The FATF grey list: An explainer

The list of countries issued by FATF following the plenary is further categorized into two: ‘high risk jurisdictions’ popularly known as the blacklist and ‘jurisdictions under increased monitoring’ popularly known as a grey list. The blacklist highlights countries that are uncooperative with FATF’s and by extension the global financial community’s efforts to fight ML/TF/PF risks. Owing to this non-cooperation, FATF advises that the international financial system applies either enhanced due diligence to the named countries, and in some extreme cases, counter measures such as de-risking by correspondent banks, targeted financial sanctions etc.  There are currently 3 countries on the FATF blacklist, Myanmar which is recommended for enhanced due diligence and Democratic People’s Republic of Korea and Iran, both of which are recommended for counter measures. 

The grey list, on the other hand, consists of countries with strategic deficiencies in their ability to counteract ML/FT/PF risks but who have made time-bound political commitments to address these deficiencies. FATF and the regional FATF-style bodies that support it, are then involved in undertaking monitoring to ensure that these gaps are closed. 

In assessing the state of a country’s Anti Money Laundering, Combatting Financing of Terrorism and Counter Proliferation Financing (AML/CFT/CPF) regime, FATF relies on regional affiliate bodies known as the FATF-Style Regional Bodies (FSRB) to undertake country assessments and produce what is known as a Mutual Evaluation Report (MER). The MER is therefore an analysis of a country’s policy, technical and operational AML/CFT/CPF framework against leading global practices and prevailing risks. 

Based on the grey list issued by FATF last week, it is noteworthy and concerning, that of the 7 countries under the East African Community (EAC), four (more than half) are currently on the FATF grey list and therefore subject to increased monitoring. These include Uganda, Tanzania, South Sudan and Democratic Republic of the Congo (DRC). 

While Uganda, Tanzania and DRC were noted as having made some steps to meet their political commitments to close these gaps, South Sudan has been noted as making little to no progress since June 2021 when these commitments were made, thereby posing the risk of slipping into the black list. 

So, what does it mean to be on the FATF grey list?

Being on the grey list is an indictment on a country’s ability to identify and effectively remediate ML/FT/PF risks. It therefore sends a message to the global financial system to exercise caution in dealings with the country. This raised risk profile has far-reaching economic implications including reduced attractiveness of the country as an investment destination for foreign direct investment, increased cost of doing business for entities domiciled in the country due to the enhanced due diligence applied by counter-parties, restrictions on cross-jurisdictional transactions particularly to/from countries that have stringent measures against grey listed countries, potential de-risking by correspondent banks and other key relationships, increased cost of public international debt from finance and development partners among others. 

In a sample of 89 emerging and developing countries grey listed between the years 2000 and 2017, a working paper published in 2021 by the International Monetary Fund (IMF) found that capital inflows on average declined by 7.6% of GDP, Foreign Direct Investment by 3% while other investments declined by 3.6% following a country’s grey listing. 

It is worth reflecting on what all this means for Kenya, which sits perilously amidst three grey listed countries, and who about a decade ago was in the same grey listing circumstance. Is the country a turned tide or a sitting duck for ML/TF/PF risks? 

The East and Southern Africa Anti- Money Laundering Group (ESAAMLG), the FSRB responsible for AML/CFT/CPF action in the Eastern and Southern Africa undertook a Mutual Evaluation process in Kenya in 2021, culminating in a Mutual Evaluation Report, issued in 2022. The MER identified a number of strategic deficiencies in Kenya’s AML/CFT/CPF framework, particularly in the financial services and non-profit sectors. As a result, it has been widely speculated that Kenya is a candidate for the grey list during the February 2024 plenary. 

To forestall this outcome, cross-industry regulators, law makers, law enforcement authorities and individual institutions have gone to work, initiating a flurry of activities aimed at remediating the gaps noted. These efforts have included the assenting of the AML/CFT (Amendment) Act, 2023 which made sweeping changes to key laws. The Central Bank of Kenya, Financial Reporting Centre and other regulators have also issued a number of new guidelines and stepped up their risk-based supervisory inspections.  

It remains to be seen whether these efforts will persuade the international watchdogs that Kenya has corrected course. Regardless of what happens in February 2024, however, these efforts must continue apace. As a country we have witnessed the devastating effects of money laundering and terrorism enough to know that managing these risks is not primarily about our standing in the international community, it’s about protecting the Nation. 

This is the first in a series of articles discussing FATF and its strategic initiatives and their implications in the Eastern Africa region.