The Financial Crime Forum - Blog

Introduction: The FATF's Grey Lists from the perspective of listed jurisdictions

The Economic Crime Forum
30 March 2023 18:00 GMT

Introduction by Nigel Morris-Cotterill

The Financial Action Task Force was created by the G7 group of Industrialised Countries, a sub-set of the Organisation for Economic Cooperation and Development. It was not created by law enforcement departments of those countries: it was created by Treasury Departments.

In the late 1980s, there were two major threats facing the world: terrorism from groups demanding independence for small regions, such as ETA, demanding the creation of a Basque region in Spain and the IRA demanding that Northern Ireland be released from the United Kingdom so that it could join the Republic of Ireland. The second was the enormous growth and international supply of commercially produced illegal narcotics. This was not a new problem – after all, the Victorians were extensive users of opium – and they were far from the first.

In 1988, the Bank for International Settlements, the central bankers’ club, issued a notice that said that banks should take steps to prevent themselves being used for the purposes of laundering the proceeds of the production and distribution of illegal narcotics.

The UK responded with measures in both its drugs and terrorism legislation that were the pre-cursors of the counter-money laundering laws that were introduced later.

There was a fundamental divergence of approach between the USA and much of the rest of the world: the USA concluded that it would be protected if it required the reporting, by banks, of transactions in cash or certain instruments exceeding a value of USD10,000. The UK and most other countries took the view that this was an intrusive blunt instrument that created an administrative burden on law enforcement which would create a lot of noisy data for very little result: instead they wanted only what were, in effect, warm leads to be sent to law enforcement and that meant introducing what we came to call Suspicion Based Reporting.

At the time, any politician who was facing a bad press knew that he could create diversion by mentioning organised crime and the drugs menace.

And so the FATF was born, with an agenda designed by Treasury Departments, but sold to the world as a law-enforcement policy.

The FATF and the European Union, which is not a country, worked together to produce the Forty Recommendations and the first Money Laundering Directive respectively.

The subterfuge as to the implications for tax were so well hidden that the British Bankers’ Association declared that the laws that were subsequently passed did not apply to tax offences. The FATF quickly amended its explanatory note to Recommendation 15 to make it clear that what it termed ″tax fraud″ should be a predicate crime for money laundering purposes.

This, at least in part, arose from another divergence of viewpoint between the USA and other countries. The USA and a handful of other countries took the view that the FATF’s Recommendations should provide for a list of predicate offences. The R40, as I like to call them, said that, as a minimum, certain offences such as (to use a convenient term) drugs trafficking, should be included. The more widely used approach, which the FATF explicitly favours, is ″all crimes″ in which all offences for which a person may be sentenced to 12 months or more in jail would regarded as predicate crime.

Tax offences were not on the FATF’s minimum list but they were, of course, included in the all crimes approach.

In the intervening period, now about 30 years, the fallacy of a lists-based approach has become clear. Those countries that, under the guidance of ″technical assistance″ from the USA and Australia, adopted that approach have learned that it is both unmanageable and inflexible. Many still have a lists-based approach on the books but render it otiose by the addition of a catch-all provision that says, in terms ″or any other offence for which a person may be sentenced to jail for 12 months or more.″

The apparently civic-minded ideal of a common approach to combatting money laundering was, it was said, intended to take account of regional variations in laws and culture and various so-called ″FATF Style Regional Bodies were formed. In Asia Pacific, the Asia-Pacific Group was led by the USA and Australia and in the Caribbean, the Caribbean Financial Action Task force was much more independent. But The Financial Action Task Force, from its offices in the OECD headquarters in Paris, decided that it would require compliance. Only one FATF full member has ever been under serious threat of being made subject to counter-measures. This is a term used to hide the objective which is to make it more difficult for that country to engage with the global financial world. They don’t like the term but what the FATF does is to implement sanctions against jurisdictions that don’t meet its demands. even though, often, those demands are also not met by some of its larger members.

That member, incidentally, was Austria which did not make as much progress as the FATF wanted in relation to its Sparbuch accounts. These were entirely anonymous accounts identified only by a passbook and therefore a bearer account. Italy had a similar account but because the limit on the amount of deposits was quite small, no action was contemplated.

As early as 1999, I was questioning whether the FATF was a lackey of the USA. I was drawing attention to the fact that great domestic harms, such as corruption and even drugs were playing second fiddle to an endeavour, in concert with the OECD, to create a globalised tax structure.

The USA has been impatient with that objective, as has Sweden and the EU and all have introduced, over the past 30 years, measures to create a network of agreements of one kind or another to require the reporting of assets held by their citizens offshore.

But it’s important to realise that, as John Moscow, the former deputy district attorney for Manhattan said in the 1990s ″everywhere is offshore to everywhere else.″

Tax is a polarising subject and the question of tax sovereignty even moreso.

Small populations generate insufficient direct tax revenue for the needs of the state, especially as small populations tend to be cash poor. Remote jurisdictions have developed, over centuries, tax regimes that work for them and, often, income tax and corporation tax do not form part of it.

Also, countries have different attitudes to what should be taxed: Ireland wants a 10% corporation tax, the OECD has insisted, and Ireland has fallen into line, that there should be a minimum 15%.

