The Grey List, A Primer

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29-06-2021

The big news came last Friday: the Philippines had been placed back on what’s colloquially known as “the grey list” of jurisdictions under increased monitoring. If I’ve been silent about this, my apologies – I was torn as later today (in a mere four hours, as a matter of fact), I’m booked to attend a Webinar by ACAMS with Atty. Mel Racela, who heads the Anti-Money Laundering Council (“AMLC”) Secretariat, and I want to be able to cover what he’s going to say. So why don’t I get into some basics in this entry, and I can cover his thought in a #mynotesfrom post later. Old hands at AML won’t find anything new here, this entry’s really for those new to the field.

Let me try to answer three basic questions here:

  1. Who is the FATF and why do they get to put us on this list?
  2. What is the grey list?
  3. What are the consequences of being on this list?

There are a few more questions worth exploring, such as, “So what happens now?”, but it makes more sense to cover those along with Atty. Racela’s talk.

Let’s start with the FATF. In 1989, The FATF, or Financial Action Task Force on Money Laundering, was formed in response to a recognition that the global banking sector was vulnerable to money laundering. It was formed at the behest of the heads of the G-7, the President of the European Commission, and eight other countries. In Europe, especially, it is sometimes referred to by its French name, Groupe d’action financière, (“GAFI”).

Its remit in its first year covered issuing recommendations for addressing money laundering risks. The document it produced, the Forty Recommendations, defined the blueprint for modern AML – how jurisdictions ought to fight money laundering. The Forty Recommendations, since updated in 2003 and on occasion as new developments arise, remains a foundational text for AML.

Since the issuance of the initial Forty Recommendations report, the FATF’s role has been to serve as the global center of expertise in AML. Its membership has increased since 1989 to include 39 members. It has its own secretariat. It serves as the model for what’s called “FATF-style regional bodies”, which are smaller organizations, geographically clustered, whose remit and operating model copies the FATF’s.

The FATF’s role is supposed to be strictly recommendatory. The FATF does not, and is not expected to, develop laws and regulations. Each of the forty recommendations strike a balance between being general enough to be applicable anywhere and being specific enough that monitoring compliance is possible. As an example, here’s the first line from the first recommendation (from the 2012 edition):

Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively.

The FATF monitors compliance by jurisdictions and maintains lists of countries with severe deficiencies in AML efforts. The most infamous such list, the “Call for Action”, short for “High risk countries subject to a call for action”, is also known as the “black list” and covers countries who are judged to be uncooperative with efforts to align with global AML efforts. As of today (June 2021), only North Korea and Iran are on the black list.

The grey list covers countries with strategic deficiencies in AML efforts but who have committed to address them within a set period of time. The FATF won’t usually take care of the evaluation or the monitoring – that is the work of the regional FATF-style bodies – but it is the FATF, voting in plenary, that determines whether or not a country is to be placed on either list.

As a collegial body with a clear mandate (besides AML, the FATF’s mandate expanded to include CFT and FP), the FATF works remarkably well. This is not to say that politics doesn’t enter the picture, or that the FATF doesn’t have problems. But in general, the FATF works.

That’s the answer to the first question: the FATF is an acknowledged leader and subject matter expert in the field of money laundering, respected and looked to worldwide, and they are within their mandate to state that the Philippines, among other countries, faces higher risks of money laundering.

Being on the grey list is not good. It’s a call-out by a global watchdog that our systems have deficiencies. Even worse, it’s a call-out by a global watchdog with clout. Countries have tried, and failed, to ignore the FATF.

As for consequences – this Rappler article covers the basics, but let me call out the quote by Atty. Racela here.

“Consequently, the Philippines’ inclusion will result in an additional layer of scrutiny from regulators and financial institutions, thereby increasing the cost of doing business with Filipinos, delay the processing of transactions, and blocking the country’s road to an A credit rating,” Racela said.

More on this after the ACAMS Webinar later.


Photo by Henry & Co. on Unsplash

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