Data Dive: FATF’s Greylisting, Benchmarked

July 5, 2023
Back
VIXIO has analysed country data from the Financial Action Task Force (FATF) country assessments and found numerous inconsistencies in whether a jurisdiction is placed on the greylist or not.

VIXIO has analysed country data from the Financial Action Task Force (FATF) country assessments and found numerous inconsistencies in whether a jurisdiction is placed on the greylist or not.

Research by VIXIO has shown that the FATF ratings — the compliance scores given to countries by the global body for anti-money laundering compliance — do not typically match up with the greylisting decisions by FATF.

By creating a numerical aggregation based on FATF’s 51 consolidated assessment ratings (40 technical compliance and 11 effective compliance metrics) for each country, this allowed us to give an overall score for each jurisdiction with which to compare. The resulting analysis highlights multiple contradictions around how and when a country is greylisted.

Even when accounting for “emphasis on (compliance) effectiveness” that FATF says it prioritises in its evaluations, the assessed inherent risk of money laundering and terrorist financing that each jurisdiction faces, and the size of its economy and financial sector, there are numerous examples where a decision on who is or is not on the greylist does not seem to be consistently applied.

Inconsistent decision making

Examining the low end of the FATF scores, in particular, reveals the greatest inconsistencies. There are multiple examples of countries with poor compliance scores avoiding the greylist, while others with better scores being put on the list. There are also examples of countries that are no longer on the greylist but which still have similar poor results to when they were greylisted.

Methodology: Scores have been created based on a numerical aggregation of technical compliance scores, according to the following metrics: compliant = 3; largely compliant = 2; partially compliant = 1; non-compliant = 0.

Where there are double entries, this is when a country has been rated and then re-rated by FATF at a later date. The higher score in each case is the most recent rating.

Source: Financial Action Task Force, data from 2010-2023

Examples such as Kenya, a previously greylisted country from 2010-14, and which received an overall score of 36 out of a possible 153 in September 2022, staying off the greylist. Taking Kenya’s specific score around the key effectiveness category, it scored just two out of a possible 33 (see below chart for scoring methodology). At the same time, countries with much higher effective and technical compliance scores, such as Jordan, remain on the greylist, despite noted improvements. This is not an isolated incident, and there are many other examples of similar inconsistencies across other countries.

Examples such as this highlight the inconsistency around FATF’s ratings, whereby it is understandable how one country has been greylisted but that the same standards do not seem to apply for other countries.

Too many examples

Even when accounting for “emphasis on (compliance) effectiveness” that FATF says it prioritises in its evaluations, inconsistencies remain. For example, the graph below shows scores for a selection of countries, both greylisted and non-greylisted, where the scores appear to bear little relation to the greylisting outcome. The US has been included as a useful benchmark for a strong effectiveness score.

Examining countries that have been greylisted shows that an effectiveness score of 10 appears to be the cutoff point in the decision to greylist, with no country with a score above 10 having ever been greylisted.

Methodology: Scores have been created based on a numerical aggregation of technical compliance scores as well as effective compliance scores, according to the following metrics:

  • Technical compliance: compliant = 3; largely compliant = 2; partially compliant = 1; non-compliant = 0.
  • Effective compliance: high effectiveness = 3; medium effectiveness = 2; low effectiveness = 1.

For example, Malta with an effectiveness score of 10 was greylisted in 2021, in part due to “uncertainty on overall effectiveness of enforcement”, despite an overall score of 102. Similarly, Gibraltar with an overall score of 110 and an effective score of 9 was greylisted in June 2022.

Yet despite this finding, there are several countries which are not greylisted, with the same or lower effectiveness scores, including China (10), Latvia (10), Hungary (9), Serbia (8), Bulgaria (6) and the Bahamas (5).

This research would also have included Croatia and Vietnam to the above list; however, both countries have recently been greylisted by FATF in its latest assessment.

Additionally, in China’s case, the country’s initial assessment in 2019 gave an overall score of 73, with 6 out of 40 technical compliance measures coming up as non-compliant, as well as an effectiveness score of 10.