Offshore jurisdictions, aware that tax and money laundering are inextricably linked have, mostly fallen in with the OECD requirement, even in relation to offshore companies which, historically, have been free of tax if they do not do business locally. The IMF has told Malaysia that it should start to tax company dividends: so far Malaysia has said that it regards that as double taxation because dividends are paid from the profits of companies that have already been taxed.

So there are serious questions of sovereignty and, even, bullying. Small remote economies have very little chance of developing an export market in anything other than financial services. The second option is tourism but large scale tourism is for many reasons undesirable. It is also very capital intensive and that would push those economies into debt which they are unlikely to be able to service, or into commercial neocolonialism of releasing land to overseas developers who will, history shows, bring tourists into resorts, including all-inclusive resorts, but will bring very little benefit to the jurisdiction as a whole.

It should be clear from all of the above that the grey-list, which does not impose countermeasures but nevertheless strongly implies that those dealing with anyone or any business in those jurisdictions should exercise enhanced caution, concentrates mostly, but not always, on small or troubled economies. Sometimes it appears as if listing is politically motivated.

Who's on the grey list at present?

Albania, Barbados, Burkina Faso, Cayman Islands, Democratic Republic of the Congo, Gibraltar, Haiti, Jamaica, Jordan, Mali, Mozambique, Nigeria, Panama, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Türkiye, Uganda, United Arab Emirates, Yemen.

There are big questions: first, to what extent is there compliance with the FATF’s R40?

Jeremy Moller, a lawyer with Norton Rose Fullbright in Sydney has produced a summary of the current state of compliance. Mr Moller is unable to be with us today so I’m putting in the chat, now, a link to his chart in his LinkedIn feed.…

The scale of non-compliance by the original members of the OECD and other forceful members is startling.

I know that what I have said might have given the impression that I disapprove of the existence of the FATF. That is not so, I think it did a vital job in its early days but it soon became, as I have termed it, the armed wing of the OECD. It continually expands its remit, even going so far as to say that it wants to redirect its Recommendations so that rather than being addressed to member states, they are addressed to regulated entities. Incidentally, the EU has adopted this approach and it will no longer use Directives but instead will use Regulations which can be enforced by EU authorities. It’s not a country but it is creating federal agencies that over-reach domestic regulators.

So, I like the original idea and if the FATF had stuck to that, all would be fine. I do not like what it quickly became.

Others might think that I am opposed to measures to combat tax evasion: I absolutely am not so opposed. But what I am opposed to is when large countries depute small economies to do their investigations and enforcement for them. True, the USA sometimes gives a reward where a recovery results but that does not cover the cost and disruption of dealing with many, often poorly prepared, requests for information that the USA issues.

The FATF does have a role to play in relation to tax evasion but it should not be to drive sovereign states into a tax structure defined by a handful of so-called industrialised nations.

Nor should it be to demand the diversion of resources in countries that are struggling with economic and social problems: they should take priority.

Jurisdictions should be able to pick and choose which of the R40 they adopt – and in truth most have willingly adopted the most essential because they have a direct and beneficial interest within those jurisdictions. They have an FIU, they have suspicious activity reporting within a defined financial services sector and they have investigations and prosecutions. That’s what matters to countries that have serious internal problems.

After all, Australia and the USA, even today, 30 years on, still do not have suspicious activity reporting by lawyers and other professionals.

And yet, even thought these sectors are widely regarded as prime loopholes in any system, the FATF has not put either country on its lists.

There is one final point: the Grey List has a disproportionate effect on poor and vulnerable families. For example, the Philippines’ economy is dependent on remittances from its overseas workers. Last month, the Philippine Star reported that 8.9 percent of the country's gross domestic product and 8.4 percent of the gross national income comes from personal remittances. Entire families (often excluding husbands who have left and shacked up with another woman and have a second family) are supported by one maid working in, for example, Singapore. Disrupting or making those payments more expensive is immoral, in my view.

I’ve given you an overview. Now let’s hear from experts.

Later, John Walker: he’s the chap the major supranational bodies have, for several decades, turned to when they want statistical analysis on financial crime. John, incidentally, is not the one who comes up with the outrageous headline-grabbing numbers that the IMF and others claim as the amount of laundered money. John and I will have a chat about the effect on jurisdictions of being listed and, equally importantly, whether coming into compliance with the R40 has any beneficial effect within those small and troubled economies and societies.

Before John, Antonia Esser will talk about what happens when a jurisdiction is added to the grey list. Antonia’s perspective is focussed on international remittances and micropayments: these are of vital importance to the most vulnerable persons in many societies. Antonia comes to us from South Africa, last month added to the Grey List.

And to start, we have Calvin Wilson, the immediate past executive director of the Caribbean Financial Action Task Force. Calvin spent many years encouraging small economies to adopt relevant measures: the CFATF even had its own set of Recommendations, tailored to the region’s needs. But he was also the buffer for the continual attacks on the offshore sector by the USA and multiple international bodies including the Financial Action Task Force and the OECD through its badly misnamed ″Unfair Tax Competition″ scheme.