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The Financial Action Task Force and it's Role with High Risk Countries
1 month ago by Lamia Massaad

The Financial Action Task Force and it's Role with High Risk Countries

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At some point, many companies will have the opportunity to grow their business further, either by adding a new overseas location or by working with a new business partner from another country. When you are ready to take this step, there is a myriad of factors that you must consider to ensure that your decision will result in the successful growth of your business. 

Most companies will begin this process by evaluating the country's risk level as it is the most effective way to identify potential dangers specific to dealing with that particular country. Only by doing this assessment can you determine the scale of the impact those risks will have on your business, if there are actions you can take to minimise the damage, and if it is worthwhile to proceed with your plans despite those risks. 

To determine a country's risk level, you must consider two different components, the first of which the quantitative factors which are hard statistics such as the debt-to-gross domestic product ratio. Quantitative factors will help you assess that country's economic health, i.e. how well they manage their finances and debts. 

The other component of this evaluation is the qualitative factors, which are the political and social environment of that country. These are crucial as they will have the most direct impact on your business. 

The political climate - aside from how stable it is - includes government policies that govern the establishment of foreign companies within that country. While social factors which include customs, belief systems, and societal behaviours will also directly influence how well you can establish yourself within a country.

Although a risk assessment is an excellent starting point, what happens when you are dealing with high-risk countries? Is it enough to look at that country's economic, political, and social factors or do you need further information before making your decision?

Below we give you three additional crucial factors you must consider when you are dealing with high-risk countries. 

How does the Financial Action Task Force define a High Risk Country?

Before we discuss the three remaining factors lets first look at what a high-risk country is. For this answer, let's look at how the Financial Action Task Force (FATF) defines this term. 

Who is FATF? They are an inter-governmental body that is responsible for setting the global standard for the prevention of illegal activities relating to terrorism, corruption, and organised crime.

According to FATF, a high-risk country is one that has inadequate policies to deal with financial crimes such as money laundering and terrorist financing, i.e. those countries whose poor policies pose a threat to the finance industry.

If you are interested in finding which countries the FATF has blacklisted as high-risk, it has several resources including a continuously updated Jurisdictions under Increased Monitoring list as well as a heatmap where you can check the status of any country of your interest.

1. High Levels of Fraud and Corruption

The fraud and corruption levels of a country are vital indicators of whether you should commit to moving or partnering with a business from there. High levels of both elements could mean that you are placing your business in danger by entering these markets. 

Countries that have significant problems with illegal activities often won't have the supporting infrastructure or capacity to prosecute criminals successfully. This includes not having enough experience with complex cases that involve international crimes and the ability to trace them to their sources. 

2. Enhanced Due Diligence

When dealing with a high-risk country, you might be required to follow various global anti-laundering initiatives to be able to set up a business there.

This is a result of more governments and financial institutions calling for enhanced regulation, that legally obligates all companies to have in place policies that deal with financial crimes. An example of this is the 5th Anti-Money Laundering Directive (AMLD5) set out by the European Union that established regulations to help EU countries prevent money laundering and terrorist financing while at the same time aligning with the objectives of the Financial Action Task Force (FATF).

The AMLD5 requires that all EU-based businesses refrain from collecting identification documents and information directly from the organisation and instead primarily rely on official documents that come from public sources such as government agencies. Additionally, it stipulates that if a potential business partner comes from a high-risk country, then that business is obligated to conduct an in-depth due diligence check.

3. Ultimate Beneficial Owners

Like we mentioned before when considering a move to or working with someone from a high-risk country, you might be required to conduct various checks so that you can get a clear image of who you are dealing with.

As part of the due diligence, protocols set out by the AMLD5 you may also have to identify the ultimate beneficial owner of any company that may potentially become your partner including but not limited to vendors, suppliers, transportation, and clients.

The beneficial owner check is a crucial tool to help you identify the rightful (true) owner of a company or the individual(s) with the most control. UBO protocols are an effective way to either reinforce what you already know about a potential business partner or to identify who is behind a company when physical verification is not possible. 

It is crucial that you know this because those individuals may be involved in illegal activities, and as the UBOs they will have a lot of influence on how that company operates.  

The Significance of Mitigating Risk in High-Risk Countries

Minimising any potential negative impact before committing to a substantial investment is crucial to ensuring that your business grows in a positive direction. Mitigating risk becomes even more critical when dealing with a country with an elevated risk because of the severe consequences that result from uninformed decision making.  

By using this article as a guide, you can prevent damaging your chances of success and avoid any negative consequences such as getting entangled in lawsuits, receiving hefty fines, or getting involved in illegal activities unknowingly.

Alternatively, you can use the solutions of a leading business intelligence provider such as Cedar Rose. Our database allows you access to data on millions of companies, directors, shareholders and individuals with our data subscriptions, packages, Add-ons, API, XML or eIDV solutions. 

We can help you discover who you are trading with through our meticulous due diligence, credit reporting and identity verification services and at the same time ensure that your business remains protected whilst dealing with companies from high-risk countries. 

For more information on how we can help your company operate within high risk countries, give us a call on +357 25 346630 or email info@cedar-rose.com.

  • Financial Action Task Force
  • FATF
  • Due Diligence