The rate of global money laundering is reaching frightening heights daily, and agencies like the Financial Action Task Force (FATF) are doing what they can to curb the spread and its effect on the world.

Money Laundering and the funding of terrorism are significant global issues that affect numerous countries, including those in Africa. These illicit activities not only undermine financial systems but also pose grave threats to national security and stability.

In recent times, there has been a growing recognition of the severity of money laundering and terrorism financing, leading to concerted efforts to combat these crimes. One notable organization at the forefront of these efforts is the Financial Action Task Force (FATF), an intergovernmental body established on the initiative of the G7. The FATF leads global initiatives to address money laundering, terrorism financing, and proliferation financing. It advocates for the establishment of global standards aimed at reducing these risks and evaluates countries’ endeavors to combat them.

As of February 2024, the FATF had conducted reviews of 131 countries and jurisdictions, publicly identifying 106 of them. Of these, 82 jurisdictions have undertaken the necessary reforms to rectify their anti-money laundering and counter-terrorism financing (AML/CFT) deficiencies and have subsequently been removed from the FATF’s monitoring process.

Jurisdictions that are subject to increased monitoring are colloquially referred to as the “grey list.” This designation highlights countries actively collaborating with the FATF to address strategic deficiencies in their AML/CFT regimes.

Historically, several African countries, including Nigeria, South Africa, Burkina Faso, Cameroon, and Uganda, have found themselves on the FATF’s grey list. However, following a recent review, Kenya and Namibia have been added to this list.

While the precise impact of greylisting on financial systems remains subject to debate, studies conducted since 2016 have suggested a decrease of up to 16% in cross-border payments. A study conducted by the International Monetary Fund (IMF) in 2021, authored by Kida and Paetzold, examined the impact across various financial flow measures. Utilizing more recent data and an extensive list of grey-listed countries, the study revealed an average decline in capital flows equivalent to 7.6% of gross domestic product (GDP).

About the Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) serves as the global watchdog for combating money laundering and terrorist financing. This inter-governmental organization is dedicated to establishing international standards aimed at preventing these illicit activities and the associated societal harm. Operating as a policy-making body, the FATF endeavors to foster the political will necessary to prompt national legislative and regulatory reforms in these critical areas.

Comprised of 40 member countries, the FATF plays a pivotal role in setting international standards to empower national authorities in combatting illicit funds linked to various crimes, including drug trafficking, the illegal arms trade, cyber fraud, and other serious offenses. Over 200 countries and jurisdictions have committed to implementing the FATF’s Standards, as part of a coordinated global effort to combat organized crime, corruption, and terrorism.

Established in 1989 and headquartered in Paris, the FATF serves as a central hub for international efforts to combat money laundering and terrorist financing. At the core of the FATF Recommendations lies the risk-based approach, which underscores the importance of countries identifying and comprehending the money laundering and terrorist financing risks they face. This approach enables nations to allocate their resources effectively, prioritizing efforts to mitigate risks in the areas deemed to be of highest risk.

Negative Effects of Money Laundering

Money laundering poses a significant threat to the stability and integrity of financial institutions crucial for economic development. This illicit practice fosters crime and corruption, hindering economic growth and diminishing efficiency within the real economy. Global research primarily concentrates on two primary sectors associated with money laundering: drug trafficking and terrorist organizations.

The ramifications of successfully laundering proceeds from drug trafficking are stark: a proliferation of drugs, increased criminal activity, and heightened violence. The connection between money laundering and terrorism, however, can be more intricate. Terrorist entities may obscure their financial trails to evade authorities and facilitate planned attacks, making monitoring and prevention efforts challenging.

Money laundering is not confined to major financial hubs and offshore centers but also extends its reach into emerging markets. As emerging economies open up their financial sectors, they become increasingly susceptible to money laundering activities. This phenomenon introduces volatility into money demand, leading to significant fluctuations in international capital flows and exchange rates.

According to various economic analyses, institutions like banks and non-bank financial entities play crucial roles in the economic development of nations. These financial institutions leverage both domestic and foreign capital to drive economic progress. However, money laundering poses a significant threat to the advancement of these institutions. The implementation of anti-money laundering measures within these institutions reveals a correlation between money laundering and fraudulent activities, thereby compromising their integrity. High rates of money laundering enable criminals to exploit financial institutions for illicit fund transfers, consequently undermining their stability and reputation.

These detrimental effects also erode the trust of customers in these institutions. Establishing and maintaining trust between customers and financial institutions is paramount for fostering a stable financial sector and leveraging it for economic development. The perception of fraud within these institutions, whether by depositors, investors, or the general public, serves as a significant barrier to trust. In essence, money laundering tarnishes the reputation of financial institutions, leading to a loss of trust from customers and stakeholders alike.

Below are the African countries captured by the FATF global dirty money watchlist in 2024:

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