Strategy Note /

FATF updates its Grey List, one piece in the ESG mosaic

  • In small emerging markets, Pakistan off FATF Grey List, Tanzania added, Morocco, Philippines, Turkey, UAE remain

  • Grey List denotes deficiencies in anti-money laundering and counter-terror regulation, but does not trigger sanctions

  • FATF designations should be treated as incomplete by ESG investors; merely one part of the country governance mosaic

FATF updates its Grey List, one piece in the ESG mosaic
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
24 October 2022
Published byTellimer Research

The Financial Action Task Force (FATF) completed its most recent meeting on 21 October and, among small emerging and frontier equity markets on its "Grey List", the highlights are the following:

  • Pakistan removed;

  • Tanzania added;

  • Morocco, Philippines, Turkey, and UAE remain.

Grey List designation has minimal practical bearing on remittances, trade, investment, or multilateral (eg IMF) financial assistance in the short-term.

But it does lead to increased scrutiny by commercial banks of cross-border transactions and may increase the risk attached to long-term investment.

FATF "Grey List" evolution over the last two years

The FATF should on no way be relied on by ESG investors as a complete indicator of the quality of governance at the country level because:

  • FATF does not assess all countries at the same time – eg, Lebanon has not been assessed since 2009;

  • FATF procedures are arguably every bit as politicised as other multilateral organisations (not least in the UN's determination of which organisations are designated as terrorist);

  • Document leaks such as Luanda Leaks, Paradise Papers, Panama Papers, Swiss Leaks, Lux Leaks, FINCEN Files, and most recently in October 2021, Pandora Papers, all suggest that there is much illicit financial activity in the larger emerging and developed markets which is completely missed by FATF.

In our screening of countries for ESG we incorporate FATF designation but we also consider metrics such as the Corruption Perceptions index from Transparency International, the Financial Secrecy Index from the Tax Justice Network, and the Anti-Money Laundering Index from the Basel Institute — these also miss much of the corrupt activity in developed markets but at least they provide something closer to annual comprehensive global coverage.

Corruption composite index in emerging markets

ESG-related data is included in our EM Investability Matrix, a curated data set covering over 50 emerging and frontier markets with about 250 metrics, and an ESG factor is incorporated into our EM Country Index, which ranks the top-down investment case of about 50 markets with customisable weights for about 30 factors. Access to both of these datasets requires a subscription.

Related reading

ESG needs to focus on countries, not just companies, Oct 2021

Corruption in emerging and developed markets – an ESG investing blindspot, May 2022

Corruption: Transparency International update for ESG and EM investors, Feb 2022

Shadow economy in EM: Bad for sovereign risk, good for consumer spend, Jun 2022

Pandora Papers: A reminder of ESG corruption risk in EM and DM, Oct 2021

ESG needs to focus on countries, not just companies, Oct 2021

FATF Grey List highlights another grey area for ESG, Jun 2021

Corruption: The latest Transparency International scores in Emerging Markets, Jan 2021

Corruption: FinCEN Files a reminder of challenges for EM and ESG investors, Sep 2020

When countries behave badly: The tortuous morality of ESG investing, Mar 2022

Corruption: The ugly truth for EM and ESG investors, Jul 2020