The Good, the Bad and the Ugly of FATF
FEATURED BLOG
The Good, the Bad and the Ugly of FATF
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By Gerald Kilimo
March, 2024
Money laundering (ML) and terrorist financing (TF) have long cast a shadow over the global financial landscape. The Financial Action Task Force (FATF), a global watchdog against ML and TF, actively develops and advocates for policies that protect the integrity of the international financial system. The FATF achieves this by persuading countries to implement its recommended strategies, which may mean policy reforms, as seen in Kenya’s recent implementation of new policies in key sectors. However, the FATF's approach has not been without controversy, as accusations of disproportionate targeting raise questions about the fairness and efficacy of the global financial system.
Kenya's response after being greylisted by the FATF in February 2024 highlights the FATF's role in driving policy reforms to combat ML and TF
Graylisting refers to the process of designating countries that have been identified as having strategic deficiencies in their anti-money laundering (AML) and counter-terrorism financing (CTF) systems. Such countries are then monitored closely to ensure they rectify identified AML and CTF deficiencies. It is estimated that up to 5% of global GDP, or approximately $2 trillion, is laundered annually. Like many countries, Kenya has faced significant repercussions due to shortcomings in its AML and CTF initiatives. For instance, Kenya's real estate sector is highly susceptible to ML due to high-value transactions that attract money launderers, a weak regulatory framework with fragmented oversight, a lack of AML awareness among industry players, and poor coordination between regulatory and law enforcement agencies. This could enable criminal exploitation, potentially leading to economic and reputational damage, and may attract international sanctions. Therefore, recognizing the seriousness of the issue and its potential consequences, Kenya is actively pursuing policy reforms in sectors identified as highly vulnerable by the FATF.
The FATF's listing of Kenya has been pivotal for the country's legal sector, which has historically shielded itself behind the veil of client confidentiality, often at the expense of transparency and accountability. This is set to change with the implementation of the Anti-Money Laundering and Combating of Terrorism Financing Bill 2023, which mandates that lawyers report any suspicious transactions to the Financial Reporting Centre (FRC), signaling a significant shift in the sector's approach to financial scrutiny. In the emerging cryptocurrency sector, Kenya leads with the highest volume and interest in the region, ranking among the top markets on the continent. However, the anonymity of this sector during cross-border transactions raises concerns about its potential exploitation for ML and TF. In response to the FATF listing and associated risks, Kenya is actively developing regulations to govern cryptocurrency trading and mitigate the threats associated with virtual assets from facilitating illegal activities. Likewise, Nigeria, Africa's largest economy - greylisted since February 2023 - is set to regulate the crypto sector, recognizing that unclear practices pose a serious threat to the stability of its financial system.
However, FATF listing has not been without controversy, with accusations of political influence and biased targeting.
According to a study, Pakistan's gray-listing (2008 - 2019) led to an estimated $38 billion GDP loss, with sharp declines in exports and FDI. In contrast, the diversified economy of the UAE demonstrated resilience during its gray-listing period, with Western investment activity achieving unprecedented levels. The expectation is that a country's capital inflows will drop by 7.6% of GDP after being gray-listed, as investor confidence wanes. Consequently, nations often strive to improve their regulatory frameworks to be delisted, thereby aiding the FATF's mission to fight ML and FT. However, UAE's case raises doubts about the uniform effectiveness of gray-listing, considering the diverse economic structures across countries.
Moreover, according to David Lewis, an ex-FATF’s Executive Secretary, the absence of a formal legal convention within the FATF allows full members, such as the US, UK, and Switzerland, to wield disproportionate influence over the nearly 200 associate member countries. For example, in February 2021, a U.N. panel found that FATF’s recommendations give more heft to its 39 full members when shaping global standards against illicit finance. This is attributed to their decision-making capacity, which shapes the agenda and sets expectations for global financial compliance. However, this dynamic excludes associate members, casting doubt on the legitimacy of the FATF's actions. Furthermore, despite the European Union's push for Switzerland’s greylisting in the wake of the 'Credit Suisse Papers' leak, it is often the developing countries—many of which are not full members of the FATF—that continue to face scrutiny.
Lastly, the independence of the FATF is under increasing scrutiny due to concerns that national governments are exerting pressure on the organization’s secretariat behind the scenes to serve their own interests. This situation compromises the FATF's autonomy, as governments attempt to place staff from their jurisdictions into key positions, circumventing the merit-based, open competition that should guide the appointments. Given the FATF's struggle to uphold internal election fairness, one might question its commitment to advocating for fairness in greylisting countries. This apparent hypocrisy casts doubt on its integrity.
The FATF has effectively established international standards and driven policy reforms, as evidenced by the progress made in Kenya regarding ML and TF. However, there is a pressing need to advocate for authentic reform within the organization and to ensure that the established standards are properly implemented.
Gerald Kilimo is an Analyst at Botho Emerging Markets Group