The Democratic Republic of the Congo placed on FATF “grey list’’

The Financial Action Task Force has taken action over DR Congo’s money laundering shortcomings. Angelika Hellweger of Rahman Ravelli details the situation.

The first Financial Action Task Force (FATF) plenary under Singaporean Presidency concluded with the Democratic Republic of the Congo (DRC) being among the countries identified as having weak frameworks to combat money laundering and terrorist financing (AML/CFT).

DRC was identified by FATF as a Jurisdiction Under Increased Monitoring - also known as the “grey list” – due to its failings. On coming to power three years ago, President Tshisekedi said he would tackle money laundering, terrorist financing and corruption. Yet FATF has shown that it has not been satisfied by Tshisekedi’s claims – and has taken action.

The FATF

The FATF, which is currently made up of 39 members, was created in 1989 with the aim of protecting the financial systems from criminal activity such as drug trafficking. It also had considerable influence regarding the implementation of the “know-your-customer” rule, which is viewed now as the gold standard for financial institutions when it comes to ascertaining the true identity of an account holder. Following the 9/11 attacks on the United States in 2001, FATF developed standards for combating terrorist financing.

Grey-listing

The grey list is a global list of countries that have insufficient safeguards against money laundering and the proliferation of terrorist financing. They are considered to require closer monitoring. The FATF does not impose any direct obligations on its members to take action against grey-listed countries. But its members are asked to take the FATF information into account in their risk analyses and to take further measures if necessary.

A country on the grey list usually has to:

• Cooperate with the FATF.
• Devise an action plan to resolve the identified anti-money laundering and anti-terrorism deficiencies.
• Adhere to its action plan. Its implementation will be monitored by the FATF.

The Impact on business if a country is grey-listed

The International Monetary Fund (IMF) came to the conclusion^[1] that a listing on the FATF’s grey list has a large and significant negative effect on a listed country’s capital inflows. It stated that incoming capital flows – both foreign investment and bank transfers – decrease by an average of 7.6% of gross domestic product.

The designation can make foreign investors more wary of doing business in a listed country. For companies that maintain business relations with DRC, enhanced due diligence obligations may now apply. Companies should compare their risk assessments for all countries with the FATF’s grey list and adapt their risk analyses accordingly.

A grey-listing can also lead to reputational damage to a country’s financial system, which can have negative capital and currency implications. It further complicates the relationship with foreign banks and investors, as a grey-listing may cast doubt on the integrity of that country’s banking system. Regulators in markets such as the US, the European Union and Japan could, in theory, impose restrictions on dealing with Congolese banks, which could severely disrupt trade and investment.  There is also the risk of banks ending relationships with clients based in high-risk jurisdictions, in order to save on significant compliance costs.

As a result of DRC’s grey-listing, states that maintain business relations with it may have to conduct due diligence audits more often and ensure that they fully take into account the risks of working with Congolese banks.

[1] https://www.imf.org/en/Publications/WP/Issues/2021/05/27/The-Impact-of-Gray-Listing-on-Capital-Flows-An-Analysis-Using-Machine-Learning-50289.