FATF ‘gray list’ exit: benefits and issues

The financial community welcomed the recent news that the Financial Action Task Force (FATF) removed the Philippines from its money laundering “gray list.” The benefits of this development are definitely welcome, but we also need to be aware that there are concerns raised by civil society organizations (CSOs) on allegations of state overreach in the counter-financing of terrorism (CFT) enforcement

The FATF, an international policy-making body, monitors global efforts to combat financial crimes. When a country is gray-listed, it means the FATF recognizes that jurisdiction’s commitment to addressing deficiencies but also notes that the existing measures are inadequate or not effectively implemented. For the Philippines, its gray list inclusion stemmed from concerns over its capacity to prevent illicit financial flows, enforce regulations, and prosecute financial crimes effectively.

The Philippines was first gray-listed in the year 2000, and then again in June 2021. The reasons for this included the weak implementation of the Anti-Money Laundering Act (AMLA), lack of effective supervision of designated nonfinancial businesses and professions, insufficient beneficial ownership transparency, and poor prosecution and conviction rates in money laundering cases. While the Philippines had a legal framework in place, its enforcement, monitoring, and risk-based supervision mechanisms were lagging.

To be removed from the gray list, several reforms were implemented. The AMLA was amended in January 2021 to strengthen the Anti-Money Laundering Council’s powers. This included the authority to impose sanctions, conduct more rigorous investigations, and enforce the submission of suspicious transaction reports. The Philippines increased efforts in registering beneficial owners of corporations, thereby reducing the risks of shell companies being used for illicit finance.

Another key development was the tighter supervision of sectors vulnerable to money laundering, such as casinos, real estate, and legal professionals. The country also committed to improving its capacity to investigate and prosecute complex financial crimes. Law enforcement agencies were trained further, and inter-agency cooperation was enhanced to support a whole-of-government approach. Additionally, the country worked closely with international partners to track cross-border financial flows and recover assets linked to criminal activity.

The benefits are significant. First, being removed from the gray list helps restore international confidence in the Philippines’ financial system. Foreign investors and financial institutions are wary of engaging with countries that are under increased FATF monitoring as this could drive up risk and compliance costs. Delisting therefore improves the country’s investment climate and facilitates smoother international financial transactions. It also helps Philippine banks retain and expand correspondent banking relationships, which are crucial for global trade and remittances.

On a broader level, strengthening the Philippines’ anti-money laundering and counter-terrorism financing framework contributes to national security and good governance. It enables the government to better detect corruption, tax evasion, and other illicit activities, leading to improved public trust and institutional integrity.

A counterpoint to this good news, however, are allegations that “the government has weaponized targeted financial sanctions and the criminalization of terrorism financing against development workers, human right defenders, and CSOs as retaliation for their outspoken criticism of anti-people policies and their advocacy for economic, social and cultural rights.” Some critics argue that the implementation of such laws may have been used to suppress dissent, criminalize activism, and restrict civic space.

These critics raise valid points, especially considering broader global concern about how anti-terrorism laws can be misused. The passage of the Anti-Terrorism Act of 2020 and related enforcement actions under the CFT framework have been accompanied by allegations of “red-tagging” — labeling individuals or organizations as communist sympathizers or terrorists without due process. Some CSOs have reported frozen bank accounts, surveillance, and administrative burdens that hinder legitimate operations. These actions, critics argue, create a chilling effect, undermining democratic participation and the role of civil society in holding governments accountable.

International standards — such as those of the FATF — emphasize the importance of ensuring that CFT regulations do not undermine fundamental freedoms. The FATF Recommendation 8, for example, calls for a proportionate, risk-based approach to regulating nonprofit organizations, to avoid unnecessarily disrupting legitimate charitable activities.

Whether these issues diminish the accomplishment of being removed from the FATF gray list depends on perspective. From a purely technical standpoint, the Philippines’ progress may still be considered a success. However, if the measures used to achieve this progress violate civil liberties or disproportionately target non-threatening entities, it raises ethical and governance concerns. It also poses a reputational risk: international partners and watchdogs may question the integrity of reforms that are perceived to harm democratic space.

Ensuring that CFT enforcement respects civil liberties is not only a moral imperative but also essential to the long-term credibility and sustainability of the country’s financial and democratic institutions. A more nuanced and risk-sensitive approach to monitoring nonprofit organizations should be developed, differentiating between those that are high-risk and those engaged in legitimate, lawful advocacy or humanitarian work.

While the Philippines deserves recognition for the technical and institutional improvements that contributed to its removal from the FATF gray list, the allegations of state overreach cannot be ignored. They highlight the need to strike a careful balance between security and human rights. The government should commit to transparency, ensure due process in investigations, and consider the role of civil society in the implementation of CFT regulations.

The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX.

Benel Dela Paz Lagua was previously EVP and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs.