In February 2024, the Financial Action Task Force (FATF) added Kenya and Namibia to its global list of countries with strategic deficiencies in combating money laundering, terrorism financing, and proliferation financing.
REGULATION | Kenya and Namibia Latest African Countries Added to Financial Action Task Force (FATF) Grey List
According to FATF, Kenya primarily faces risks associated with flows of money connected to terrorism financing from both domestic and international sources,… pic.twitter.com/zsHXN1vCCC
— BitKE (@BitcoinKE) February 26, 2024
The two became just the latest African countries, in a long list that captures several African countries, including:
Burkina Faso
Cameroon
Democratic Republic of Congo (DRC)
Mali
Mozambique
Nigeria
Senegal
South Africa
South Sudan
Tanzania
Uganda
Kenya
Namibia
The grey list, also referred to as the ‘Jurisdictions under Increased Monitoring,’ encompasses countries that are evaluated as having strategic deficiencies in their AML, CFT, and CPF regimes and are committed to addressing these deficiencies. FATF subjects countries in the grey list to increased monitoring.
The areas the aforementioned countries were found to have deficiencies in, in terms of government regulations, includes:
AML: Anti-money laundering (AML) is a set of regulations that prevent criminals from hiding illegally obtained funds as legitimate income
CFT: Combating the Financing of Terrorism (CFT) involves efforts to prevent individuals or groups from providing financial support or resources to terrorist organizations or activities
CPF: Combating Proliferation Financing (CPF) refers to the actions taken to prevent the financing of weapons of mass destruction (WMD) proliferation
But what exactly are the implications of this designation for the countries involved?
In this article, we take a look at the possible implications that the affected nations will be facing, including the impacts to the business and financial environments.
Implications of Grey-Listing
According to a report by PriceWaterhouseCoopers (PwC), grey-listing adversely impacts a country’s:
International reputation
Trade relations
Investment opportunities, and
Diplomatic ties
among others.
This has a snowball effect on a country’s ability to raise capital, attract aid, access international finance, engage in international trade, and sustain diplomatic relationships.
According to a 2021 International Monetary Fund (IMF) study, 89 of the emerging and developing countries grey-listed between 2000 and 2017 experienced a drop in capital flows equal to 7.6% of GDP. According to the study, financial institutions tend to adopt a risk-based approach which results in derisking and terminating relationships with customers from high-risk countries.
Additionally, investors consider grey-listing as a key factor when evaluating the risk of conducting business. This could result in the diversion and re-allocation of investor resources in a bid to minimize their risk exposure.
Practical Implications of Grey-Listing
According to PwC, financial institutions and businesses need to brace themselves for substantial shifts in the business environment characterized by regulatory changes, heightened scrutiny when conducting business, and increased emphasis on compliance, amongst other shifts.
What are the Implications of FATF Grey-Listing Kenya?
Grey-listing adversely impacts a country’s international reputation, trade relations, investment opportunities, diplomatic ties, among others. This has a snowball effect on a country’s ability to raise capital, attract… pic.twitter.com/18tYfXwp89
— BitKE (@BitcoinKE) February 27, 2024
For banks, insurance companies, and other financial entities, grey-listing heralds a period of heightened vigilance and regulatory scrutiny that involves:
Compliance requirements are expected to become more stringent
Enhanced AML, CFT, and CPF measures
There may be stricter due diligence measures for customer onboarding
Enhanced reporting obligations for suspicious transactions
Greater scrutiny of international transactions
Businesses outside the financial institutions also need to prepare for a challenging business environment. With uncertainties surrounding regulatory changes and potential reputational risks, investors, and business partners may approach the affected countries with caution, said PwC.
Additionally, heightened compliance costs and potential delays in financial processes may pose challenges, especially for businesses engaged in global trade and financial activities.
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