CLA News / Combatting Financing of Terrorism and Proliferation Financing: Has FATF Enhanced Monitoring Made Any Difference in Non-Compliant Countries? by Olanipekun Olukoyede, Executive Chairman of the Economic and Financial Crimes Commission

Background

The transnational nature of crime and the increasing threat it poses to international peace and security underscores the various multilateral conventions, protocols and initiates to combat money laundering, terrorist financing and financing of proliferation of weapons of mass destruction. Fast paced globalization aided by the growth of the internet since its adoption in the 1990s, and the accompanying emerging technologies have made the threats more present than ever.

For instance ten years ago, criminal perpetrating business email compromise fraud would have been limited to sending individual individual letters and emails. Now, criminals can access huge “sucker lists” and can send out thousands of letters all over the world instantly.

Evidences from investigation and prosecution of economic and financial crimes globally have shown organized criminal groups migrate to new countries, particularly developing countries to exploit the lack of legislation, poorly coordinated law enforcement, or easily corruptible governments, or to take advantage of geographical location. Hence, the international cooperation to combat money laundering, its predicate offences, terrorist financing and proliferation financing, and the accountability framework to ensure the effectiveness of each country’s effort and the sustainability of collective efforts, which the Financial Action Task (FATF) Mutual Evaluations and the accompanying Follow Up monitoring typify, has become one of humanity’s bastion against the threat to global peace and security. This paper explore the general impact of  the FATF enhanced monitoring process on subject countries, presents Nigeria experience and explores lessons other Commonwealth nations can draw from its experience.

The FATF Enhanced Monitoring and its Implications for Countries

The FATF Mutual Evaluation and the Follow up process form the core of the framework for ensuring that countries maintain effective regime to combat money laundering, terrorist financing an proliferation financing.

As you are aware, Jurisdictions are referred to the International Cooperation Review Group (ICRG) for the purpose of enhanced monitoring following identification of a considerable number of key weaknesses that clearly suggests strategic deficiencies in the country’s AML/CFT Regime.

From a cross sectional analysis of action items proposed for countries that are currently under enhanced monitoring, the issues generally are basically the same.  Most of the action items include requirements to obtain proper AML/CFT/CPF risk understanding through conduct of National and Sectoral Risk Assessment and the development of a national strategy and action plan that will give expression to the outcomes of the risk assessments in risk based supervision of entities, enhancement of risk based supervision of Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions,  implementation of  preventive measures including politically exposed persons due diligence, beneficial ownership identification and verification for legal persons and arrangements, implementation of Targeted Financial Sanction, Suspicious Transaction reporting, Effective use of financial intelligence, national and international cooperation  and other issues across the eleven Immediate Outcomes(IOs)

Countries under enhanced monitoring could attract undesirable publicity; however, it is unnecessary in most cases. The FATF itself acknowledged that countries under enhanced monitoring are not non cooperative countries or countries under sanctions, rather they are countries that have made high level commitment to work with the FATF to address to the strategic deficiencies observed in their AML/TFC regime.

In their own words, the FATF states that “Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing” they further affirmed that when a jurisdiction is placed under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes…”  Therefore countries under enhanced monitoring should not be mistaken for jurisdictions that the FATF has formally called for application of enhanced due diligence measures against.

However, studies have shown that being under enhanced monitoring could portend serious economic and development consequences for countries both in the short and long run, if the issues raised in their Mutual Evaluation reports and the proposed ICRG action plans are not expeditiously addressed.

In a study conducted by the IMF in 2021, titled, “Impact of Gray-Listing on Capital Flow”, the study showed that countries under enhanced monitoring suffered large and statistically significant reduction in capital flow. Such as follows:

• Capital inflows decline on average by 7.6% of GDP when the country is grey listed.
• Foreign direct investment inflows decline on average by 3.0% of GDP.
• Portfolio inflows decline on average by 2.9% of GDP.
• Other investment inflows decline on average by 3.6% of GDP.

