FATF Blacklist and its Implications on DNFBPs and VASPs

The FATF Blacklist is a list of countries that either do not have any anti-money laundering and counter-terrorist financing (AML/CFT) legislation or have inefficient ones due to which they have failed to make sufficient progress in addressing these ML/FT concerns.

FATF Blacklist (Jurisdictions Subject to a Call for Action)

The Financial Action Task Force (FATF) is a global watchdog for activities involving Money Laundering, Terrorism Financing, and Proliferation Financing of weapons of mass destruction (ML/TF/PF). It was founded to research and analyse global trends in ML, FT, and PF and give recommendations to its signatories, enabling them to combat these illicit activities. As of 27 October 2023, the FATF had 40 members, and over 200 countries are signatories to its recommendations.

A blacklisted country is subject to a call for action by the FATF, which means that other countries are informed by the FATF that blacklisted countries should not be entertained for conducting business until their AML framework is at par with the requirements of the FATF.

FATF is a global AML watchdog and does not have the power to enforce a complete ban on blacklisted countries. However, the issuance of blacklist signals that businesses and countries must avoid conducting business with such a country.

Why is a Country Put on the FATF Black List?

A country or jurisdiction is placed on the FATF Blacklist when:

• It fails to criminalise money laundering and terrorist financing as required by the FATF Recommendations.
• It lacks adequate legal and regulatory frameworks for addressing money laundering and terrorist financing risks in their country or promoting the proliferation of weapons of mass destruction.
• In that country, there is no effective supervision and monitoring of financial institutions and businesses.
• The country’s law enforcement agencies do not effectively investigate and prosecute money laundering and terrorist financing cases.
• It fails to implement financial sanctions related to terrorism and proliferation financing.

In order to ensure compliance, the FATF conducts regular assessments of countries’ AML and CFT status through its mutual evaluation process. If a country is found to have deficiencies or if it fails to make sufficient progress in addressing the deficiencies, the FATF can place them on the Blacklist after warnings.

The FATF frequently updates their blacklist; if a blacklisted country appears to have addressed their deficiencies in curbing ML/FT and PF, the FATF evaluates whether the country can be de-listed or should its listing in the ‘blacklist’ continue.

Consequences of Blacklisting on a Country

A country which is placed on the FATF Blacklist can have severe consequences, which include:

1. FATF blacklisting signals other countries and international organisations to impose sanctions and various kinds of trade restrictions against the blacklisted country.
2. Blacklisting can damage a country’s reputation and also impact its credibility as a reliable partner in the global financial system. This ultimately leads to a loss of confidence in the eyes of investors and financial institutions, making it difficult for such a country to attract foreign investments.
3. FATF member countries and other jurisdictions can impose economic sanctions or countermeasures on blacklisted countries, like limiting or prohibiting financial transactions, imposing additional reporting requirements, etc. These measures significantly affect the blacklisted country’s economy and ability to engage in international trade and foreign exchange inflows.
4. Blacklisted countries face challenges in accessing international financial markets and securing loans for funding from international organisations due to their blacklisted category. Lack of access to international funds can result in the country’s inability to finance infrastructure projects, support economic development, and address other pressing needs.

What are the Implications of FATF Blacklisting on DNFBPs and VASPs

The Designated Non-Financial Businesses and Professions (DNFBPs), such as Dealers in Precious Metals and Stones (DPMS), real estate agents, and professionals such as lawyers, accountants, and Virtual Asset Service Providers (VASPs) involved in Virtual Assets (VA) activities operating in the UAE need to be vigilant about having due diligence measures in place while dealing with customers (also suppliers, business partners, or third parties) from the blacklisted countries.

Ideally, DNFBPs and VASPs should not conduct business with a FATF-blacklisted country. However, FATF recommendations are only suggestive in nature and cannot be enforced, but since UAE is a signatory to FATF, it is important that DNFBPs and VASPs in UAE follow certain measures as follows:

