The financial and professional services sector, encompassing banking, insurance, capital markets, asset management, pensions, non-interest finance, FinTech, legal, and sustainable finance services, is a cornerstone of economic growth. While this sector facilitates legitimate financial transactions, and supports economic productivity of the wider economy, it can also be exploited for activities detrimental to the economy, such as money laundering (ML), terrorist financing (TF), and proliferation financing (PF). These illicit activities pose risks not only to local economies but also to global financial stability. To mitigate such risks, international bodies like the Financial Action Task Force (FATF)—formed by the G7 in 1987—establish standards and monitor compliance to safeguard the financial ecosystem. FATF’s lists of jurisdictions under increased monitoring (Grey list) or high-risk jurisdictions (Black list) identify countries with strategic deficiencies in combating financial crimes. As of October 2024, three countries/jurisdictions were in the Black list and 24 countries/jurisdictions in the Grey list, including a quarter (14) of countries in Africa, namely Algeria, Angola, Burkina Faso, Cameroon, Cote d’Ivoire, Democratic Republic of Congo, Kenya, Mali, Mozambique, Namibia, Nigeria, South Africa, South Sudan and Tanzania.
Being on the FATF’s Grey list could have many significant negative implications, particularly for the two larger economies in Sub-Sahara Africa, Nigeria and South Africa, which were recently added to the list, in October 2023. Grey-listing implies a high-risk profile and projects a poor image to the rest of the world, thereby reducing the ability of the grey-listed country to effectively engage in financial and economic exchanges and possible partnerships and collaboration. Significant negative economic subsequence of grey-listing include:
Reduction in Cross-border Transactions and Investment Inflows:
Cross-border payments to grey-listed countries could decrease significantly due to increased scrutiny by international financial institutions. An analysis of financial institutions’ exchange data from the SWIFT Institute indicates a 10% reduction in cross-border payments in countries/jurisdictions under increased monitoring (i.e. grey-listed) – (Collin, Cook & Soramaki, ‘The Impact of Anti-Money Laundering Regulation on Payment Flows: Evidence from SWIFT Data’, (November 28, 2024), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2893790).
Grey-listing also reduces financial resources allocated to grey-listed countries by international market actors. The liabilities (investments from international business actors) of financial institutions in the grey-listed nations reduced to as low as 15% – 16% – (Julia Morse, ‘Blacklists, Market Enforcement, and the Global Regime to Combat Terrorist Financing’, (November 28, 2024), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3348622 ). When the Philippines was listed in 2010, its average cross-border liabilities per quarter were $11.5 billion. By 2012 its liabilities had reduced to $8.7 billion and rebounded to pre-listing level by 2014; the country was removed from the list in June 2013. A study estimated that grey-listing could reduce capital inflows by as much as 7.6 percent of GDP annually. In the period when Botswana was listed (2018 – 2021) – (Kida & Paetzold, ‘The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning’, (November 28, 2024), available at https://www.imf.org/en/Publications/WP/Issues/2021/05/27/The-Impact-of-Gray-Listing-on-Capital-Flows-An-Analysis-Using-Machine-Learning-50289), FDI in the diamond sector plummeted and transactions by asset managers with offshore portfolio pension funds became limited – (KPMG South Africa, ‘The Financial Action Taskforce Grey Listing is possible… are you prepared for it?’, (November 29, 2024), available at https://assets.kpmg.com/content/dam/kpmg/za/pdf/2022/the-financial-action-task-force-10.pdf ). When Mauritius was grey-listed in 2020, the Reserve Bank of India halted licenses applications of non-banking financial companies (NBFC) affiliated with Mauritius-based venture capital and private equity funds – (Digbijay Mishra, ‘RBI blocks NBFC plans of Mauritius funded startups’, (November 29, 2024), available at https://timesofindia.indiatimes.com/business/india-business/rbi-blocks-nbfc-plans-of-mauritius-funded-startups/articleshow/77360368.cms).
