raises questions about the fairness of the listing criteria and their efficacy in strengthening national anti-money laundering (AML) and counter-terrorist financing (CTF) regimes, particularly for under-resourced countries. As the next round of FATF evaluations approaches, this issue cannot be overlooked any longer.

Navigating Grey Listing and Unintended Consequences

Going on to the grey list is one thing; getting off it is another. The economic repercussions of the process are well-studied, consistently revealing a cascade of negative effects, from a decrease in GDP to a loss of foreign investment, negative impact on international trade and a decline in official development assistance, even after being de-listed. Considering that 60% of African countries rank among the least developed globally, the implications of these economic setbacks are profound. These economies often have limited fiscal resources to pursue development plans, and any disruption to the flow of foreign funds in effect cuts off the lifeblood of their economies.

However, the consequences of grey listing extend beyond the impact on the economy. Despite the FATF's best intentions to mitigate the impact of grey listing, financial and non-financial institutions often respond by imposing increased scrutiny and restrictions on financial transactions involving the listed jurisdiction and its citizens. For the developing and impoverished countries of Africa, this could mean de-banking or restricted access to foreign currency, increased transaction fees and slower remittances.

Grey listing may also impact financial inclusion within a country. More stringent AML/CTF regulation, such as requiring stricter customer due diligence procedures when someone seeks to open a bank account, may make it more difficult for people to access the formal financial system or push them towards a higher use of digital platforms and cryptocurrency. African countries are not unfamiliar with the usage of digital money-transfer solutions which have proved popular partly as a result of continued grey listing. While a growing crypto market has the potential to reduce the impact of financial exclusion, the risks of crypto assets are clear and Africa requires well-planned regulation to reap the benefits. With more than half of the population in Sub-Saharan Africa unbanked grey listing is hindering access to essential financial services and exacerbating existing inequalities.

Why do African Countries Keep Being Grey Listed?

The primary cause for this trend is Africa's distinctive features. According to a study, the poorest countries are most likely to be grey listed. With limited resources, authorities often have to prioritise more vital national issues, such as providing access to food, health and shelter, as well as ensuring basic security. Compliance with the FATF’s Recommendations often has to compete with these most fundamental necessities. These economies have a different structure and different sectors are prioritised, so they face different types of illicit finance threats compared with FATF members – mostly developed countries – such as illegal wildlife trafficking, gold trafficking, and illicit financial flows especially related to corruption or illegal arms trade. These issues underscore the need for a nuanced approach to effectively address the challenges posed to cash-based economies.

Moreover, corruption and insecurity remain as fundamental factors in many of the challenges that some African countries face. South Sudan, for example, has just entered the second year of a civil war. The country was grey listed three years ago, and the deadline for the action plan has passed. However, given the current fragile security situation in the country, there does not appear to be any chance of the country being removed from the grey list in the short term. South Sudan will, therefore, continue to suffer the consequences of grey listing while facing ongoing violence and a humanitarian crisis. Without a stable security environment, credible public authorities and an impartial court system, it is extremely challenging to meet the FATF's requirements of establishing and effectively executing an anti-financial crime regime.

The last issue is inherently related to the FATF system. As highlighted in a previous commentary, the FATF's standardised approach potentially creates challenges for countries in prioritising agendas vital to their own development that are not always aligned with the FATF's priorities. Indeed, the watchdog reviews over 200 countries, each with different resources, capacity and priorities. Its uniform technique of evaluation creates a clear disadvantage for low-income countries which prioritise combating issues that are central concerns for the society such as human trafficking, rape, murder and housebreakings. Another issue is the fact that only one African country, South Africa, is a member of FATF in its own right. All other countries in Africa are members of the various FATF-Style Regional Bodies (FSRBs) that cover the region. This means that there is little African representation at the FATF table but African countries are required to implement decisions made by the FATF members.

This disconnect underscores a fundamental flaw in the FATF framework, wherein countries with divergent needs and challenges are held to a uniform standard. For African countries, it is a never-ending cycle; several countries, such as Kenya and Nigeria, added to grey list twice since 2011. When countries are grey listed, they have to agree to an action plan to address the deficiencies found by the FATF. Meeting the requirements of an action plan can be resource and cost intensive for a country as well as having potential adverse impacts, such as on financial inclusion. The 2023 grey listing of South Africa, the only FATF member in the region, clearly demonstrates that all countries on the continent are at risk, leaving less-developed countries with no hope that they might avoid the same fate and undermining the FATF's relevance in the region.

Improving the Next Round: A Crucial Step for Africa and the Global Financial System

It is time for the FATF to hold transparent and honest discussions with countries and the FSRBs that represent them about Africa's critical needs and the role of the FATF and its evaluations. At the same time, it is critical to prevent third countries from leveraging this narrative to politicise the FATF and infiltrate FSRBs to promote their own interests. As the FATF encourages countries to comprehensively assess and prioritise illicit finance risks with a risk-based approach, it might be beneficial to apply this concept to its own evaluation and listing process, prioritising strategically important countries over punishing poor or developing countries for small breaches that represent a minimal threat to the international financial system. When it comes to strategically important regions that act as conduits for global illicit financial flows, an increasing number of recent studies highlight other regions such as the Americas and Asia-Pacific as requiring greater scrutiny.

There are also some other models that the FATF may integrate into its processes. Such models exhibit the risk-based approach. For example, the IMF’s Financial Sector Assessment Program conducts peer reviews similar to the FATF’s, conducting more frequent assessments of 25 countries with systemically important financial sectors to reflect their significance to the global financial system. Similarly, the EU maintains a list of ‘high-risk third countries’, omitting the least developed countries unless they are specifically identified as posing a threat to the EU financial system or are designated as an offshore financial centre. The present FATF review procedure does prioritise grey-listed countries with significant financial sectors with $5 billion or more in financial assets, applying more demanding and frequent follow-up measures – but this approach does not apply during the initial evaluation.

This month, the most recent biennial ministerial-level meeting recognised that the existing approach has created an unfair race for low-capacity states. Ministers pledged to enhance risk-based criteria for identifying countries that pose a higher threat to the global financial system. While encouraging, this commitment needs to be translated into action before the next round of assessments. Strengthening the global network and enhancing the capacity of FSRBs is crucial. Particularly for the least developed countries, addressing their needs through financial and technical assistance should supersede punitive measures. These steps represent the primary way the watchdog can help Africa break free from this seemingly unbreakable cycle and focus more of its time on scrutinising the real ‘high risk’ countries that threaten global financial integrity.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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