In the global financial ecosystem, US banks play a pivotal role. However, their ability to serve customers from developing countries is often hindered by various challenges. Recent events, such as the popular startup Mercury Bank's decision to cut ties with startups from countries involved in the FATF grey list, highlight the complexities involved. Startup founders in these affected countries have recently been thrown into a state of dilemma as it becomes extremely difficult to do business in the United States.
This article explores the reasons why US banks like Mercury close the accounts of startups in 13 African countries, focusing on regulatory challenges, risk management, and the evolving financial landscape, with a special emphasis on the FATF grey list.
Understanding the FATF Grey List
The Financial Action Task Force (FATF) is an intergovernmental organization established to combat money laundering, terrorist financing, and other related threats to the integrity of the international financial system. The FATF maintains two lists: the black list and the grey list.
What is the FATF Grey List?
The FATF grey list includes countries that have strategic deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks but have committed to addressing these issues. Being on the FATF grey list indicates that the country is under increased monitoring and is working with the FATF to resolve identified weaknesses. As at June 2024, the countries under the FATF grey list are 21 in number
What Countries Are Currently on the FATF Grey List?
According to the FATF's most recently released jurisdictions under increased monitoring as of June 2024, below is the list of countries currently on the FATF Grey List:
- Bulgaria
- Burkina Faso
- Cameroon
- Croatia
- Democratic Republic of Congo
- Haiti
- Kenya
- Mali
- Monaco
- Mozambique
- Namibia
- Nigeria
- Philippines
- Senegal
- South Africa
- Syria
- Tanzania
- Venezuela
- Vietnam
- Yemen
Why is the FATF Grey List Important?
The grey list is crucial because it signals to the global financial community that a country has vulnerabilities that need addressing. It serves as a warning to banks and financial institutions to exercise caution when dealing with entities from these countries. This heightened scrutiny aims to prevent financial crimes and ensure the integrity of the global financial system.
What are the Disadvantages of Being on the FATF Grey List
1. Increased Scrutiny:
Countries on the grey list are subject to more rigorous monitoring and reporting requirements. This can lead to delays and higher compliance costs for businesses operating within these jurisdictions.
2. Reputation Damage:
Being grey-listed can harm a country's reputation, making it less attractive to foreign investors and financial institutions.
3. Economic Impact:
The increased compliance burden can stifle economic growth and innovation, particularly for startups and small businesses that may struggle to meet the stringent requirements.
4. Reduced Access to Financial Services:
Banks and financial institutions may limit their services or sever ties with entities from grey-listed countries to avoid the risk of non-compliance and associated penalties.
What Impact Does Being on the FATF Grey List Have on Businesses
Businesses in grey-listed countries face significant challenges. The enhanced due diligence requirements can lead to operational inefficiencies, higher costs, and difficulties in securing international partnerships and investments.
For startups and entrepreneurs, this environment can be particularly stifling, hindering their ability to grow and scale their operations.
Why Does US Banks Struggle to Serve Customers from Developing Countries?
1. Regulatory Challenges
One of the primary obstacles US banks face in serving customers from developing countries is the stringent regulatory environment. The FATF grey list includes countries that are under increased monitoring due to deficiencies in their AML and CTF frameworks. When a country is added to this list, its financial transactions are subject to enhanced scrutiny.
US banks, bound by domestic and international regulations, must perform rigorous due diligence on customers from these regions. This process can be time-consuming and costly, often requiring advanced technology and significant human resources to ensure compliance. The complexity of navigating these regulatory requirements makes it challenging for US banks to maintain relationships with customers from developing countries.
2. Risk Management
Risk management is another critical factor. Serving customers from developing countries can expose US banks to higher levels of risk, including political instability, economic volatility, and regulatory uncertainty, especially if these countries are listed on the FATF grey list. These risks can lead to potential losses and increased operational costs.
To mitigate these risks, US banks often adopt a conservative approach, limiting their exposure to markets perceived as high-risk. This cautious stance can result in the termination of accounts and services for customers from developing countries, as seen in the recent actions of Mercury Bank.
3. Technological Barriers
While technology has revolutionized the banking industry, it also presents barriers. Many developing countries lack the technological infrastructure that is standard in developed nations. This disparity can hinder the ability of US banks to implement and monitor AML and CTF measures effectively.
Moreover, integrating banking systems with those in developing countries can be fraught with technical challenges. Ensuring secure and seamless transactions across different technological platforms requires significant investment in both technology and expertise, which can be a deterrent for US banks.
4. Economic Factors
Economic conditions in developing countries can also impact the ability of US banks to serve these markets. Issues such as currency instability, inflation, and limited access to financial services can complicate banking operations. Additionally, economic sanctions imposed by the US or international bodies can restrict financial transactions, making it difficult for US banks to operate in certain regions.
Case Study: Mercury Bank
The recent decision by Mercury Bank to sever ties with startups from countries on the FATF grey list by closing the account of startups in 13 African countries, underscores these challenges. The bank which was earlier caught up in federal scrutiny through one of its partners Choice Bank, cited the need to comply with stringent AML checks as a primary reason for its actions. This move not only highlights the regulatory pressures faced by US banks in general, but also the broader implications for businesses and entrepreneurs in developing countries and especially with countries who are listed in the FATF grey list.
Startups in these regions often rely on access to international banking services to grow and scale their operations. The withdrawal of services by US banks can stifle innovation and economic development, further entrenching financial exclusion.
FATF Grey List and AML Compliance
The FATF's grey and blacklists are essential tools for compliance professionals. Companies should evaluate both current and prospective clients against these lists and implement risk-based procedures when engaging with individuals or entities operating in these regions.
Additionally, it's crucial to recognize that these lists are subject to change. The FATF publishes two public documents—one for each list—three times a year, which may include the addition or removal of jurisdictions based on FATF evaluations.
How Businesses Can Ensure AML Compliance
1. Screening:
To ensure AML compliance, it is important that businesses screen customers against both black and grey lists. This is true for both the onboarding of new customers, but also for existing customers as lists can change and new jurisdictions can be added. Part of complying with FATF recommendations and ensuring a robust compliance program includes the use of a sanctions and watchlist screening tool for the individuals and corporations your business deals with.
2. Customer Due Diligence
Having strong customer due diligence (CDD) processes is crucial for accurately verifying the countries in which your clients operate. This is particularly important because if clients are engaged in activities in grey or blacklisted countries, you must implement a comprehensive enhanced due diligence (EDD) process.
3. Transaction Monitoring
After your screening and due diligence processes can effectively identify new and existing customers situated in black or grey-listed countries, it's essential to closely monitor the transactions conducted by these entities. Make sure your AML program includes a real-time transaction monitoring solution to identify and report any suspicious activities.
How Youverify Can Help
Youverify’s AML compliance platform offers a thorough overview of client risk and activities, enabling you to swiftly identify and report any suspicious activities to the relevant regulators. Reach out to us today for more information or to arrange your complimentary demo of our platform, which features our powerful real-time sanctions screening solution.
With Youverify you can confidently engage with any entities, including those operating in jurisdictions listed on FATF grey or black lists.
Conclusion
The struggle of US banks to serve customers from developing countries is multifaceted, involving regulatory, risk management, technological, and economic challenges. As the global financial landscape continues to evolve, finding solutions to these issues will be crucial. US banks must balance compliance and risk management with the need to support financial inclusion and global economic growth.
Efforts to enhance regulatory frameworks, invest in technology, and foster international cooperation will be key to overcoming these challenges. By addressing these barriers, US banks can better serve customers from developing countries, contributing to a more inclusive and resilient global financial system.