Greylist

What Is Greylist?

A greylist, in the context of global financial regulation, refers to a list of jurisdictions identified by the Financial Action Task Force (FATF) as having strategic deficiencies in their Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) regimes. These countries are placed under increased monitoring by the FATF, signaling to the international community that while they pose a risk, they have also committed to actively working with the FATF to address their shortcomings within an agreed timeframe. The greylist is distinct from a blacklist, which identifies countries with critical deficiencies that are unwilling or unable to cooperate, often leading to calls for countermeasures. Inclusion on the greylist highlights a country's need for enhanced due diligence from financial institutions globally, although the FATF itself does not explicitly mandate sanctions for greylisted nations. The primary objective of the greylist mechanism is to encourage and facilitate these jurisdictions in strengthening their frameworks to combat illicit financial flows.

History and Origin

The Financial Action Task Force (FATF), an intergovernmental organization established by the G7 in 1989, develops and promotes policies to combat money laundering and terrorist financing. While the FATF initially focused on recommendations and mutual evaluations, it introduced a process for publicly identifying non-cooperative countries and territories in 2000. This early "Non-Cooperative Countries and Territories" (NCCT) list was a precursor to the modern greylist and blacklist. After a period where the list was largely phased out, the FATF reinstituted its public listing process in 2010, establishing the current system of "Jurisdictions under Increased Monitoring" (the greylist) and "High-Risk Jurisdictions Subject to a Call for Action" (the blacklist)⁴⁵. This evolution reflected the FATF's goal to create a "powerful tool" to pressure countries into addressing deficiencies and maintaining their position in the global economy⁴⁴. The intent behind the greylist was to provide a mechanism for continuous engagement and reform, rather than immediate punitive measures, for countries demonstrating a political commitment to rectify their AML/CFT weaknesses⁴², ⁴³.

Key Takeaways

• The greylist identifies countries with strategic deficiencies in their Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) frameworks.
• Jurisdictions on the greylist have committed to implementing action plans to address these identified shortcomings.
• While not implying direct sanctions, greylisting often leads to increased scrutiny and enhanced due diligence requirements from international financial institutions.
• The Financial Action Task Force (FATF) maintains and updates the greylist as part of its efforts to protect the integrity of the global financial system.
• Countries are motivated to exit the greylist to mitigate negative economic and reputational impacts.

Interpreting the Greylist

When a country is placed on the greylist, it signifies that the Financial Action Task Force (FATF) has identified weaknesses in its anti-money laundering (AML) and counter-terrorist financing (CFT) systems. However, crucially, it also indicates that the country has made a high-level political commitment to work with the FATF to resolve these strategic deficiencies⁴¹. This means the jurisdiction is actively undergoing a process of reform and is under increased monitoring.

For financial institutions and investors, a country's presence on the greylist serves as a crucial indicator for risk assessment. While the FATF itself does not call for automatic enhanced due diligence (EDD) or de-risking for these jurisdictions, it encourages its members and all jurisdictions to take this information into account in their own risk analysis⁴⁰. This typically leads to a heightened level of scrutiny for transactions and business relationships involving entities from greylisted countries, affecting correspondent banking relationships and potentially increasing compliance costs for global financial institutions. The goal is to ensure that legitimate financial flows are not unduly disrupted, but that potential illicit financial flows are more effectively identified and mitigated through robust customer due diligence and transaction monitoring.

Hypothetical Example

Imagine "Oceania," a small island nation, heavily reliant on tourism and international investment. Following a mutual evaluation by the Financial Action Task Force (FATF), Oceania is identified as having significant deficiencies in its framework for combating money laundering. Specifically, its laws regarding beneficial ownership disclosure are weak, and its financial intelligence unit lacks sufficient resources for effective transaction monitoring.

Consequently, the FATF places Oceania on its greylist. This means Oceania formally commits to an action plan to address these issues, which might include drafting new legislation to enhance transparency, increasing funding for its financial intelligence unit, and providing training for compliance officers in local banks.

Immediately, international banks dealing with Oceania begin applying enhanced due diligence measures to transactions originating from or destined for the country. A European pension fund considering a significant investment in Oceania's hospitality sector decides to pause its plans due to the increased reputational risk and the additional compliance burden. Local businesses in Oceania find it slightly harder and more expensive to conduct international trade, as foreign banks are more cautious. This hypothetical scenario illustrates how inclusion on the greylist, even without direct sanctions, can influence investment decisions and global financial flows by raising perceived risk and increasing scrutiny.

Practical Applications

The greylist, maintained by the Financial Action Task Force (FATF), has significant practical applications across global finance, impacting various stakeholders from national governments to individual financial institutions and investors. Governments of countries on the greylist are compelled to undertake substantial regulatory and legal reforms to improve compliance with international Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) standards³⁹. This often involves strengthening legislation, enhancing supervisory capabilities, and improving international cooperation in combating financial crime.

For financial institutions, greylisting translates into a mandate for heightened vigilance. Banks, investment firms, and other entities must implement enhanced due diligence measures when engaging in transactions or establishing relationships with individuals or businesses from greylisted jurisdictions³⁷, ³⁸. This increased scrutiny aims to mitigate risks associated with illicit financial flows, such as money laundering and terrorist financing. Failure to apply appropriate risk management can lead to regulatory penalties for these institutions³⁶.

