The [Gray] List?
Martin Macq

On May 7th, the European Commission (EC) adopted a new “delegated regulation in relation to third countries which have strategic deficiencies in their AML/CFT regimes that pose significant threats to the financial system of the Union”. The regulation might establish another step towards a long-awaited objective EU money-laundering blacklist, repeatedly jeopardized by internal and external political pressures since its first release in July 2016. Meanwhile, a new draft list, which is not yet into force and which is still subject to changes, has been released with 12 new high-risk third countries on it, namely The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe.

The latest list is based on a new methodology shaped to strengthen the high-risk third country identification process. Key elements of this new framework include an enhanced interaction between the EU and the FATF and an autonomous assessment by the EU, based on eight building blocks. While the EU-FATF collaboration could certainly enable a more powerful response to money-laundering and terrorism financing at the international level, it is also set to have a limited impact. Indeed, the new methodology foresees that countries listed on the FATF list of Jurisdictions under Increased Monitoring will also be present in principle on the EU so-called blacklist. This nuance suggests there could be room for political or economic lobbying in order to exclude a specific country. In fact, upon closer inspection, this might have already happened, as Albania and Iceland, both present on the FATF list, have not been included in the newest EU draft list.

As a member of the European Economic Area (EEA), EU-Iceland trade relations are key to both internal markets. Indeed, “the EU absorbs 71.8% of Icelandic exports and it supplies 49.1% of total products”. Allegedly, this trading interdependence seems to be a mitigating circumstance to the country’s strategic deficiencies in its national AML/CFT regimes identified by the FATF. The exclusion of Iceland in the EU's list definitely highlights that the bloc is still fighting with its old demons. Back to 2018, the EC said 54 countries merited a risk assessment and a potential listing, including US protectorates or the US itself, but it fell short for pretended methodological reasons.

In late March, the EU decided to open accession talks with Albania as part of the Western Balkans enlargement process. Overshadowed by the current covid-19 crisis, this decision entails several positive outcomes for the country, along with some apparent privileges. Obviously, the EU could not, on the one hand, initiate the accession dialogue with Tirana, and on the other hand, designate Albania as a high-risk country for money laundering and terrorism financing. Indeed, it would have sent mixed signals to the country while undermining the EU accession process credibility internationally. Not to mention that Albania is identified as a higher risk country in terms of regulation and a hotspot for financial crime (high risk) by Sigma’s dynamic country risk rating.

Clearly, granting Albania and Iceland a kind of immunity suggests that political or economic biases are still present in the high-risk third country designation mechanism. Constructed to be, in the EC’s own words, more robust, objective and transparent, the new methodology might after all lack once again an accurate objectivity defiant to any political and economic squeeze.

To address the problem, the EC could for example draw its inspiration from one of the UK's Financial Conduct Authority (FCA) initiatives in order to finally bring a substantial objectivity improvement within its list of high-risk third countries. In 2017, the FCA asked firms jointly supervised by itself and the Prudential Regulation Authority to list which countries and jurisdictions pose the highest risk to them in terms of financial crime. The result is a ranking of 228 jurisdictions industry’s views which provides firms with a hand share in assessing financial crime risks. Therefore, a useful addition to the EU methodology might include an industry consultative process to aggregate entities’ risk assessment evaluations on high risk jurisdictions for financial crime. This would result in a more comprehensive and transparent list with broader value for the risk management community.

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