Updated July 28, 2023
Definition of Grey List
Grey List as the word suggests, means something which is prohibited or has flaws in it, and in a financial scenario, gray list means can be implemented by FATF (Financial Action Task Force), which is a global body of countries that are in a doubtful state of involvement in terror funding, money laundering and other threats which are related to disturbing the integrity of the international financial system.
Explanation
Grey List is a collective list prepared by FATF (Financial Action Task Force) where countries involved in illegal activities like involvement in terrorist financing, money laundering, and other threats to the integrity of the international financial system are put in, and strong restrictions are placed on such countries along with close monitoring on behalf of FATF. When FATF places a country on a grey list, the monitoring of those countries is increased, and the nation has to find a quick-paced solution to the financial discrepancy, which is generally highlighted by FATF. The strategic deficiencies highlighted by FATF must be quickly resolved by such countries based on the time frames decided by FATF, failing to which FATF may impose severe punishment and penalties on such a nation.
At present, there are close to 18 countries that are on the grey list as per FATF based on certain strategic deficiencies noted by the Financial Action Task Force group. A few examples of such countries are Pakistan, Mauritius, etc. Grey list countries find a lot of trouble in making investments and also allowing investments by other countries due to the restrictions prescribed by FATF. Thus, a quick resolution to the strategic deficiencies is the only solution for a nation to get back in shape and keep the economy rolling.
Example of Grey List
Two examples of grey list countries can be Pakistan and Mauritius.
a) Pakistan
Due to repeated warning from FATF for Pakistan’s involvement in terror financing and money laundering, Pakistan has been included in the grey list of FATF and are also looking into a situation where if not acted on an urgent basis, they might also be shifted to the Blacklist of FATF.
b) Mauritius
Mauritius being a tax haven has been always utilized by other countries for money laundering activities and, thus, a route for FPIs to launder the huge sum of money based on the limited oversight that Mauritius has over the investments. Mauritius is taking several steps to identify and rectify this problem and has now started working closely with FATF to rectify the strategic deficiencies in dealing with terrorist financing, money laundering, and other illegal financing activities. A massive chunk of foreign portfolio investors investing in Indian markets is registered in Mauritius. After Mauritius was placed on a grey list, a lot of fund managers became worried about SEBI enquiring about the validity of the investments in their funds as the majority of FPI investments are made from this safe haven which was now placed in the grey list by FATF.
When Country Comes in Grey List?
Grey list is a kind of warning given to countries to prevent them from being blacklisted by the Financial Action Task Force, which is a global body governing all nations. When nations involve in illegal activities like terror funding, money laundering, and other illegal practices hampering financial integrity, FATF first warns such countries by placing them on a grey list and suggests them a plan of action to quickly rectify the strategic deficiencies with a guided time frame. If a country fails to act and rectify those issues highlighted by FATF, they are then placed into a separate list which is known as the blacklist.
A country, when put on the grey list, attracts close monitoring by FATF and strict regulations imposed on them. A country coming into the grey list faces severe problems like a lack of trade opportunities, a downgrade of ratings, and a shrinking economy. It also affects the potential borrowings from the IMF and other global bodies.
How Does it Affect that Country?
Greylisting affects the country in several ways, which are mentioned below:
- On getting greylisted, the country’s rating gets downgraded by global bodies, and thus this impacts the bond market of the country.
- The economy starts shrinking due to a lack of investment opportunities, and this takes a toll on the financial needs of the country.
- The borrowing capacity of the country gets affected due to severing ties with other bodies like the UN, IMF, etc.
- The trade opportunity with other countries also suffers a blow, and other countries look over grey listed countries with a lot of speculation.
- The country is deemed a high-risk country which also affects the tourism sector.
- There comes the problem of enhanced economic pressures like degrading currency value, trade deficit and rise in inflation.
Advantages and Disadvantages of Grey List
Below are the advantages and disadvantages of Grey List:
Advantages
- FATF involvement may help a country tied up in illegal activities come back to form and shape.
- Greylist is more of a warning to prevent a country from coming to the blacklist where the regulations and penalties are more severe.
- Greylisting may help a country revive its lost economy and amend its mistakes.
Disadvantages
- It hampers the economy of a country in a negative manner where other countries start looking at the greylisted country as a risky nation for investment.
- Grey listed countries also suffer a blow to their tourism industry as people generally prefer to avoid such a nation.
- Grey listed countries find it difficult to obtain additional financing from global bodies like the IMF and other borrowers.
- They suffer international boycotts from other countries.
- The economy goes for a toss with severe problems that come with greylisting, such as currency degrading, inflation, and deficit in trade.
- The bond market of the country falls as international bodies downgrade the ratings of such countries.
Conclusion
As discussed above, a grey listing can be considered as a warning and a remedial phase where countries are given a chance to amend their mistakes, and strategic deficiencies before FATF declares a country under its blacklist where the punishment and penalties are more severe. To avoid such listing, a country must adopt ethical practices and should not get involved in terror financing and money laundering activities.
Recommended Articles
This is a guide to Grey List. Here we discuss an introduction to Grey List, an explanation, and examples of how it works with advantages and disadvantages. You can also go through our other related articles to learn more –
