FATF describes jurisdictions under increased monitoring as countries that are working with FATF to address strategic deficiencies in their AML/CFT, counter-terrorist financing and proliferation financing frameworks within agreed timeframes. This is commonly referred to as the grey list.

For the financial system, this designation can act as a risk signal. It tells banks and other financial institutions that the jurisdiction has identified weaknesses that require remediation. In practice, this may lead financial institutions to apply enhanced due diligence, request additional information, review correspondent banking relationships, or reassess the commercial value of maintaining exposure to that jurisdiction.

Correspondent banking relationships allow one bank to access financial services through another bank, often to support cross-border payments, foreign currency clearing, trade finance and international remittances. FATF has recognised that correspondent banking relationships are essential to the global payment system, international trade and economic activity, especially for emerging markets and developing economies.

However, correspondent banks often have limited visibility over the underlying customers and transactions of respondent banks. If the perceived risk becomes too high, or the cost of managing that risk becomes commercially unattractive, a correspondent bank may restrict or terminate the relationship.

This is why grey listing can matter so much in practice. Even where the local financial system continues to operate domestically, international connectivity can become more difficult.

De-risking occurs when financial institutions terminate or restrict business relationships with clients, sectors, regions or jurisdictions to avoid risk rather than manage it. FATF has expressly stated that de-risking is not consistent with the risk-based approach and may reduce transparency by pushing activity into less regulated channels.

De-banking is closely related. It refers to the denial, restriction or termination of access to banking services. In the grey-listing context, de-banking may affect local banks, money transfer operators, charities, businesses, politically exposed persons, high-risk sectors, or customers connected to a jurisdiction perceived as higher risk.

Over-compliance occurs when institutions go beyond what the law strictly requires, often because they fear regulatory criticism, enforcement action, reputational damage or uncertainty. De Koker and Casanovas describe this as an “over-compliance dilemma”, where banks may adopt conservative approaches such as restricting or terminating relationships even where a more nuanced, risk-based assessment may be possible.

This is important because the practical effect of grey listing may be shaped less by the FATF list itself and more by how private financial institutions react to it.

Grey listing can also have unintended consequences for financial inclusion. Recent RUSI research argues that grey listing can indirectly undermine financial inclusion through increased compliance pressure, banking sector retrenchment, higher costs and restricted access to financial services for vulnerable populations.

This creates a policy tension. AML/CFT systems are intended to protect the financial system from abuse, but if compliance responses become too blunt, they may exclude legitimate people and businesses from the regulated financial system. That exclusion can reduce transparency and make illicit finance harder, not easier, to detect.

A local bank in a grey-listed jurisdiction maintains a correspondent banking relationship with an overseas bank. The overseas bank reviews the relationship after the FATF grey listing.

The overseas bank does not automatically terminate the relationship. However, it may ask for:

• updated AML/CFT policies and procedures;

• information on customer due diligence and beneficial ownership controls;

• details of transaction monitoring systems;

• sanctions screening arrangements;

• information on high-risk customers, politically exposed persons and money transfer operators;

• evidence of regulatory engagement and remediation progress;

• additional reporting on payment flows and unusual activity; and

• senior management assurance that financial crime risks are being managed.

If the local bank cannot provide adequate comfort, the overseas bank may restrict services, increase fees, limit payment corridors, apply enhanced monitoring, or exit the relationship.