The study affirmed the suspicion that countries under enhanced monitoring may suffer de-risking from foreign bank, while investors may use the grey list as a restriction for investments and reallocation of resources away from the country under enhanced monitoring. Generally, FATF enhanced monitoring status on a country could also create perceptions of weak institutional frameworks, discouraging development partners and donor agencies from providing aid. It could also raise risk assessment costs for a disbursement. The International Monetary Fund (IMF) required Pakistan to be removed from the FATF’s Grey list as part of the conditions for a $6 billion bailout programme in 2018 – (Caitlin Maslen, ‘The Impact of Grey-listing by the Financial Action Task Force (FATF)’, (November 28, 2024),

Notwithstanding the tremendous negative impact of enhanced monitoring on the subject countries, evidences abound on the potentials benefits of going through the enhanced process to the subject countries. The process may lead to implementation of broad based reforms that will impact on credibility and long term economic stability of the subject country, in addition to strengthening its national combating ability against money laundering, terrorist financing and proliferation financing threats.

The FATF Enhanced Monitoring Process and the Nigerian Experience

• Pre-First Round of Mutual Evaluation

Nigerian experience with the FATF enhanced monitoring process actually began in 2001, when Nigeria was blacklisted alongside 22 other countries, as part of the Non Cooperative Countries and Territories.

Concerted efforts were made by the Government of Nigeria to address the highlighted issues which led to putting in place legal, institutional and regulatory frameworks required, chiefly among which was the passage of the Money Laundering (Prohibition) Act, 2004 and Economic and Financial Crimes Commission (Establishment) Act, 2004. These two legislations formed the pivot for other subsequent regulatory and institutional initiatives that forms the Nigeria’s AML/CFT regime, such as:

• Establishment of the Nigerian Financial Intelligence Unit;
• Establishment of the Special Control Unit against Money Laundering for supervision of the DNFBPs;
• Criminalizing of terrorist financing in accordance with FAFT standards and relevant conventions;
• Criminalizing of money laundering on the basis of Vienna Convention, Palermo Convention and application of crime of money laundering to all serious offences and
• Addressing the deficiencies in customer due diligence requirements

The legislations also clarify the AML/CFT responsibilities of the Nigerian Financial Intelligence Unit (NFIU) and the three financial services supervisory bodies – Central Bank of Nigeria (CBN), Securities & exchange Commission (SEC) and National Insurance Commission (NAICOM).

Consequently, the first mutual evaluation report of Nigeria was adopted by the GIABA Plenary on May 7, 2008 and in a public statement issued at the end of its plenary meeting held in Paris, France from the 14th to 18th of October, 2013, the FATF removed Nigeria from the list of jurisdictions with significant deficiencies in their Anti-money laundering & Counter Financial Terrorism (AML/CFT) regimes. The decision followed the on-site visit of the FATF International Cooperation Review Group (ICRG) in September, 2013 which visit revealed that Nigeria has substantially completed the technical terms of the Action plan developed to address the deficiencies and that there was political will as well as institutional capacity for continuous implementation of reforms.

Post First Round of Mutual Evaluation

Nigeria continued its effort towards sustaining an effective AML/CFT with the enactment of the Money Laundering (Prohibition) Act, 2011 and the Terrorism (Prevention)Act, 2011(amended in 2013). To align its AML/CFT regime with the modifications in the FATF 40 Recommendations, particularly as it regards its emphasis on risk understanding, Nigeria conducted its first AML/CFT National Risk Assessment (NRA) in 2016. The 2016 NRA formed the foundation for the analysis and the conclusions reached by the GIABA assessors in the Nigeria 2^nd round of Mutual Evaluation Report.