Reduced Development Assistance and High Borrowing Cost:
Grey-listing creates perceptions of weak institutional frameworks, discouraging development partners and donor agencies from providing aid. It could also raise risk assessment costs for a disbursement. The International Monetary Fund (IMF) required Pakistan to be removed from the FATF’s Grey list as part of the conditions for a $6 billion bailout programme in 2018 – (Caitlin Maslen, ‘The Impact of Grey-listing by the Financial Action Task Force (FATF)’, (November 28, 2024), available at https://www.u4.no/publications/the-impact-of-grey-listing-by-the-financial-action-task-force-fatf.pdf).
Decline in Economic Growth:
The combined impact of reduced investments, exports, and remittances diminishes overall economic performance. Between 2008 and 2019, the periods Pakistan was grey-listed – (Pakistan was grey listed 2008, 2012 and 2018), it recorded an accumulated gross domestic product (GDP) loss, approximately $38 billion, alongside declines in FDI and exports to $3.6 billion and $4.5 billion, respectively – (Naafey Sardar, ‘Bearing the Cost of Global Politics: The Impact of FATF Grey-Listing on Pakistan’s Economy’, (November 28, 2024), available at https://www.tabadlab.com/wp-content/uploads/2021/02/Tabadlab-Working-Paper-07-Bearing-the-Cost-of-Global-Politics.pdf).
Loss of Correspondent Banking Relationships:
FATF’s grey-listing could cause exclusion of local banks from the international banking system and loss of correspondent banking relationships. As of 2022, when Zimbabwe exited FATF’s Grey list, the Zimbabwean banks had lost at least 100 correspondent banking relationships and were challenged to establish new partnerships with any international banks – (Mhlanga & Nyamuziwa, ‘Non-compliance led to loss of correspondent banking deals’, (November 28, 2024), available at https://www.newsday.co.zw/business/article/200017815/non-compliance-led-to-loss-of-correspondent-banking-deals).
Nigeria being grey-listed could increase scrutiny and due diligence costs for international businesses, adding more pressure to heightened business operations costs – (S&P Global, ‘Nigerian Banking Outlook 2024’, (December 11, 2024), available at https://www.spglobal.com/_assets/documents/ratings/research/101592100.pdf). According to the National Bureau of Statistics, FDI decreased by 33% and 19% in 2022 and 2023, respectively. The country recorded a decrease in annual non-oil exports by more than $300 million in 2023 – (Kelvin Okojie, ‘Nigeria’s Non-oil Exports Drop to $4.5 billion in 2023, Says NEPC’, (December 11, 2024), available at https://businessday.ng/news/article/nigerias-non-oil-exports-drops-to-4-5bn-in-2023-says-nepc/). There is a likelihood that these were influenced by the country’s grey-listing status. While Grey-listing presents challenges, it can also catalyse reforms. Strengthening AML/CFT systems can improve transparency, governance, and global confidence, attracting investments in the long term. For example, Mauritius, after being grey-listed in 2020, leveraged the opportunity to enhance its financial systems and emerged stronger within 18 months.
What lessons can Nigeria and other African countries learn from Mauritius, to navigate out of the FATF’s grey-listing and minimize its impacts? Leaning on Mauritius’s exist strategy, there are six focus areas that any country can prioritise for impact:
Political Commitment:
A unified, high-level commitment led by the Prime Minister drove swift reforms. Strong political will facilitated the development and implementation of an exit strategy aligned with FATF recommendations.
Legal and Institutional Framework:
Mauritius established a comprehensive regulatory framework by reviewing its AML/CFT framework legislation, enacted the United Nations Sanction Act 2019, and established an AML/CFT task force. Supervisory frameworks ensured compliance across financial institutions, Designated Non-Financial Businesses and Professions (DNFBPs), and Non-profit organisations. Different AML/CFT supervisory authorities created a separate AML/CFT supervision unit to enhance supervision. Vulnerable sectors like gambling, banking, securities, jewellery and real estate were prioritised.