Moreover, greylisting can directly influence foreign direct investment (FDI) and portfolio investment inflows into the affected country, as the perceived risk for international investors increases, potentially impeding economic growth and development³⁵. For instance, studies suggest a notable reduction in the ratio of foreign direct investment to GDP for greylisted countries³⁴. This can also lead to increased borrowing costs for governments and businesses in these nations due to a higher perceived credit risk³³. Countries like Pakistan and Turkey have experienced substantial economic impacts, including capital flight and currency pressure, during their periods on the greylist³². The FATF publishes its list of jurisdictions under increased monitoring, which as of February 2025 included countries such as Algeria, Angola, Bulgaria, and South Africa, among others, indicating their ongoing efforts to address deficiencies³⁰, ³¹.

Limitations and Criticisms

While the greylist mechanism is intended to drive improvements in Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) regimes, it faces several limitations and criticisms. A significant concern is the often substantial negative economic impact experienced by greylisted countries, particularly low-income economies dependent on foreign investment and aid²⁸, ²⁹. Even though the FATF states it does not call for enhanced due diligence, financial institutions frequently apply it, or even "de-risk" by cutting off business relationships to avoid increased compliance and risk management costs, leading to reduced capital inflows and trade volumes²⁶, ²⁷. This effectively penalizes countries that are actively committed to and working on reforms²⁵. For example, an International Monetary Fund (IMF) paper found that capital inflows can decline by an average of 7.6% of GDP following greylisting²⁴.

Critics also argue that the system can disproportionately affect developing nations with fewer resources to implement complex AML/CFT frameworks²³. While the FATF has introduced new prioritization criteria that consider a country's financial center size, the perception of unfairness persists, especially as more than half of greylisted countries have historically been from Sub-Saharan Africa²¹, ²². Furthermore, some analyses suggest that the actual effectiveness of the greylist in deterring illicit financial flows and forcing deep structural changes in targeted economies is not consistently proven, with some states complying ceremonially rather than fundamentally²⁰. This raises questions about whether the punitive economic consequences outweigh the actual benefits in combating financial crime.

Greylist vs. Blacklist

The greylist and blacklist are both tools used by the Financial Action Task Force (FATF) to identify jurisdictions with deficiencies in their Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) frameworks, but they represent different levels of risk and engagement.

The greylist, officially known as "Jurisdictions Under Increased Monitoring," signifies that a country has strategic deficiencies in its AML/CFT regime but has made a high-level political commitment to work with the FATF to address these shortcomings within an agreed timeframe¹⁸, ¹⁹. Countries on the greylist are under active scrutiny and are implementing action plans to improve their systems. The FATF does not explicitly call for sanctions or enhanced due diligence for greylisted countries, though financial institutions often apply heightened monitoring due to perceived risk¹⁶, ¹⁷.

In contrast, the blacklist, formally termed "High-Risk Jurisdictions Subject to a Call for Action," identifies countries with severe strategic deficiencies in their AML/CFT regimes that are considered uncooperative or have not made sufficient progress in addressing their weaknesses¹⁴, ¹⁵. For these blacklisted jurisdictions, the FATF calls on all members and other jurisdictions to apply enhanced due diligence measures, and in the most serious cases, urges the application of countermeasures to protect the international financial system from ongoing risks¹³. Countries typically found on the blacklist, such as the Democratic People's Republic of Korea (DPRK), Iran, and Myanmar, face significant international isolation and more severe economic consequences due to mandated actions¹¹, ¹². The key distinction lies in the level of cooperation and commitment to reform; greylisted countries are actively working towards compliance, whereas blacklisted countries are deemed unwilling or unable to adequately address their deficiencies.

FAQs

What does it mean for a country to be on the FATF greylist?

Being on the FATF greylist means a country has been identified as having strategic weaknesses in its Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) systems. Crucially, it also signifies that the country has committed to working with the FATF to address these deficiencies by implementing a specific action plan within a set timeframe¹⁰.

Does being greylisted lead to economic sanctions?

No, being greylisted by the FATF does not directly lead to official economic sanctions imposed by the FATF itself⁸, ⁹. However, it often results in increased scrutiny from international financial institutions, which may apply enhanced due diligence to transactions from these countries, potentially increasing borrowing costs, reducing foreign direct investment, and impacting international trade⁶, ⁷.

How can a country get off the greylist?

To get off the greylist, a country must successfully implement the action plan agreed upon with the FATF. This involves demonstrating tangible progress in addressing the identified Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) deficiencies through legal, regulatory, and operational reforms. Once the FATF is satisfied that the country has met its commitments and its AML/CFT framework is sufficiently robust, it will be removed from the list⁴, ⁵.

What is the difference between the greylist and the blacklist?

The greylist (Jurisdictions Under Increased Monitoring) includes countries that have committed to addressing deficiencies in their AML/CFT systems and are actively working with the FATF³. The blacklist (High-Risk Jurisdictions Subject to a Call for Action) refers to countries with severe strategic deficiencies that are considered uncooperative or have not made sufficient progress, leading to calls for countermeasures and stricter actions from the international community².

Why is the greylist important for financial institutions?

The greylist is important for financial institutions because it serves as a critical indicator of money laundering and terrorist financing risk associated with a particular jurisdiction. While not a direct sanction, it prompts banks and other financial entities to apply enhanced due diligence and strengthen their risk assessment procedures for transactions and clients linked to greylisted countries to ensure regulatory compliance and protect against illicit financial flows¹.