Tag: Financial Investment for Beginners

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… Continue reading Navigating Out of the Financial Action Task Force’s Grey-listing: Lessons for Nigeria