Three times a year, the Financial Action Task Force (FATF) identifies and documents countries with strong AML controls relating to the FATF 40 recommendations and those without. Those countries with sufficient cause for concern that they have insufficient controls but are committed to improving their controls are added to the FATF watch list, referred to as the Grey List. Countries that do not conform to the 40 FATF recommendations and are making no attempts to conform are added to the Black List, a list no country wants to be on. FATF’s objective is publicly to identify countries with weak AML/CFT regimes.

As of  February 2023,  FATF has reviewed 125 countries and jurisdictions and publicly identified 98 of them. To date, of those  98, 72 have since made the necessary reforms to address their AML/CFT weaknesses and have been removed from the process.

What are the implications of being grey-listed, the step right before total backlisting?  A country that is added to the FATF Grey List knows that that this identification has far-reaching ramifications both reputationally and financially.  Any country being considered as a new addition to the grey list will try desperately to ensure they’re not added. Showing up on a FATF Grey List can adversely impact investment into the country, overall growth, and it can affect the country’s currency—making goods and services more expensive.

Impact to Financial Institutions

To third parties outside a financial institution, risk heightens significantly dealing with a country on the grey list or any of its entities which may be operating within that country.  Any organization, especially in financial services, will conduct enhanced due diligence on grey-listed organizations. In the most extreme of cases, it can result in de-risking, which means that international financial institutions will completely exit a customer relationship.

This impact can be devastating for a country, especially if correspondent banking services are exited or heavily restricted. FATF does offer a remediation step by FATF to prevent a country from being promoted to b blacklisted. Which countries still remain at the top of the lists?

Currently there are three countries on the FATF Black List. These countries are the Democratic People’s Republic of Korea, Iran and Myanmar. After the 2023 FATF Plenary  held in Paris during February, two countries were removed from the Grey List (Cambodia and Morocco.) However, two new countries were added to the FATF Grey List: South Africa and Nigeria.

For those new countries making these short lists, what happens next?

South Africa – Showing Improvements

It wasn’t a surprise that South Africa was added to the Grey List. The result of their mutual evaluation was released in October 2021. It was identified that South Africa has a relatively high volume and intensity of crime, with more than half the reported crimes falling into categories which generate proceeds. The main crimes being corruption, tax crimes, and fraud, then followed by drug trafficking and environmental crime, including wildlife crime.

South Africa, in FATF’s latest assessment, was deemed largely compliant or compliant in 20 of the 40 FATF recommendations. By and large, South African  financial institutions (FIs) are doing a good job in understanding risks and taking appropriate action to manage and mitigate these risks. The FATF report does call out some of the smaller South African FIs not all having comprehensive and effective programs. There is mention of DNFBPs stating many have limited compliance functions and low SAR numbers.

So why was South Africa grey-listed, and what can they do to improve their rating?

There are eight focus areas on the FATF action plan where South Africa need to improve compliance. The first focus areas for South Africa is to improve its response to Mutual Legal Assistance (MLA) requests that help facilitate money laundering and terrorist financing investigations and confiscation of different types of assets.

It was also noted that South African needs to Improve risk-based supervision and the risk-based approach taken by some smaller FIs and Designated Non-Financial Businesses and Professions. It has been identified that some of these organizations are ticking a box rather than understanding and mitigating their organizations financial crime risk, as evidenced by the low numbers of SAR reports filed by some of these high-risk sectors.

Explained Adam McLaughlin, Global Head of Financial Crime Strategy & Marketing, AML, NICE Actimize, “Corporate transparency and accuracy is a glaring issue in South Africa. particularly in beneficial ownership information. Some institutions in the region need to substantially improve their mechanisms for ensuring that verified and up-to-date beneficial ownership information is available to competent authorities and consider having an authority responsible for this. South Africa also needs to apply sanctions for breaches by legal persons to beneficial ownership obligations.”

According to FATF analysts, South Africa Law Enforcement Agencies (LEAs) must also show an increase in requests for information from the Financial Intelligence Centre (FIC) to support and start new criminal investigations. The challenge identified by FATF is that the LEAs lack the required skills and resources to proactively investigate money laundering or terrorist financing, possibly, in part, because of the lack of intelligence due to limited interaction with the FIC.

Closely linked to law enforcement collaboration is that in South Africa, proactive identification and investigation of money laundering networks and professional enablers is not occurring says FATF. Most money laundering convictions are as a result of fraud offences rather than other high- risk money laundering offences or the crimes which generate criminal proceeds. ‘State capture’ is specifically called out as being insufficiently pursued. One of the action points is for South Africa to demonstrate an increase in investigations and prosecutions of serious and complex money laundering and terrorist financing offenses.

Following on from investigations, it was found by FATF that asset recovery is low, especially in the case of ‘state capture’. Therefore, the FATF action is for South Africa to enhance its identification, seizure, and confiscation of proceeds of crime. South Africa needs to update its terrorist financing risk assessment and implement a comprehensive national counter financing of terrorism strategy.

Finally, FATF expects South Africa to ensure effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.

