Nigeria and South Africa have been added to the Financial Action Task Force's so-called "grey list."
Although chastised for focusing on small, low-income economies outside the OECD club of rich countries, this group includes Africa's economic powerhouses, including a present G20 and FATF member, South Africa, and a prospective future member, Nigeria. The FATF, on the other hand, has been accused of racism, and this will do little to erase that notion.
Most countries, great and small, continue to defy effective action on dirty money. The number of countries on lists, as well as the number of lists themselves, is expanding, thanks to international organisations such as the FATF and the OECD, as well as jurisdictions such as the EU, US, and UK.
They cover dirty money more widely, from 'non-cooperative jurisdictions' for tax purposes to terrorism financing and WMD proliferation. Keeping track of and comprehending how and why countries are placed on these lists is becoming increasingly difficult.
Despite efforts to increase openness, it is difficult for corporations, as well as many experts, to grasp why some countries are on the lists while others are not, and what it all implies.
Only five of the more than 140 nations reviewed against the FATF Standards are substantially or entirely compliant with its 40 Guidelines, and even this is no guarantee of not being listed, as the recent listing of Malta and the continuous listing of the Cayman Islands demonstrate.
'It is critical for both countries to focus on, and invest in, effective methods to reclaim the proceeds of corruption and track the money fueling crime and terrorism.'
To avoid or be de-listed, governments must now demonstrate effective action backed up by outcomes. A single sophisticated money laundering case can take years, or in Nigeria's case with the Abacha inquiry, decades.
For countries like South Africa, which has been subjected to years of state capture, the ability to investigate and prosecute money laundering and corruption, as well as confiscate criminal proceeds, has been severely undermined and must be rebuilt.
Turning around a country's whole AML/CFT system is difficult and needs a long-term, sustained whole-of-government effort, international cooperation, and participation with the private sector. This is the task that South Africa and Nigeria are currently confronting.
Nigeria's inclusion comes on the eve of a crucial election in the country. The economy is the most important concern for many voters. Although being a prosperous and resource-rich country, inhabitants face frequent power shortages, the state is losing revenue from its oil and gas assets due to unlawful activities, the ongoing danger from the ISIL-affiliated terrorist group Boko Haram, livestock rustling, and a slew of other issues.
According to an IMF staff research on the impact of grey-listing, a drop in capital inflows of 7-8% of GDP is typical. Being listed raises the friction and costs of running business.
With a reduction in the number of correspondent banking relationships, it can lead to de-risking and even present financial stability problems. As a result, the timing is particularly difficult for Nigeria.
Both countries must focus on, and invest in, effective methods to recover the proceeds of corruption and track down the money fueling crime and terrorism. This includes ensuring the rule of law through the criminal justice system, as well as improved oversight and compliance by regulated sectors.
'South Africa and Nigeria both have a lot to do, covering a wide range of the 11 urgent outcomes for effectiveness and touching on many of the same issues.'
This will come as no surprise to any country, which the FATF statement acknowledges is making progress. They are currently attempting to meet the FATF's strict timelines. Failing to satisfy these deadlines can have even more serious consequences, as we recently saw with Myanmar's inclusion on the blacklist alongside Iran and North Korea.
South Africa and Nigeria both have a lot of work to do, encompassing a wide range of the 11 urgent outcomes for effectiveness and many of the same issues.
In the case of Nigeria, FATF recommends that the country improve its oversight of both financial institutions and non-financial sectors, which include lawyers, accountants, casinos, real estate agents, trust and company service providers, and precious metals and stones dealers, or DNFBPs in FATF jargon.
In contrast, the FATF has called for improved risk-based supervision of DNFBPs in South Africa. This represents the reality in most nations and is frequently ambiguous in the FATF evaluations for monitoring effectiveness (immediate result 3) and preventive actions (immediate outcome 4).
Currently, a single grade is assigned to financial and non-financial sectors, and in nearly every case, this results in a country receiving a rating of'moderately effectiveness,' implying that significant changes are required - essentially a fail. Yet, the financial sector's supervision and preventive measures are better and improving quicker than the non-financial sector's. As a result, the FATF will analyse these industries individually in the future.
Gatekeepers This should help to focus more attention on gatekeepers or professional enablers, and give financial institutions more credit.
While many in South Africa and Nigeria will be unhappy with their inclusion on the grey list, there is an obvious advantage. Countries that have successfully gone through the ringer and exited the list frequently have stronger defences than many of those that will almost certainly never be listed for one reason or another.
They will be better off as a result, with policies in place to encourage solid and sustainable economic growth, as well as to better safeguard their citizens from crime, corruption, and terrorism.
Stakeholders in both nations should seize this opportunity and capitalise on the increased political support it produces for more effective anti-dark money action.
By fLEXI tEAM