April 18, 2024. 3 countries – North Korea, Iran, and Myanmar. Black-Listed. 21 countries – Bulgaria, Burkina Faso, Cameroon, Croatia, DRC, Haiti, Jamaica, Kenya, Mali, Mozambique, Namibia, Nigeria, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Turkey, Uganda, Vietnam, and Yemen. Grey-Listed. The two lists are maintained by the Financial Action Task Force (FATF) and represent countries that either have weak measures to combat money laundering and terrorist financing (AML/CFT) or those that are actively working with the FATF to address these strategic deficiencies. FATF is a 39 member inter-governmental body established in 1989 and is the global money laundering and terrorist financing watchdog.
Additionally, the European Union (EU), as per its 4th Anti-Money Laundering Directive, identifies 27 high-risk third countries as having strategic deficiencies in their regime on anti-money laundering and countering the financing of terrorism that pose significant threats to the financial system of the Union – North Korea, Iran, Myanmar, Afghanistan, Barbados, Burkina Faso, Cameroon, DRC, Gibraltar, Haiti, Jamaica, Mali, Mozambique, Nigeria, Panama, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Trinidad & Tobago, Uganda, UAE, Vanuatu, Vietnam, and Yemen.
A third list, of non-cooperative jurisdictions for tax purposes, is also maintained by the EU, and includes the following 12 jurisdictions – American Samoa, Antigua and Barbuda, Anguilla, Fiji, Guam, Palau, Panama, Russia, Samoa, Trinidad and Tobago, US Virgin Islands, and Vanuatu. This EU list of non-cooperative tax jurisdictions, designed by the Organization for Economic Co-operation and Development (OECD’s) Global Forum on transparency and exchange of information for tax purposes, includes those that either have not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement the necessary reforms.
The implications of being listed by the FATF and the EU
According to the FATF, being Black-Listed or Grey-Listed signifies that the country is not effectively implementing measures to combat money laundering and terrorist financing according to the FATF standards including the management of an efficient, up-to-date, and accurate register of beneficial ownership.The impact of being on the FATF’s lists can be quite damaging to a country’s economy, stability, reputation, and society in general:
Impact on Financial System Stability: decreased confidence in a country’s financial system. This can result in capital flight as investors, both domestic and international, may withdraw their funds due to concerns about the integrity of the financial system. This can weaken the stability of banks and other financial institutions within the country.
Restricted Access to International Financial Markets: restrictions on a country’s access to international financial markets. Financial institutions in Black-Listed countries may face difficulties in conducting international transactions, such as wire transfers and currency exchanges. This can hinder trade and investment activities, leading to economic stagnation.
Increased Compliance Costs: To adhere to FATF standards and regulations, countries may need to implement costly reforms and compliance measures within their financial systems. This can include strengthening anti-money laundering and combating the financing of terrorism (AML and CFT) regulations, enhancing regulatory oversight, and improving law enforcement capabilities. These measures can impose significant financial burdens on governments and financial institutions.
Negative Impact on Foreign Direct Investment (FDI): deter foreign investors from investing in the country due to concerns about the risks associated with operating in an environment with weak AML/CFT controls. This can lead to a decline in foreign direct investment, which is crucial for economic growth and development.
Damage to Reputation and Business Environment: damage a country’s reputation as a reliable and trustworthy financial jurisdiction. This can deter foreign businesses from establishing operations in the country and discourage international trade partnerships. Moreover, it can erode confidence among domestic businesses and consumers, further undermining economic activity.
Risk of Sanctions and Isolation: In extreme cases, being Black Listed by the FATF can result in the imposition of international sanctions by other countries or international organizations. These sanctions can further isolate the country from the global financial system and have severe economic consequences, including restrictions on trade, investment, and financial transactions. Being Black-Listed or Grey-Listed by the FATF can also have profound social implications, including increased poverty and inequality, reduced access to financial services, negative impacts on education and healthcare, heightened social stigma and discrimination, brain drain, and political instability. It is essential for governments to address deficiencies in their financial systems promptly and implement measures to mitigate the social consequences of FATF listings, focusing on inclusive growth, social protection, and community resilience.
Removal from FATF and EU lists
To be removed from FATF monitoring, a jurisdiction must comprehensively address its action plan. Once the FATF confirms this, it will conduct an on-site assessment to ensure reforms are being implemented and there’s sufficient commitment and capacity. A favorable assessment leads to removal from public identification at the next FATF plenary. The jurisdiction remains engaged in the FATF or relevant regional FATF bodies follow-up process to enhance its AML/CFT regime. In February 2024, four countries were removed from the FATF lists – Barbados, Gibraltar, UAE and Uganda. The EU will occasionally adopt delegated acts regarding high-risk third countries, as it did in December 2023, when it concluded that the Cayman Islands and Jordan no longer have strategic deficiencies in their AML/CFT regimes and therefore removed from its list. In February 2024, four additional countries were removed from the EU’s list of non-cooperative jurisdictions for tax purposes – Bahamas, Belize, Seychelles, and Turks and Caicos.
