By Dr. Michael Atingi-Ego
Uganda’s financial sector received a significant boost with its removal from the Financial Action Task Force (FATF) Grey List on February 23. This signifies our commitment to improving anti-money laundering and counter-terrorist financing (AML/CFT) measures.
Grey-listing publicly identifies countries as having weaknesses in their AML/CFT regimes that require remedial actions.
Being grey-listed discourages international business, as institutions avoid transactions with high-risk nations.
Research by Mizuho Kida and Simon Paetzold in an international Monetary Fund (IMF) Working paper, published in 2021, showed that grey-listing has a large and statistically significant negative impact on a country’s capital inflows.
According to the result from the econometric analysis using machine learning techniques, total capital inflows declined on average by 7.6 percent of gross domestic products (GDP) when a country is grey-listed.
Breaking it down by type of capital flow, foreign direct investment (FDI) inflows decline on average by 3.0 percent of GDP. Portfolio inflows decline on average by 2.9 percent of GDP, other investment in-flows decline on average by 3.6 percent of GDP.
The study shows that grey-listing hurts overall investment in a country reducing FDI, portfolio flows and others as a share of GDP. While a study on the specific impact on Uganda has yet to be done, survey results show restricted financial cross border transactions increased credit costs by foreign lenders and decreased foreign investments.
Uganda addressed these concerns through a collaborative effort involving Government, regulators and international organizations such as the international monitory funds and the Eastern and Southern Africa anti-money laundering group (ESAAMLG).
The Bank of Uganda (BOU) implemented a robust AML/CFT monitoring system and improved compliance tools. We spearheaded a multi-pronged approach to strengthen AML/CFT compliance in the banking sector including implementing a robust monitoring system for banks, foreign exchange bureaus and money and remittance companies.
The bank also developed industry guidance notes to clarify AML/CFT requirements. We launched effective awareness companies to educate financial institutions. The bank also enhanced supervisory procedures and tools to meet international standards.
The benefits from removal from the grey lists include enhanced reputation, thus attracting more investors and lowering risk premiums.
It also increases capital inflows due to easier transactions and reduced costs.
It improves economic growth fueled by higher investments.
Uganda’s dedication to financial transparency paves the way for brighter economic future. The Bank of Uganda remains committed to maintaining these advancements.
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