The impact of the Financial Action Task Force's greylisting on financial systems and trade of emerging economies

Abstract

The Financial Action Task Force (FATF) has become the lead driving force in the combat of Money Laundering and Terror Financing (AML/TF) through their 40 recommendations that member states have to comply with. This compliance is sought through the development of effective Anti-Money Laundering and Counter Terror Financing (AML/CTF) frameworks that must be implemented by the member states and all states with which they conduct trade, despite the inequality of the financial impact such implementation may have on each state when failure results in greylisting. Greylisting alerts the other states to the ineffectiveness of the AML/CRF frameworks of the state in question, and this affects the manner in which the greylisted state trades. The grey list was developed by the FATF in order to assess the states in accordance to their compliance with the 40 recommendations and to publicly list them in the event of failure to implement effective AML/CTF frameworks which, in an increasingly global financial market, would mean the possible compromise of said global financial market. The FATF is able to enforce the 40 recommendations and coerce states to be compliant due to the fact that they are backed by international institutions such as the International Monetary Fund (IMF) as well as the World Bank (WB), in addition financial institutions of states such as the United States of America, United Kingdom and the European Union require adherence to the 40 recommendations in order to interact with the states applying for a loan or aid.1 Greylisted states in the global south are disproportionately represented on the grey list and most are in need of the foreign aid, investment, loans and trade from the abovementioned states. The additional scrutiny which must be applied when conducting trade with the greylisted states raises a deterrent to those wishing to trade with the greylisted state and has been shown to affect the cash inflow and GDP of the grey listed state. FATF March 2022 https://www.fatf-gafi.org/en/publications/high-risk-and-other-monitoredjurisdictions/documents/increased-monitoring-march-2022.html. Due to the disproportionate representation of states with emerging economies on the greylist, 60% of which states are located in Africa, a continent plagued by its own historical inequities, raises the question whether the 40 recommendations warrants a blanket approach and whether the penalty, being greylisted, considering the investment required to formulate and establish AML/CTF frameworks, is justified. The discussion examines states considered successful and those who have repeatedly failed to comply - as evidenced by their repeated appearance on the grey list - furthermore, how they can develop the AML/CTF frameworks with assistance from the FATF and others considered less vulnerable to the abuse of ML/TF by the FATF.