2^nd Round of Mutual Evaluation and the Nigeria ICRG process

The FATF 2^nd round of Mutual Evaluation is distinguished by its unique methology which focus on demonstrable effectiveness of AML/CFT regime rather than mere ticking boxes of technical compliance ass it was in the 1^st round of Mutual Evaluation.  The 2^nd round of Mutual Evaluation Report published in August 2021 observed certain strategic deficiencies in the Nigeria’s AML/CFT regime chiefly among which are as follows:

• Supervision and Prevention efforts(CDD & EDD) do not align with the result of the NRA 2016
• There is no assessment of ML/TF risk of virtual asset activities and internet casinos.
• Nigeria has not identified at-risk NPOs, and the nature of threats posed by terrorist entities, as well as how terrorist actors abuse those NPOs
• Nigeria lacks procedures or mechanisms for identifying targets for designation in relation to UNSCRs 1267 and 1373.
• Nigeria does not have measures and mechanisms in place to implement TFS on PF.
• No requirement to identify beneficial owners (including legal arrangements) & third parties
• Weak record keeping obligations i.e., There is no requirement for DNFBPs to keep records of the results of any analysis undertaken on the record kept
• No requirement to apply relevant measures consistent with identification of high risk jurisdictions.
• Poor understanding and weak reporting of STR by DNFBPS
• Limited scope of supervision- lawyers and internet casinos are not supervised for AML/CFT/PF
• Risk-based AML/CFT supervision is not well established for the DNFBP sector.
• Lack of legal framework for SCUML (including administrative sanction powers)
• The range of sanctions available to supervisors were not considered to be effective, proportionate and dissuasive

After the adoption of Nigeria’s Mutual Evaluations Report on August, 2022, Nigeria entered into its post observation period which ended on October 2023. However, despite the tremendous inter-agency efforts that saw the reduction in the action items from 84 to 15 at the end of the post observation period.

15 action items cutting across Immediate Outcomes 1 to 10, remained largely unaddressed leading to Nigeria coming under the FATF enhanced monitoring process.

Impact of the Enhanced Monitoring Process on Nigeria’s AML/CFT Regime

Since the endorsement of action plans for Nigeria in February 2023, Nigeria has muscled high level political will to record tremendous improvements demonstrated in its 1^st to the current 6^th progress report which has been submitted for consideration at the next Nigeria face to face meeting with the African Joint Group in Tanzania.   Notably these improvement are products of broadbased legal, regulatory, and institutional which has impacted in the following areas:

1. Strengthening of AML/CFT/CPF Laws and Regulations

The enhanced monitoring process has led to legislative reforms which have given expression to its commitments to address the outstanding actions items.   The Money Laundering (Prevention & Prohibition) Act, 2022, was enacted to address all the Technical Compliance issues including clarifying the legal status of SCUML and strengthening administrative sanction powers of all supervisors & regulators. Similarly, the Terrorism (Prevention & Prohibition) Act, 2022(TPPA) was enacted to account for Nigeria’s full implementation of the United Nations Security Council Regulations (UNSCR) 1267 & 1373 including providing appropriate procedures to freeze, seize aand confiscate terrorist funds.

The TPPA also established the Nigerian Sanction Committee with responsibility and powers to designate persons and organizations and also provide the framework for implementation of Targeted Financial Sanction by reporting entities. The TPPA also provided for the Counter Terrorist Financing oversight of Non Profit Organization as oppose to their former supervision as DNFBPs.

Government licensing authourities and Self Regulatory Bodies have also strengthened their market entry controls to implement full range of AML/CFT controls including implementation of Targeted Financial Sanctions, beneficial ownership identification and verification.

Nigeria has also strengthened its beneficial ownership framework with the amendment of the Corporate and Allied Matters Act, resulting in the development of   public beneficial ownership register. In similar vein, the enhancement of national identification infrastructure have also led to improved KYC/CDD by reporting entities.

Improved AML/CFT/CPF National Coordination & Cooperation Framework.

The enhanced monitoring process has also improved Nigeria’s domestic coordination and cooperation. The AML/CFT Inter-Ministerial Committee was established to serve as the high level apex committee chaired by the three lines Minister comprising the Minister of Justice, Minister of Interior and the Minister of Finance. The coordination framework has also flown down into Committee of Regulators and Supervisors, AML/CFT Authorize Officers Forum and various other working groups that facilitate exchange of information and better outcomes in terms of investigation and prosecutions of economic and financial crimes.