Removal from FATF and EU lists
Combating money laundering and terrorist financing is a top priority for the FATF and the EU. Money laundering and terrorist financing is often facilitated in part by the use of shell corporations for the purpose of obscuring their true ownership. The relationship between beneficial ownership, especially that of shell companies, and money laundering, terrorist financing, and sanctions, is a complex, multifaceted issue that poses significant risks to global security, and challenges its financial integrity. Addressing these challenges requires a comprehensive approach that combines policy reform, technological innovation, and international cooperation.
A significant piece of this puzzle lies with countries maintaining accurate, up-to-date records of beneficial ownership. These records serve as a foundation to combat illegal activities. Reliable data about company owners empowers authorities to uncover hidden connections, identify potential money laundering and terrorist financing activities, and enforce sanctions more effectively. These records reinforce regulatory oversight, safeguarding the financial system from abuse and limiting access to funds to those countries that support and orchestrate terrorism.
The EU Council and Parliament have recently found a provisional agreement on parts of the anti-money laundering package that aims to protect EU citizens and the EU’s financial system against money laundering and terrorist financing. With the new package, all rules applying to the private sector will be transferred to a new regulation, while the directive will deal with the organization of institutional AML/CFT systems at national level in the member states. The ultimate goal is to harmonize rules throughout the EU and improve the organization of national anti-money laundering systems.
The UK Parliament has also taken steps to ensure that inhabited Overseas Territories implement publicly accessible registers of beneficial ownership as an essential tool in the fight against illicit finance and corruption. The looming deadline for implementation of the registers is set during 2024 or the beginning of 2025.
Beneficial ownership and its links to money laundering and terrorist financing
Combating money laundering and terrorist financing is a top priority for the FATF and the EU. Money laundering and terrorist financing is often facilitated in part by the use of shell corporations for the purpose of obscuring their true ownership. The relationship between beneficial ownership, especially that of shell companies, and money laundering, terrorist financing, and sanctions, is a complex, multifaceted issue that poses significant risks to global security, and challenges its financial integrity. Addressing these challenges requires a comprehensive approach that combines policy reform, technological innovation, and international cooperation.
A significant piece of this puzzle lies with countries maintaining accurate, up-to-date records of beneficial ownership. These records serve as a foundation to combat illegal activities. Reliable data about company owners empowers authorities to uncover hidden connections, identify potential money laundering and terrorist financing activities, and enforce sanctions more effectively. These records reinforce regulatory oversight, safeguarding the financial system from abuse and limiting access to funds to those countries that support and orchestrate terrorism.
The EU Council and Parliament have recently found a provisional agreement on parts of the anti-money laundering package that aims to protect EU citizens and the EU’s financial system against money laundering and terrorist financing. With the new package, all rules applying to the private sector will be transferred to a new regulation, while the directive will deal with the organization of institutional AML/CFT systems at national level in the member states. The ultimate goal is to harmonize rules throughout the EU and improve the organization of national anti-money laundering systems.
The UK Parliament has also taken steps to ensure that inhabited Overseas Territories implement publicly accessible registers of beneficial ownership as an essential tool in the fight against illicit finance and corruption. The looming deadline for implementation of the registers is set during 2024 or the beginning of 2025.
Combating the abuse of financial systems via Beneficial Ownership registries
EU based NRD Companies, a global IT and consulting firm specializing in Govtech and digital transformation in the public sector, offers several practical recommendations for countries to effectively combat the consequences of a lacking beneficial ownership regime or those that do not meet international standards, include the following:
Having in place a defined legal framework
- The legal framework should explicitly define beneficial ownership, ensuring adherence to FATF Recommendations. A clear methodology for identification must be established, providing a solid foundation for subsequent regulatory measures.
- To ensure thorough coverage, the legal framework should encompass all relevant entities, leaving no room for potential loopholes. This inclusivity is critical for a holistic approach to combating illicit financial activities.
- Establishing robust record-keeping obligations is imperative. The legal framework should mandate entities to maintain accurate and up-to-date beneficial ownership records, contributing to transparency and accountability.
- A legal framework must include provisions for sanctions in cases of failure to comply with beneficial ownership obligations
Establishing a Central Beneficial Ownership (BO) Register
- The central register can facilitate improved data quality and supervision of beneficial ownership obligations. It should be mandated to collect and record essential BO information and independently verify it through document checks and cross-referencing with national databases.
- The central register should have a mandate and enforcement powers to supervise entities’ beneficial ownership obligations effectively and regularly (including for inactive entities), with sanctions applied in case of failure to file accurate and up-to-date information. Registers should possess the authority to request additional documents and enforce penalties for non-compliance.
- Law enforcement authorities benefit from real-time access to comprehensive beneficial ownership information. Conditional access may extend to AML/CFT obligated entities and individuals with legitimate interest, enhancing regulatory efficiency.
International cooperation
- Money laundering and the financing of terrorism have long transcended national borders, necessitating the involvement of the international community in combating these threats. Therefore, international collaboration is indispensable for effective action. Additionally, there is a crucial need to exchange data between countries to enhance the collective ability to identify and address these illicit activities.
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