There is significant interest in the Australian AML Tranche 2 updates, the delays, the politicking and, in the end, the impact of regulatory compliance, but why? Why go to all this effort, why now and what if we don’t? In this article I’d like to explain one of the technical impacts, being Greylisted. However, we shouldn’t lose sight of the real answer to my question: we are doing the Tranche 2 reforms because it is the right thing to do.
The Financial Action Task Force (FATF) is the global watchdog for money laundering and terrorist financing. They set international standards that countries should follow to prevent these illegal activities.
The grey list is a tool used by the FATF to identify countries that have significant deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CTF) regimes but are actively working to address them. Being added to the grey list signals a need for increased regulatory scrutiny and corrective measures. This status can have profound financial and economic impacts on the listed countries, influencing their international standing and financial stability.
In Australia, the upcoming AML Tranche 2 changes are poised to significantly strengthen the country’s AML/CTF framework. However, the potential exists for Australia to be added to the grey list if these measures are deemed insufficient or if further deficiencies are identified. This possibility raises concerns about the broader implications for Australia’s financial sector and overall economy.
What is the Grey list?
The grey list is a public identification of countries with strategic deficiencies in their AML/CTF regimes. Inclusion signifies that a country has weaknesses that make them more vulnerable to money laundering and terrorist financing activities.
The FATF assesses a country’s compliance with their recommendations for Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF). These recommendations cover a wide range of areas, including:
- Laws and regulations related to AML/CTF
- Effectiveness of financial intelligence units (FIUs)
- Customer due diligence (CDD) measures by financial institutions
- Transparency of beneficial ownership information
The FATF conducts a review process for all member countries and relevant jurisdictions on an ongoing basis. They issue public reports, known as “Mutual Evaluations Reports” (MERs), which detail a country’s progress in implementing the FATF recommendations. These reports are typically issued every few years, but the exact timeframe can vary depending on the specific country.
And the Black list?
The black list identifies countries that FATF considers non-cooperative in the fight against money laundering and terrorist financing. These countries are deemed to have significant weaknesses in their regulations and controls for preventing these illegal activities. The global blacklist currently includes Iran, North Korea and Myanmar.
Current Grey list Countries (as of June 2024):
It’s important to note that the grey list is dynamic, with countries added and removed as their AML/CTF frameworks evolve. For the most up-to-date information, you can consult the FATF website here (June 2024)
The Impact of the Grey list
While there are no formal sanctions associated with the Grey list, inclusion carries significant weight:
- Reputational Damage: Being labelled as deficient in AML/CTF controls can severely damage a country’s reputation as a financial centre, deterring foreign investment and hindering economic growth.
- Increased Scrutiny: Financial institutions worldwide will be more cautious when dealing with clients and transactions from grey listed countries. Expect more stringent due diligence procedures, which can slow down business activity.
- Potential for Blacklisting: The grey list serves as a warning shot. Failure to address deficiencies can lead to the far more serious consequence of blacklisting, which carries mandated sanctions and severe reputational harm.
Countries on the grey list often experience a range of financial repercussions, including:
- Increased Due Diligence: Financial institutions worldwide may apply enhanced due diligence to transactions involving grey-listed countries, leading to increased scrutiny and potential delays.
- Capital Flight: Investors may withdraw capital due to perceived risks, leading to reduced investment and economic instability.
- Higher Borrowing Costs: Grey-listed countries may face higher interest rates on international loans due to elevated risk premiums.
- Impact on Trade: Trade partners may impose stricter conditions or reduce business dealings, affecting exports and imports.
For example, Pakistan’s inclusion on the grey list has led to significant economic challenges, including a reported loss of billions of dollars in potential investment and increased costs for obtaining international financing.
Potential Impact on Australia
If Australia were to be added to the grey list, the consequences could be significant:
- Short-term Impacts:
- Market Reactions: Immediate market reactions could include a drop in the Australian dollar and stock market volatility.
- Investor Confidence: A grey listing could erode investor confidence, leading to capital outflows and reduced foreign direct investment.
- Long-term Impacts:
- Economic Growth: Prolonged grey listing could hinder economic growth due to sustained investor uncertainty and higher borrowing costs.
- Reputational Damage: Australia’s international reputation as a stable and secure financial hub could be damaged, impacting trade and diplomatic relations.
Escaping the Grey
Fortunately, the grey list also provides an opportunity for improvement. Countries on the list work closely with the FATF to develop an action plan addressing the identified weaknesses. This typically involves:
- Strengthening Legal Frameworks: Implementing robust AML/CTF legislation that meets international standards.
- Enhancing Regulatory Oversight: Building effective supervisory bodies to monitor financial institutions and enforce AML/CTF regulations.
- Improving International Cooperation: Increasing collaboration with other countries to combat cross-border financial crime.
By demonstrating a strong commitment to these reforms, countries can demonstrate progress and ultimately be removed from the grey list.
The Bottom Line
The FATF grey list serves as a critical mechanism for encouraging countries to strengthen their AML/CTF frameworks. While the potential inclusion of Australia on the grey list is a real concern, the upcoming AML Tranche 2 changes represent a proactive step towards mitigating this risk. By staying informed about FATF regulations and their implications, industry professionals can better navigate the complexities of the global financial landscape and contribute to the ongoing efforts to combat financial crime.
