In this new edition, I want to focus on the European Union’s efforts around anti-money laundering and counter-terrorist financing (AML/CTF), which help safeguard the integrity of the international financial system.
The EU maintains a list of high-risk third countries identified as having strategic deficiencies in their AML/CTF regimes. This controversial list aims to protect the EU financial sector but has drawn criticism over opaque inclusion criteria and consequences from some listed countries.
How does the EU evaluate and update this high-risk list? What were the latest changes? Can implementing reforms enable countries to get removed?
This edition will provide insights into the EU’s AML/CTF listing process and spotlight recent debates. We’ll examine how some countries are working to strengthen their frameworks and mitigate risks. Understanding these issues is key for investors operating globally.
EU High-Risk Third Countries
The European Union established a list of high-risk third countries in 2016 as part of its evolving legal framework to prevent financial crimes and maintain the integrity of the European financial system. This list identifies countries outside the EU with strategic deficiencies in their anti-money laundering/counter-terrorist financing (AML/CTF) regulations and is seen as a key instrument for mitigating money laundering and terrorism financing risks.
The EU Commission develops and updates the list regularly based on in-depth assessments of third countries. Jurisdictions are analyzed on criteria such as levels of corruption, prevalence of terrorism financing, and adherence to EU and international transparency standards set by bodies like the Financial Action Task Force (FATF).
Countries are designated as high-risk if they have inadequate national policies, insufficient regulatory oversight, poor cooperation with EU authorities, or known weaknesses in their legal and judicial systems that insufficiently sanction financial crimes.
Being placed on the high-risk list can act as an incentive for countries to implement reforms by restricting financial transactions and damaging reputations of flagged jurisdictions. However, civil society groups have argued the listing process negatively impacts citizens and businesses in blacklisted countries due to increased due diligence requirements and obstacles for foreign trade. This has spurred debates about balancing effectiveness against proportionality.
The EU Commission updates the list at least once a year to account for changing risks and evolving improvements in countries’ AML/CTF frameworks, adding transparency and encouraging progress in financial crime prevention globally.
Updates to the EU High-Risk Third Country List in 2023
The EU’s high-risk list has triggered backlash from listed countries about the designation process and its fairness. As of 2023, over 20 jurisdictions are included, such as Yemen, Syria, and Panama.
In May 2023, the European Commission updated the list of high-risk third countries. Nigeria and South Africa were added, while Cambodia and Morocco were removed.
The United Arab Emirates (UAE) was first added to the EU’s list of high-risk third countries on 16 March 2023 and remains on the latest list updated in May 2023. It is one example that claims it has upgraded its framework yet remains blacklisted. The UAE argues it complies with Financial Action Task Force (FATF) standards and that its inclusion is arbitrary and politically driven. It warns the listing undermines investment and growth.
Other nations like Tunisia and Jamaica have also suggested the EU criteria are unclear or disproportionately impact developing countries. Being labeled high-risk can stagnate foreign investment and increase transaction costs for businesses.
Mauritius’ Progress in Strengthening Its AML/CTF Framework
Mauritius provides a positive case study for how a country can engage constructively with the EU to address deficiencies in its anti-money laundering/counter-terrorist financing (AML/CTF) regime and eventually be removed from the high-risk list.
Mauritius was first added to the EU’s list in February 2020 after being identified as having strategic deficiencies in its AML/CTF measures. Specifically, the EU cited insufficient supervision and oversight of the financial and non-financial sectors, as well as shortcomings in the investigation and prosecution of financial crimes.
In response, Mauritius implemented a comprehensive action plan between 2020-2022 to strengthen its framework. This included enacting legislation to reinforce the powers and resources of the national financial intelligence unit and improve information sharing with foreign counterparts. Mauritius also increased oversight of banks, real estate agents, and other designated non-financial businesses through more stringent auditing and reporting rules.
Additional measures involved augmenting the monitoring and investigation capabilities of law enforcement agencies to better detect and deter financial crimes. Throughout the process, Mauritius collaborated extensively with the EU, providing timely updates and transparency about its progress.
After three years of substantial reforms, the EU concluded in May 2022 that Mauritius had made sufficient enhancements to its policies and institutional oversight. Consequently, the EU removed Mauritius from its list, highlighting its increased compliance with international AML/CTF standards.
Mauritius demonstrated that targeted domestic reforms, coupled with proactive engagement, can enable countries to correct deficiencies and mitigate risks. Its experience provides a constructive roadmap that could inform other jurisdictions seeking to exit the EU high-risk list through concrete improvements.
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Chief Executive Officer | MYJ Group