In the original FATF report, there was repeated mention of “State Capture”, basically corruption. This sustained corruption had generated significant proceeds and undermined agencies that combat this activity. Though this was not called out extensively in the FATF action plan, South Africa is taking steps to address it. However, corruption is still a systemic problem in South Africa and needs to be addressed.

Nigeria and Terrorist Financing

A bigger surprise was the addition of Nigeria to the FATF Grey List. Nigeria was assessed and the mutual evaluation report was released in August 2021. In the report, Nigeria was found to be compliant or largely compliant in 26 of the 40 FATF recommendations. They were partially compliant in 11 of 40 recommendations, and non-compliant in 3 of the 40 recommendations,

Interestingly, where FATF states that Nigeria needs to improve in their AML and CTF measures is quite similar to improvements needed in South Africa. There are nine areas that FATF feels that Nigeria must address. Nigeria is required to complete its residual money laundering and terrorist financing risk assessment and update its national strategy to ensure alignment with other strategies relating to high-risk predicate offences.

It appears cooperation needs to be enhanced in African nations, as FATF’s action plan includes the requirement for Nigeria to enhance international cooperation in line with ML and TF risks, including timely responses to MLAs.

DNFBPs is another area which appears consistently in multiple, different jurisdictions. One of Nigeria’s action items is to improve AML and CFT risk-based supervision DNFBPs and enhance implementation of preventive measures for high-risk sectors. They also need to improve supervision of FIs.

Another area which appears to be a challenge around the globe is understanding Beneficial Ownership (BO). FATF requires Nigeria to improve access to BO information and ensure it is up to date. Nigeria has to put in place processes to ensure competent authorities have timely access to accurate and up-to-date BO information on legal persons, but also ensure appropriate application of sanctions for breaches of BO obligations.

Like South Africa, Nigeria needs to demonstrate an increase in the dissemination of financial intelligence by the FIU and facilitate appropriate use of this information by LEAs.

Notes McLaughlin, “Nigeria needs to increase its investigation and prosecutions of terrorist financing (TF) activity. This is especially prevalent where terrorist organizations such as Boko Haram and Islamic State are prevalent and active. Nigeria must demonstrate sustained increase in investigations and prosecutions of different types of activities and enhance interagency cooperation on TF investigations.”

The final action required of Nigeria is to conduct an assessment to understand the risk of Terrorist Financing, specifically with identifying and engaging with Not-for-Profit Organizations (NPOs) at risk. Nigeria also needs to implement risk-based monitoring for the NPOs at risk without adversely impacting legitimate NPO activities.

Nigeria and South Africa Improvements

There are several AML and CTF areas where both Nigeria and South Africa need to improve in order to convince FATF that they have comprehensive and effective controls to manage AML and CTF risks to help mitigate financial crime. What is interesting is that they share a number of improvement areas in the actions outlined by FATF. Both countries need to increase their cooperation  with third-party country law enforcement authorities, with the use of financial intelligence, and to increase and improve the effectiveness of their ML law enforcement investigations.

Observed McLaughlin, “Other areas where South Africa and Nigeria need to improve is increased BO transparency, access to BO information, and effective supervision of DNFBPs. Interestingly, these areas are areas of focus around the globe. There is a constant battle to increase corporate transparency, but also challenges in regulating and supervising DNFBPs, with recent blocking of the Enablers Act in the U.S. by the DNFBPs who would have ultimately been supervised as a result of the act.

The FATF findings show that there is more to be done globally by governments, government agencies, FIs and all other stakeholders to increase legislation, processes, controls, and cooperation. Additionally, working together to make it a hostile environment, globally, for criminals to operate, move, and clean their illicit wealth. The FATF findings show the importance of us all working together, sharing best practices, learning, and adapting to changing criminal threats.

Public and private partnerships are excellent examples of where collaboration has shown tangible results in helping to tackle financial crime: By sharing intelligence, knowledge, and experience to mitigate financial crime and identify criminals who are abusing the financial system.

Technology and Tackling These Issues

Technology can and should play a big part in any plan to tackle financial crime. There are a number of proven technologies that can help to break down barriers between agencies and FIs, facilitating information sharing in a controlled and compliant manner. If used correctly, this would help to resolve some of the action points around the sharing and use of intelligence. It’s vital to aid law enforcement in conducting targeted and effective financial crime investigations, help the FIC to gather relevant information, and ensure FIs fully understand today’s threats and take necessary steps to monitor and mitigate them.

Beyond this, information sharing could help with the challenges of BO transparency, providing collective intelligence on corporate structures. BOs would help to validate and verify this information, ensuring effectiveness against one of FATF’s action points. Technology can also aid in information gathering from structured and unstructured third-party sources.

Explains NICE Actimize’s McLaughlin, “Technology that learns, such as machine learning, will analyze data, looking at changes and decisions against historic data and data across peers to ensure continuous optimization. This will drive ongoing effectiveness for all relevant stakeholders who have an interest in monitoring and mitigating financial crime. It ensures changing and emerging trends and financial crime patterns are spotted early and action can be taken to manage and reduce the risk.”

Nigeria and South Africa will eventually be removed from the Grey List. When they do, they will be stronger and better equipped, across both the public and private sectors, to monitor, manage and fight financial crime.