Anti-money laundering a key ESG Country risk factor.
Greylisted: Anti-money laundering is an ESG risk for countries because it affects the social and governance aspects of a country's economy.
On Friday the 24th of February 2023, South Africa was greylisted by the global anti-money laundering watchdog, the Financial Action Task Force (FATF).
The Financial Task Force (FATF) is an intergovernmental organization established in 1989 to combat money laundering and terrorism financing. The organization is composed of 39 member countries and two regional organizations, and its mandate is to develop and promote policies, both nationally and internationally, to combat money laundering and terrorism financing.
FATF works to promote international cooperation among countries to combat money laundering and terrorism financing. It develops and promotes policies, standards, and best practices in these areas, and provides technical assistance to countries that need it. FATF also monitors countries' compliance with its recommendations, conducts mutual evaluations, and issues public statements when necessary to encourage countries to comply with international standards.
One of the key activities of the FATF is the development of international standards for anti-money laundering and counter-terrorism financing (AML/CFT). These standards are known as the FATF Recommendations, and they are widely recognized as the global standard for AML/CFT. The FATF Recommendations provide a comprehensive framework for countries to prevent, detect, and prosecute money laundering and terrorism financing.
The FATF also works to promote effective implementation of its recommendations by conducting mutual evaluations of countries' AML/CFT systems. These evaluations assess the extent to which countries have implemented the FATF Recommendations, and identify areas where improvements are needed. The results of these evaluations are published in mutual evaluation reports, which provide guidance and recommendations to countries on how to strengthen their AML/CFT systems.
Anti-money laundering (AML) is a critical aspect of financial regulation in today's global economy. It refers to the set of laws, regulations, and procedures aimed at preventing criminals from disguising illegally obtained funds as legitimate income. AML regulations are enforced by governments, regulators, and financial institutions, and their primary objective is to combat money laundering, terrorism financing, and other financial crimes.
In recent years, AML has become an important environmental, social, and governance (ESG) risk for countries. ESG refers to the three main factors that measure the sustainability and societal impact of a company or an investment: environmental, social, and governance. However, ESG factors are not limited to companies but can also apply to countries.
AML is an ESG risk for countries because it affects the social and governance aspects of a country's economy. Money laundering can have serious social implications, such as increasing income inequality and undermining the rule of law. It can also lead to increased criminal activities such as drug trafficking, corruption, and other crimes, which can negatively impact a country's society.
* South Africa’s ESG risk rating in comparison to country’s with a Baa3 ratings from Moody’s (Source: Sustainalytics)
From a governance perspective, ineffective AML regulations can damage a country's reputation and hinder its economic growth. If a country fails to enforce adequate AML laws and regulations, it may be perceived as a high-risk jurisdiction for doing business. This perception can result in a lack of investment and reduced access to international markets, which can have significant economic consequences.
Furthermore, money laundering and other financial crimes can damage a country's financial system and its stability. These crimes can create an unfair playing field for businesses, leading to decreased investor confidence and ultimately harming a country's economy.
In summary, AML is a crucial ESG risk for countries that can have significant social, governance, and economic implications. It is important for countries to have effective AML regulations in place and enforce them to combat money laundering and other financial crimes. By doing so, countries can protect their citizens, promote a fair and sustainable economy, and strengthen their reputation as a responsible and trustworthy jurisdiction for doing business.