How The Financial Action Task Force (FATF) “Grey listing” Significantly Impacts Countries and Businesses and Why Mauritius is the Alternative Business Jurisdiction and Solution for Investors

By Michael Adjei*

The Financial Action Task Force (FATF) is an inter-governmental policymaking body whose purpose is to establish international standards, and to develop and promote policies, both at national and international levels, to combat money laundering and the financing of terrorism. The organisation was set up by the G7 in 1989 to prevent and combat money laundering, terrorism, and proliferation finance.

T Raja Kumar, a Singaporean, is the current president of the world’s anti-money laundering and anti-terrorism financing agency. His appointment is for a set two-year term, During the FATF plenary, he was chosen to succeed Dr Marcus Pleyer of Germany. The FATF also reviews and supervises member jurisdictions to ensure that they fully and effectively apply the FATF standards.

Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”.

High-risk jurisdictions have significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation. For all countries identified as high-risk, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and, in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing (ML/TF/PF) risks emanating from the country. This list is often externally referred to as the “black list”.

While being Grey listed may increase the government’s foreign-funding costs and weigh on trade flows, it’s likely to also significantly affect its creditworthiness and has potentially damaging consequences for acountry’s financial and business sectors.

The global financial watchdog’s so-called Grey list denoting nations with shortcomings in tackling illicit financial flows, scars their international reputations and may raise costs for banks and asset managers, impact financial stability and the costs of doing business. The most significant implication to a country that is grey listed is the reputational damage to the country, as its effectiveness in combatting financial crimes like corruption and money-laundering as well as terror financing are deemed to be below international standards. Other related implication arises from consequential action taken with regards to cross-border transactions, particularly possible action taken by foreign banks that provide correspondent banking services.

Countries grey listed by the FATF typically suffer the loss of capital flow into their states relative to GDP according to IMF. The domestic financial cost of subsequent compliance can be significant. It often takes 2–5 years for a country to be removed from the grey list once the mandated requirements are duly satisfied and accepted by the FATF. Grey listing also discourages the drive of foreign investment into a country and affected countries stands to suffer a shrinkage in foreign direct investment as a consequence while portfolio inflows and other general investment inflows are likely to decline.

Foreign banks and investors may become restrained and discouraged about doing business in the country and prefer to operate within other jurisdictions that present formidable risk profiles. Foreign companies wishing to do business may also face increased bureaucratic obstacles, costs of operation and difficult levels of scrutiny. Listed countries are automatically considered high-risk jurisdictions by the European Union and the UK which means they are considered jurisdictions with strategic deficiencies in their Anti-Money Laundering/Counter Terrorist Financing regimes that pose significant threats to the financial system.

Why is Mauritius the alternative jurisdiction and springboard to doing business in Africa? According to the Capital Economics Report released on 30th August 2021, Foreign Direct Investment (FDI) to the tune of USD 82 billion into mainland Africa is mediated by Mauritius alone due to its compliant nature and the number one in Africa in meeting all of the Financial Action Task Force (FATF) recommendations and not only that but also supports other African countries to access the necessary capital to finance investment by reducing both the risks and costs associated with cross-border dealings. These investments from Mauritius account for 9% of Foreign Direct Investment into Africa, generating $6bn annually in tax revenue for African states, and support 4.2 million jobs which create an additional US$30bn in spending power.

Mauritius is the most compliant country and the number one in Africa in meeting all of the Financial Action Task Force (FATF) recommendations and has over the years consolidated its leadership position in Africa with the 1st position for ease of doing business and number 13 in the world. This acknowledgement by the World Bank confirms that Mauritius remains a competitive and attractive jurisdiction for the international investors’ community.

Mauritius is also a fully collaborative and responsible international financial centre that has taken significant steps to adhere to international best practices. It is a member of the Early Adopters Group committed to the early implementation of the Common Reporting Standard (CRS) on the automatic exchange of financial account information while the OECD Global Forum has rated Mauritius as a “Largely Compliant” jurisdiction, a rating which equals that obtained by developed economies such as the US, the UK and Germany. It was the first African country to sign up to an Intergovernmental Agreement with the US for the implementation of the Foreign Accounts Tax Compliance Act (FATCA) and has joined the OECD’s Inclusive Framework to implement the Base Erosion and Profit Shifting (BEPS) recommendations and the new initiative on exchange of beneficial ownership information.

Private equity capital is one of the best sources of capital to power a company’s growth and the Financial Services commission (FSC) of Mauritius, the most pragmatic and rigorous financial service institution in Africa noted for their austerity and robustness with a sophisticated level of regulation and professionality in their level of services acknowledges that. Thereby boosting investor confidence through a number of measures which has eventually attracted strong and internationally recognized banks and other financial institutions and subsequently developed a strong banking infrastructure in the region with very low lending rates, simple and attractive tax system and no foreign exchange control policies.

Reach out to Órama Corporate Services for more information and guidance on how to use Mauritius as your investment destination.

**Michael Adjeiis International Business Development Executive atÓrama.

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