FATF ¦ FATF changes its grey listing criteria to further focus on risk

FATF Refines Grey-Listing Criteria to Focus on Highest-Risk Jurisdictions and Ease Burden on Least Developed Countries

A sharper, risk-based approach to global AML/CFT oversight The Financial Action Task Force (FATF) has announced significant changes to how it prioritizes jurisdictions for review and potential listing, aiming to concentrate scrutiny on countries that pose greater risks to the international financial system while easing pressure on least developed countries (LDCs). The reforms, unveiled on 17 October 2024, recalibrate the criteria for “active review” and adjust timelines for lower-capacity jurisdictions, with the goal of improving outcomes and reducing unintended development impacts.

Refocusing the review pipeline on systemic risk

Under the revised criteria, jurisdictions that meet the initial referral thresholds will be prioritized for active FATF review if they are one of the following:

• a FATF Member;
• on the World Bank’s High-Income Countries list (excluding those with financial sectors comprising two or fewer banks); or
• a country with financial sector assets exceeding USD 10 billion, measured by broad money.

This pivot emphasizes jurisdictions with larger financial footprints or systemic links, where deficiencies can propagate risk across borders.

Calibrated Relief for Least Developed Countries

In a notable shift, LDCs, as defined by the United Nations, will not be prioritized for active review unless FATF agrees they pose a significant risk of money laundering, terrorist financing, or proliferation financing. Where an LDC is brought into the process due to material risk, the FATF may grant a longer observation period — up to two years — to progress against a Key Recommended Action roadmap. The extended runway is designed to recognize capacity constraints, provide targeted technical support, and enable sustainable remedial action without exacerbating development challenges.

Why this matters: illicit flows and development harm

Illicit financial flows disproportionately harm LDCs, diverting scarce public resources away from health, education, and infrastructure. Crimes such as tax evasion, corruption, and organized criminal activity siphon billions annually, undermining state capacity and citizens’ welfare. By sharpening the listing process and focusing on higher-impact jurisdictions, FATF aims to protect the integrity of the global financial system while reducing collateral pressure on countries with limited supervisory and enforcement bandwidth.

Bastian Schwind-Wagner_Follow "FATF’s revised listing criteria sharpen the focus on jurisdictions with the greatest systemic risk and ease pressure on least developed countries through longer observation periods. The changes aim to cut by half the number of low-capacity countries listed in the next cycle while improving global AML/CFT outcomes."

How the grey list process works—peer-led, targeted, and time-bound

The grey list signals strategic deficiencies in a country’s AML/CFT framework, triggering a tailored action plan developed and monitored by a peer group of regional and global experts. This approach directs scarce resources to the most consequential gaps — whether beneficial ownership transparency, risk-based supervision, targeted financial sanctions, or cross-border cooperation — in order to reduce illicit flows. The process is collaborative, evidence-based, and focused on measurable progress, which ultimately strengthens national defenses and reduces cross-border contagion risks.

Anticipated impact: fewer low-capacity countries listed, better alignment with risk

FATF expects the reforms to reduce by about half the number of low-capacity countries being listed in the next assessment cycle. Practically, this means supervisory and enforcement attention should tilt toward jurisdictions whose financial size, interconnectedness, or membership status presents greater systemic exposure. For the private sector, enhanced clarity on prioritization may improve screening and de-risking decisions, while pushing for more efficient allocation of compliance resources.

What financial institutions should watch

1. Recalibrated exposure mapping:

   Banks and fintechs should re-assess jurisdictional risk given the revised prioritization, especially in high-income and large-asset markets that may face closer scrutiny.

2. Expectation on remediation metrics:

   Action plans will continue to stress effective implementation — quality of risk-based supervision, enforcement outcomes, sanctions implementation, and ML/TF/PF risk mitigation — over mere technical alignment.

3. Potential shift in correspondent banking dynamics:

   As the listings skew toward more systemically significant jurisdictions, institutions may need to refine their correspondent and trade finance risk assessments and enhance monitoring in specific corridors.

4. Support for clients in LDCs:

   With extended observation windows for LDCs, institutions can align capacity-building and advisory support to client remediation timelines, potentially mitigating de-risking pressures.

5. Strategic takeaway:

   By tightening the criteria for review and tailoring timelines for LDCs, FATF is steering its grey-listing process toward jurisdictions where deficiencies can create outsized global harm, while enabling more constructive, sustainable remediation in countries with limited capacity. If implemented effectively, this should reduce development-side frictions, concentrate global compliance energy where it matters most, and yield a more resilient financial crime risk perimeter.

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