Including Lebanon on FATF’s Grey list: what to expect?
Introduction
This year marks the 24th anniversary of the Financial Action Task Force’s (FATF) statement of Jurisdictions Under Increased Monitoring. This statement identifies countries or jurisdictions with serious strategic deficiencies in countering money laundering, terrorist financing, and proliferation financing. While the FATF insists that inclusion on this list is not punitive, its more common nickname, “the grey list,” suggests otherwise. For developed economies, avoiding this label is crucial to maintaining their international reputation. Listed countries often allocate considerable resources to swiftly address deficiencies and exit the grey list.
The FATF, whose presidency rotates between member states every two years, recently convened in Singapore for its second annual plenary session. Decisions were made regarding countries to be placed on the grey list (technically called “Jurisdictions under Increased Monitoring”) and those on the blacklist (technically called “High-Risk Jurisdictions subject to a Call for Action”). The next FATF meeting is scheduled in Paris in late October of this year.
For lower-middle-income economies like Lebanon, avoiding this listing is of great importance, but things are more nuanced in comparison to developed economies. We briefly examine below these nuances through some questions related to the macroeconomic impact, and fairness of the listing process, especially given the increasing sophistication of the banks’ compliance functions.
Defining FATF’s “Grey List”
The FATF, established in 1989 by the G7, initially focused on combating money laundering. After the 9/11 attacks in the US, its mandate expanded to include terrorist financing. Over the years, its standards evolved to cover various aspects, including advances in money laundering techniques, weapons of mass destruction financing, asset recovery, beneficial ownership disclosure, and virtual assets.
Introduced in 2000, the grey list comprises countries with deficiencies in their anti-money laundering and counter-financing of terrorism (AML/CFT) regimes. These countries have also made political commitments to address these deficiencies. The black list, on the other hand, includes countries not actively cooperating with the FATF. Both lists are updated tri-annually during FATF’s plenary meetings. Inclusion on the grey list is not considered a punitive action; rather, it is conceived as a stimulus that helps countries identify gaps and collaborate with the FATF to create action plans. Successful implementation of these plans allows countries to exit the grey list and restore confidence in their financial systems.
Fairness of the listing process
Criticism of the FATF’s grey list decisions has persisted over the years. While Panama celebrated its exit from the list last year, its President argued that his country had been treated unfairly. He pointed out that Panama housed only 0.27% of the world’s offshore companies, questioning why the FATF didn’t scrutinize the remaining 99%. Additionally, the mutual evaluation process might sometimes be based on the assessment of teams unfamiliar with the region or jurisdiction under assessment, raising concerns about consistency.
Debates continue about whether the FATF should evaluate a country’s banking system separately from the nation as a whole. While assessors consider specific risks and contexts, achieving accurate assessments remains crucial since the quality of these assessments determines precise recommendations for enhancing control systems.
Potential economic consequences
Greylisting has tangible effects on a country’s economy and financial system. It can restrict cross-border transactions, hinder credit access, and limit foreign investment. An IMF study in 2021 revealed significant impacts on GDP, FDI inflows, portfolio inflows, and other investment inflows. However, given the current variety of economies on the list, common markers of economic impact are virtually impossible to accurately determine. Therefore, the real impact of greylisting – on its own – on individual jurisdictions is hard to pin down.
The UAE for example, despite being greylisted from March 2022 to February 2024, thrived economically due to higher energy prices and steady foreign direct investments. Lebanon, however, now facing potential greylisting, must prepare to mitigate economic consequences.
Impact on the banking sector
Higher due diligence requirements for counterparties in greylisted countries increase costs and time commitments for correspondent banks. De-risking – terminating certain relationships – becomes common. Panama and Malta offer insights: Panama maintained correspondent banking links, while Malta faced challenges due to reputational issues.
Lebanese banks, once considered pionners in fighting international financial crime, must brace for potential de-risking consequences. Also, upgrading the Lebanese legal and regulatory frameworks will be crucial for exiting the grey list.
Looking ahead
FATF initiatives have improved the fight against financial crime. Now, the focus shifts to effective implementation. Laws must translate into positive outcomes. Governments must assess their efforts to know what works and what doesn’t.
Lebanon’s potential greylisting will require a national multiparty strategic action. While uncomfortable, a potential greylisting will underscore the need for more robust AML/CFT measures and further global collaboration with the international community.