However, rather than greylist China as the scores would suggest, the country was put into an enhanced follow-up process and was re-rated to 86 overall in 2022. However, China’s overall effectiveness score stayed the same at 10.

The rule, not the exception

Furthermore, inconsistencies like those shown above seem not to be the exception but the rule. Despite an expectation that, on average, countries that are currently greylisted should have lower scores than those previously or never greylisted, this is not the case.

In fact, the average score of a country that has never been greylisted is below the scores of multiple countries that are currently and were formerly on the greylist. Additionally, current and former greylisted countries have almost exactly the same high, average and low scores, calling into question exactly how FATF determines whether a country should come off the greylist if their scores are so similar.

Not quantified

The underlying factor behind the inconsistencies between greylisted and non-greylisted countries could lie with the FATF methodology.

FATF’s methodology gives emphasis to both technical and effective compliance within an understanding of the overall risk of money laundering in the country.

For example, the FATF methodology says “ML/TF risks are critically relevant to evaluating technical compliance … and to assess effectiveness” and that assessors should consider the nature and extent of the risks “at the outset of the assessment, and throughout the assessment process”.

The last factor, the overall risk of money laundering, shapes the overall perception of whether performance needs to be improved, but unlike the technical and effective compliance metrics, is only vaguely estimated in FATF’s reports. This could be the source of these discrepancies.

For example, when FATF reviewed Madagascar in 2018, it was given an overall compliance rating of 46 out of 153 and an effectiveness score of 0, which is one of the worst scores FATF has recorded. And the country has made little progress since.

Despite this poor score, Madagascar has not been greylisted, nor even put into enhanced follow-up measures, which typically occurs to avoid harsher measures.

However, when examining the assessment of the risks, it read, “Madagascar is facing significant ML risks” from sources such as corruption, resource smuggling and drug trafficking, as well as “moderate FT risk”. Furthermore, the risk assessment gave no explanation of how the risk of money laundering affected the overall decision. Madagascar did not even conduct a formal money laundering risk assessment, meaning the information had to be gathered through informal inquiries.

This kind of discrepancy is not uncommon. There are 13 countries which have an effectiveness score of zero, i.e., all areas of compliance effectiveness are ranked low, which is the lowest score possible. Yet the majority of these countries have never been greylisted.

The result of the emphasis on inherent money laundering risk means countries such as Malta are greylisted, despite high compliance, while other countries with zero effectiveness score, are not.

Geographically concentrated

The result of FATF’s greylisting decisions since 2010 has been the targeting of countries predominantly in Africa and South East Asia. In 13 years, FATF has greylisted 51 countries, 20 from Africa and 11 from Asia, eight from the Americas, eight from Europe, four from the Middle East and one from Australasia.

The majority of countries that are currently greylisted reside in Africa. Only two EU markets have ever been greylisted, Malta and most recently Croatia, while non-EU European countries to be greylisted include several Balkan countries and Iceland, Malta and Gibraltar.

Additionally, since 2010, 14 countries have also been greylisted more than once, most of which are either in Africa or South East Asia.

Future predictions

Although this research by VIXIO has shown that the FATF ratings give little to no indication of the likelihood a jurisdiction will be greylisted, there are several indicators that do correlate with being greylisted. These indicators include:

  • Is geographically in Africa or South East Asia.
  • Suffers from political instability, particularly domestic terrorism, i.e., Nigeria, Syria, Turkey, Iraq.
  • Has issues with drug trafficking such as those in South America or South East Asia.
  • Is a small European country, i.e., Malta, Gibraltar, Iceland or Croatia.
  • Is a Balkan European country, i.e., Croatia, Greece, Albania or Turkey.
  • Has a reputation for being a tax haven, i.e., the Cayman Islands, although this is a weaker factor.

Conversely, large and significant economies, regardless of scores, including China, India and key Western European and North American countries such as the UK and the US, have never previously been greylisted and are least likely to be greylisted in the future.

Our premium content is available to users of our services.

To view articles, please Log-in to your account, or sign up today for full access:

Opt in to hear about webinars, events, industry and product news

To find out more about Vixio, contact us today
No items found.
No items found.