Effective Coordination Mechanisms:
Mauritius exhibited an effective coordination between regulatory authorities and private sector stakeholders. The coordination enhanced AML/CFT policy formulation and supervision among regulators, while ensuring implementation by the private sector stakeholders. To address the FATF’s recommendations, the country set up a National AML/CTF Committee and eleven (11) sub-committees, including a coordination and cooperation committee for operational-level proliferation financing; National Sanctions Committee, and Statistics Committee. Others include Technical Subcommittee on Supervision, Technical Subcommittee on Coordination and Technical Subcommittee on Legal and Regulatory Requirements, Training and Awareness-raising.
Consolidated Human Resources and Training:
Public and private stakeholders, including regulators, law enforcement agencies embraced training and capacity building development programmes, enhancing their ability to implement and monitor AML/CFT measures.
Technical Assistance and Support:
Through regional and international cooperation, Mauritius sought technical assistance and support from the United Nation Office on Drugs and Crime (UNODC), EU Global facility on AML/CFT, the German Development Agency (GIZ), UK, France, World Bank and IMF. It also worked very closely with the FATF regional body – the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).
Data tracking and Communication:
The regulatory authorities established a mechanism to collect and manage AML/CFT data to continuously assess and improve AML/CFT measure performance. A dedicated statistics committee managed AML/CFT data, enabling continuous performance assessment and improvement.
Nigeria is making efforts to get off the FATF’s Grey list by May 2025 deadline. The country is committed to an action plan to strengthen its anti-money laundering and counter-terrorist financing frameworks. As of June 2024, the FATF plenary acknowledged and approved a 30% completion of the action – (Oluwakemi Abimbola, ‘After 20 Months, Nigeria Struggling to Exit FATF Grey List’, (December 11, 2024), available at https://punchng.com/after-20-months-nigeria-struggling-to-exit-faft-grey-list/?utm_source=chatgpt.com). The Economic and Financial Crimes Commission (EFCC) and the Nigerian Financial Intelligence Unit (NFIU) have intensified efforts to enhance compliance and enforcement. In March 2024, both agencies mapped out fresh strategies aimed at facilitating Nigeria’s exit from the grey list – (Economic and Financial Crimes Commission (EFCC), ‘FATF Grey List: EFCC, NFIU Step Up Exist Plan’, (December 11, 2024), available at https://www.efcc.gov.ng/efcc/news-and-information/news-release/9919-fatf-grey-list-efcc-nfiu-step-up-exit-plan?utm_source=chatgpt.com). The Central Bank of Nigeria (CBN) has been proactive in addressing regulatory deficiencies. The Bank mandated credit restrictions on three tier accounts and wallets without Bank Verification Numbers and/or National Identity Numbers. In September 2024, an inter-agency team from security agencies such as Nigerian Financial Intelligence Unit (NFIU) and EFCC, and the financial and business sector including CBN and Securities and Exchange Commission met with the FATF’s International Cooperation Review Group in Brussels to provide updates on progress on the action plan – (Nduka Chiejina, ‘Grey-list: Nigeria Concludes 30% of FATF Action Plan Items’, (December 11, 2024), available at https://thenationonlineng.net/grey-list-nigeria-concludes-30-of-fatf-action-plan-items/?utm_source=chatgpt.com).
Nigeria can emulate Mauritius to fast-track process by prioritizing strong political will, establishing a robust regulatory framework, fostering coordination among stakeholders, and leveraging international partnerships. By implementing FATF’s recommendations and focusing on systemic reforms, Nigeria can minimize the economic fallout of grey-listing and restore global confidence in its financial ecosystem. The journey out of grey-listing is both challenging and transformative, but with decisive action, Nigeria can emerge stronger and more resilient in its quest to become a leading financial hub in Africa.