Financial Crime Country Lists in a Fragmenting World Order

Naming and shaming countries that fail to meet the international community’s anti-financial crime standards is an increasingly popular pastime. The Financial Action Task Force (FATF, the global money-laundering and terrorist-financing watchdog) has long been a proponent and has recently been joined by the EU. The EU has now developed its own list of countries, that supplements that of the FATF, to protect the integrity of the EU financial system, alongside the EU’s existing list of countries it deems non-cooperative for tax purposes. NGOs such as Transparency International and the Tax Justice Network are keen on such lists too. Yet as the European Commission discovered in 2019 when its first list was rejected by member states, integrity, transparency and politics increasingly play a role in acceptance.

On the List

The scrutiny of the FATF’s lists has become a global preoccupation. Every four months, sections of the anti-financial crime community become consumed with speculation as the FATF considers changes to its list of jurisdictions whose failings warrant being ‘monitored’ or are classified as ‘high risk’. As the status of countries on these so-called ‘grey’ and ‘black’ lists is debated by policymakers behind closed doors, passions run high on the outside where supporters and detractors alike raise their voices in the press and on social media. Just consider the war of words between those backing Pakistan and India over the decisions made (and not made) by the FATF at its thrice-yearly plenary meetings; and pity current FATF president Marcus Pleyer in last week’s post-plenary press conference where fully half the questions he fielded from journalists reflected the patriotic fervour of India and Pakistan, the latter still firmly on the FATF’s grey-list despite much progress. As these passionate displays reveal, appearing on such lists is not merely a technical nuisance, it can have political ramifications.

The benefit of publicly highlighting those countries that are failing to meet these globally mandated standards for strengthening the integrity of the financial system has been fruitful, with some asserting the FATF has ‘become a dynamic contributor to peace and security’; others suggest these lists are being weaponised, particularly against countries that lack representation.

There is no doubt that in the case of the FATF, coercing an improvement in standards has strengthened the ability of countries to identify and respond to financial crime over the 30 years since the watchdog was created. Laws have been passed; new policymaking institutions and law enforcement agencies have been established; and financial institutions have responded to tighter regulation.

The Harder Test

Since 2012, alongside assessing compliance with its recommendations, the FATF has also considered how effectively countries are using these tools. This has proved to be a much harder test for countries to pass, with a number that had just escaped the clutches of the FATF’s technical grey-list returning there once their (lack of) effectiveness was assessed. Panama is a case in point. Released from the list in February 2016 (shortly before the Panama Papers story broke), the result of the 2018 evaluation of its effectiveness saw it returned to the list in June 2019.

But Panama is certainly not alone. As David Lewis, Executive Secretary of the FATF, has previously noted, the new laws and regulations introduced by countries, ‘are rarely being used effectively, or to the extent that we [the FATF] would expect’, observing that although some countries are heading in the right direction, there is still a long way to go.

Alongside the steps required by countries to respond to the failings identified by the FATF, political will is the critical ingredient needed ‘to bring about national legislative and regulatory reforms’. Leaders must be willing to promote the legislative changes demanded by the FATF; funds need to be made available to staff the required law enforcement response; and all these new tools need to be used to demonstrate effectiveness. This can be a politically unpopular move given only a fraction of those countries subject to the FATF’s standards have any say in their creation and thus bowing to its pressure can attract domestic opposition. But in most cases, the importance countries place on addressing their FATF shortcomings and avoiding further public shaming via relegation to the black list means that they strive hard to be promoted from the spotlight of FATF’s grey list back to obscurity. Countries such as Mongolia – promoted from the list this month – should be congratulated for their hard work and persistence, particularly in the face of the challenges posed by the global pandemic.

The Challenging Dossiers: Iran and Pakistan

But not all countries embrace the challenge to improve posed by the FATF. In recent years, much focus has been placed on Iran. Noted by the FATF as high-risk for many years, the country was offered some respite from the black list by the FATF membership in 2016, as part of the global rapprochement following the signing of the Iran nuclear deal. But, in February 2020, patience ran out with Iran’s failure to reform – primarily due to a lack of political will – and it was returned to the black list, cheered on by those that felt the relief offered to the country was never warranted.

Which brings us to Pakistan. Having been released from the FATF’s grey list in February 2015 due to ‘the significant progress made in addressing the strategic AML/CFT deficiencies earlier identified by the FATF’, in June 2018 the FATF had a change of heart and Pakistan was added back to the list as the result of a long list of fundamental failings. Following the most recent plenary last week, Pakistan remains on the grey list, although the FATF does note that 21 of the 27 areas of deficiency are now largely addressed. Yet this technical analysis tells only half the story, for although the FATF recognises that political commitment has been key to achieving progress thus far, those deficiencies that remain are primarily related to terrorist financing, a domain where the military, rather than the Imran Khan government, holds sway.

Furthermore, recognising the importance of securing the political support of FATF member countries (a group in which Pakistan itself is not represented), the country has reportedly hired lobbyists to engage with the Trump administration in its efforts to move off the list. Pushing hard in the opposite direction is India, itself a member of the FATF, that is quick to point out that Pakistan’s remaining shortcomings are primarily related to terrorist financing. In the end, Turkey was reportedly the only one of the FATF’s 39 members to back Pakistan’s removal – perhaps because following its FATF evaluation last year which identified ‘serious shortcomings’, it seems destined for the grey list itself.

In Pakistan, a war of words has been triggered by the FATF’s decision, with the opposition criticising the Khan government’s ‘slipshod’ work and ‘lack of homework’, and suggesting the FATF process is being used ‘as an excuse to pass draconian laws to target the opposition’. The FATF’s desire to remain a technical body has – once again – become highly politicised.

So where does this leave the future of such lists? What role does publicising failings play? It seems likely such lists are here to stay – evidence suggests that where political will exists, such lists provide the necessary impetus for change. Yet in a time where the sanctity of international norms and standards is being increasingly questioned and tested, and as countries and their supporters and detractors alike awaken to the impact of the use and abuse of these lists, those that champion their existence must ensure that their operation is transparent, defensible and absent of politics.

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