Enhanced Financial Supervision and Compliance Culture

Across the FIs and DNFBPs, supervisors have enhanced risk based supervision focussing on the high risk sectors as obtained from the completed National Risk Assessment and the various sectoral risk assessments. Supervisors have shown effective supervision through targeted offsite and onsite examinations and effective follow-up to ensure implementation of recommended remedial actions. Evidences from supervisory report have also shown increased compliance among the reporting entities. Particularly in the DNFBP sector compliance indicators such as development of AML/CFT policy, implementation of TFS, rendition of Currency Transaction and Suspicious Transaction Reports etc, have also increased significantly since the end of the post observation period.

Access to Technical Assistance and Capacity Building

Capacity development for supervisors and law enforcement officers has improved. There has been an increased in technical support from international and regional bodies like GIABA, the WorldBank, FATF etc, to help improve their capacities of  supervisors and law enforcement officers. This support includes training, policy guidance, and financial intelligence sharing and strengthening of national institutions.

Stronger Law Enforcement and Investigations

Nigeria has also intensified efforts on investigation and prosecution of money laundering and terrorist financing offences. A case in point is the tremendous success recorded in the prosecution of terrorism and terrorist financing cases, which has been attributed to improved cooperation and coordination between the law enforcement agencies, the military and the Federal Ministry of Justice.

Evidences abound in terms of higher numbers of money laundering and terrorist financing convictions, increased asset recoveries and confiscations and greater use of targeted financial sanctions (TFS) to freeze asset of terrorist financiers. Management of proceed of crimes has also improved significantly since the post observation period with the passage of Proceed of Crimes of Act, 2022.

Lessons for Other Commonwealth Countries

Nigeria has largely addressed all its action items under the enhanced monitoring process with exception of the items under Immediate Outcome 8 (Confiscation).  Nigeria’s journey offers several instructive lessons for other Commonwealth nations:

• High Level Political Commitment- High Level Political Commitment is needed to pull the mammoth machineries of government to address the action items and also to sustain the gains secured during the enhanced monitoring process. Nigeria demonstrated jih level political will through the three line Ministers and Chief Executives of the regulatory and law enforcement agencies.
• Proactive Compliance Over Reactive Measures: The drive to enhance AML/CFT frameworks should stem from a commitment to national security and economic stability, rather than merely to satisfy international requirements.
• Building Enforcement Capacity: Investing in training, technology, and infrastructure for financial crime enforcement agencies is essential for creating an effective regulatory environment.
• Harnessing Technology: Advanced financial intelligence tools, including blockchain analytics and AI-driven monitoring systems, can significantly bolster the detection and prevention of illicit transactions.
• Fostering Public-Private Partnerships: Collaboration between governmental bodies, financial institutions, and the private sector is crucial to establish a robust AML/CFT ecosystem.
• Continuous International Engagement: Maintaining regular dialogue with FATF and regional bodies ensures that countries can proactively adapt to evolving risks in terrorism and proliferation financing.

Conclusion

FATF’s enhanced monitoring framework, while presenting significant challenges, also offers a clear roadmap for reforms.  Nigeria’s experience underscores that the benefits of such monitoring extend beyond mere compliance—they facilitate the creation of a resilient financial system capable of disrupting the financing of terrorism and proliferation activities.

Commonwealth nations can learn from Nigeria’s proactive reforms and collaborative approaches, ultimately strengthening their own defences against financial crimes.

While the FATF has made major changes to the criteria for putting countries on its lists to relieve pressures on least developed countries and focus on those countries posing greater risks to the international financial system. The members of the Commonwealth should continued to push for more considerations for countries in the Sub-Saharan who continued to constitute the highest number on countries on the enhanced monitoring list.

By Olanipekun Olukoyede

Executive Chairman of the Economic and Financial Crimes Commission

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