• Adopt a risk-based approach to implement specific CDD measures and countermeasures prescribed for high-risk countries. Consider the business’s risk appetite when dealing with high-risk countries and implement risk-based controls such as transaction limits and reporting thresholds.
• Have in place stringent Customer Due Diligence (CDD) measures to identify customers from blacklisted countries.
• Assigning and treating customers from blacklisted countries as high-risk customers and ceasing business with them, but if conducting business is essential to the DNFBP and VASP, they may, at their discretion, conduct enhanced due diligence by seeking additional information from them and getting approval of the senior management before executing such transactions.
• Verify sources of funds and sources of wealth and request the first payment from such customers from their own bank accounts.
• Ensure that if any virtual asset transaction is involved, the originator and receiver information is attached to the transaction, and the virtual asset travel rule is adhered to.
• Ensure that they continuously monitor their customer databases against blacklist countries. Continuous monitoring and screening will signal them to avoid business with blacklist countries or upgrading their status to high-risk and conducting enhanced due diligence.
• Ensuring that independent audit of transactions and EDD measures involved with high-risk countries is conducted on a regular basis.
• The reporting entity is also required to submit a High-Risk Country Report (HRC) or High-Risk Country Activity Report with the FIU on the goAML portal.
• The reporting entity should wait 3 days for the FIU to provide necessary instructions and then act according to those instructions. If the FIU does not provide any instructions, the entity can continue with the transaction.

What should Countries do to Exit the Blacklist?

To exit the FATF Blacklist, countries must address the deficiencies in their regulatory framework identified by the FATF and implement an action plan to strengthen their AML/CFT regimes. This involves:

1. Laws and Regulations:

Blacklisted countries must improve their legal and regulatory frameworks to ensure compliance with the FATF’s recommendations for combating money laundering and terrorist financing. The countries should adequately criminalise ML, FT and PF activities.

2. Monitoring Mechanisms:

Blacklisted countries must establish an effective monitoring system and customer due diligence regime enabling their businesses to detect money laundering and terrorist financing risks, often supported by reliable AML Software to strengthen these controls in practice.

3. Enforcement Agencies:

Blacklisted countries must ensure that law enforcement agencies like judiciary, tribunals and police are equipped with the necessary resources, training, and AML Softwares and tools to effectively investigate and prosecute cases related to money laundering and terrorist financing.

4. Targeted Financial Sanctions:

The FATF recommends financial sanctions to comply with the resolutions of the United Nations Security Council (UNSC). The UNSC regulations require member states to freeze the funds and assets of the listed individuals and groups and ensure that no further funds or assets are made available to them in the future.

5. Mutual Assistance:

Backlisted countries must ratify international conventions on the prevention of TF, such as the Palermo Convention, clarifying that they shall provide mutual legal assistance.

6. Regular Reporting and On-Site Assessments:

The FATF and its regional bodies conduct regular assessments and on-site visits to evaluate a country’s progress in implementing the FATF’s recommendations and addressing deficiencies identified by the FATF. Countries must ensure effective implementation of the recommendations from time to time to be considered for removal from the Blacklist.

Jurisdictions Currently on the FATF Blacklist

As of February 2024, the following jurisdictions are on the FATF Blacklist:

1. Democratic People’s Republic of Korea

The FATF has blacklisted North Korea as it poses a threat to the proliferation of weapons of mass destruction, and it has failed to address these concerns.

2. Iran

Iran is on the blacklist as it has failed to enforce the Palermo and Terrorist Financing conventions in accordance with FATF standards. Iran will be out of the blacklist or be delisted when the full ‘Action Plan’ is completed.

3. Myanmar

Myanmar is on the blacklist due to not renewing or updating its action plan and not addressing the supervision of money value transfers. Myanmar will be out of the blacklist when its full action plan is completed.

Conclusion

AML software play a critical role in enabling DNFBPs and VASPs operating in the UAE to consider the FATF blacklist effectively when making customer onboarding or offboarding decisions, while ensuring their internal policies, procedures, and controls must be formulated on the basis of a risk-based approach.

Whether or not to conduct business with blacklisted countries depends on the risk appetite of the DNFBPs and VASPs, as blacklisting is suggestive in nature, signalling that such a country should be avoided while conducting business due to their nature of being associated with criminal activities such as money laundering, terrorism financing, and proliferation of weapons of mass destruction and conducting business with them would mean exposing one’s own business with high risk emanating from conducting business with such blacklist countries.

DNFBPs and VASPs in the UAE need to educate themselves on the reasons why certain countries are blacklisted and why these countries are unable to remove themselves from the blacklist. Having this information helps DNFBPs and VASPs in the UAE formulate and implement AML/CFT and CPF measures that are compliant with UAE federal laws and FATF recommendations, supported by RapidAML specifically designed to address high-risk customers, high-risk countries, and enhanced due diligence requirements