Just recently, the Financial Action Task Force (FATF) updated its two public publications, which are together known as "High-risk and Other Monitored Jurisdictions."
Following the FATF's triannual meetings, the first list, "Jurisdictions under Increased Monitoring," sometimes known as the "Grey List," is frequently amended. On this occasion, three nations were added to the Grey List: Tanzania, Mozambique, and the Democratic Republic of the Congo, while Pakistan and Nicaragua both left the list.
A country is placed on the Grey List when it has made a serious commitment to work with the FATF to remedy the most serious strategic flaws discovered through the mutual review process. This commitment is closely related to the FATF International Cooperation Review Group (ICRG) procedure.
The "High-Risk Jurisdictions subject to a Call for Action" list, commonly referred to as the "Black List," is less of a revolving door and is saved for jurisdictions with major unaddressed strategic weaknesses in their AML/CFT/CPF regimes.
Myanmar and Iran serve as examples of how the labels "Black List" and "Grey List" may be somewhat misleading and how nations on either list should not be generalized. Not all nations on the Black List must adhere to the same standards.
In the most egregious situations, the FATF mandates that countries impose countermeasures on countries on the blacklist commensurate to the risks posed by the targeted jurisdictions. This is consistent with FATF Criterion 19.2(a), making this condition virtually mandatory[iv].
Both the Democratic People's Republic of Korea (DPRK) and the Islamic Republic of Iran (Iran) are the targets of such a demand for countermeasures and have long been the sole countries on the black list.
However, as a starting point, the FATF urges all countries to use enhanced due diligence (EDD) in proportion to the risks, for all business dealings and transactions with natural and legal persons (including financial institutions) in FATF's blacklisted countries. In contrast to Iran and the DPRK, Myanmar has now been included to the Black List and is subject to the demand for EDD, but not a request for countermeasures.
Such EDD is required by FATF Criterion 19.1, which is another stage on the ICRG continuum for countries who do not finish their action plans as agreed upon with the FATF. The action plan for Myanmar ran out in September 2021 without making any significant advancements.
By October 2022, little more progress had been achieved, and the FATF had heeded its June 2022 warning to Myanmar that it would request EDD if significant action had not been reported at the most recent FATF plenary. Therefore, financial institutions and other obligated parties should anticipate their national authorities issuing guidelines soon mandating the application of such EDD to commercial connections and transactions involving Myanmar.
If Myanmar does not make any more strides, the FATF may escalate the situation and call for countermeasures, like they did with Iran. After spending several years on the "Black List," Iran committed to an action plan in June 2016 that would resolve its strategic shortcomings, and the FATF halted its request for countermeasures.
However, the Iran action plan was still unfinished when it ran out in January 2018. As a result, the FATF proposed specific countermeasures beyond EDD in October 2019 even if it did not call for the entire reapplication of countermeasures. These included heightened appropriate reporting procedures or systematic reporting of financial transactions, as well as increased supervisory exams and external audit requirements for branches and subsidiaries in Iran. However, by February 2020, FATF's tolerance had run its course, and the demand for actions against Iran was once again made.
Myanmar and Iran serve as examples of how the labels "Black List" and "Grey List" may be somewhat misleading and how countries on either list should not be generalized. Under FATF Recommendation 19, not all countries on the Black List are subject to the same standards.
In 2016, FATF loosened its actions against Iran in an effort to spur further improvement in the country's inadequacies; their gradual reinstatement was meant as a proportionate reaction to Iran's sluggish improvement. Similar to how Iran and the DPRK were not subject to the same nuclear option as Myanmar, even if obligatory EDD is an improvement than countries being put on the Grey List.
The international community must adopt a coordinated strategy for both taking defensive action and acknowledging success in order for underdeveloped countries to make positive changes.
Reiterating that the Grey List itself is not a FATF demand for any kind of countermeasures or even EDD is important. While the ICRG process has useful components that help countries advance, the Grey List itself has come under fire from a number of quarters for doing more harm than good in terms of de-risking, pushing people into unregulated industries, and ultimately endangering the international financial system.
It is also critical to remember that EDD does not qualify as a countermeasure under the FATF system[x], which has a higher threshold response. Therefore, while if mandatory EDD may be seen a "darker shade of grey," it could be more helpful to think of it as "lighter shades of black," together with the gradual deployment of specialized countermeasures (as was the case with Iran in 2019).
The FATF can constantly escalate countries from enhanced follow-up or the ICRG pool to the Grey List, to EDD, and finally to full countermeasures. However, both Myanmar and Iran serve as warning lessons for all countries in the FATF global community. Falling into any of these categories, whether they are on the Black List, Grey List, or anywhere in between, can seriously impair a country's financial system and economy.
By fLEXI tEAM