Botswana’s removal from financial gray list spurs optimism

During its plenary session held on October 21, 2021 in Paris, the Financial action group (FATF) has removed Botswana from its gray list of jurisdictions.

The intergovernmental body concerned with money laundering, terrorist financing and other illicit money flows cited improvements in Botswana’s management of its anti-money laundering (AML) regimes and the financing of terrorism (CTF), which initially put the country on the gray list in October 2018.

This list prompted Botswana to make a high-level commitment to working with the FATF to strengthen its AML and CTF regimes and to address other technical gaps identified by the organization. The commitment to align its regulations with global standards has resulted in the establishment of a new legal framework.

This led the East and Southern Africa Anti-Money Laundering Group (ESAAMLG), which is implementing the FATF recommendations in the region, to complete its assessment of Botswana’s systems, prompting the FATF to withdraw the country. from its gray list.

Implications for foreign investment

Botswana’s removal from the gray list will be a relief for the government. The FATF gray list meant automatic inclusion in the European Union’s list of non-cooperative jurisdictions and the UK’s list of high-risk countries.

With all Botswana-related transactions requiring further consideration, the listing has had implications for the country’s foreign investment environment. Cross-border transactions have been affected as foreign companies have to take into account the risks of working with Botswana banks and other companies.

“NGOs, for example, must have sent more knowledge about your client [KYC] documents to their donors who were vigilant and had increased the degree and nature of oversight of Botswana-based NGOs and were reluctant to send money to Botswana to avoid potential sanctions, ”said Thuto Senwedi, Head of Risk and Compliance. compliance at Bookbinder Business Law.

“Registration has limited efforts to attract foreign business to Botswana, cross-border transactions and financial transaction flows, and increased the costs of local financial institutions doing business with international banks and other organizations due to the higher due diligence applied to them. . ”

Removing Botswana from the gray list also lowers the risk of future sanctions from other multilateral organizations. The FATF gray list may be the first step in a series of increasingly stringent sanctions from the World Bank, IMF and European Bank for Reconstruction and Development.

Instead, the FATF decision should lead to exiting the EU’s list of non-cooperative countries and the UK’s high-risk list. Gaborone lobbied the European Commission to remove him from the EU list given the dampening effect on foreign direct investment and the impact on creating a conducive business environment.

“As the EU and UK both refer to the implementation of the FATF action plan, it should only be a matter of time before Botswana is removed from the blacklists of the UK and EU, ”says Senwedi.

Diversify the economy

Listing is a major obstacle in attracting foreign investors and businesses, and removal from the EU and UK listings would give the Botswana government more leeway in its efforts to diversify the economy.

This bodes well for Botswana’s economy, which relies heavily on diamond mining but wants to develop the financial sector and the local stock market. The mining sector accounts for about a fifth of gross domestic product and diamond production constitutes 80% of exports.

“The financial sector has been identified as a driver of economic diversification and as part of the economic diversification strategy, Botswana aspires to be a regional financial center,” said Thapelo Tsheole, CEO of the Botswana Stock Exchange.

The government has also adopted a strategy comprising fiscal incentives, government support for export promotion activities and the establishment and expansion of special economic zones. The country is also seeking to diversify diamond mining, particularly by exploiting its valuable copper reserves.

“The country has many strengths in the mining sector that it intends to use to break out of its dependence on diamonds,” said Charles Siwawa, CEO of the Botswana Chamber of Mines. “A number of companies are investing in the expansion and development of coal, nickel, manganese, iron ore and silver mines.

Rare earth metals are also found in abundance and Botswana expects to benefit from the boom in the electric cars and the resulting high demand for battery minerals as part of its efforts to attract non-diamond mining.

Pandemic recovery

Diversification is essential if the country is to emerge from the economic disruption of the global Covid-19 pandemic. Botswana’s economy has been dragged into a severe recession due to the pandemic-induced economic crisis, with GDP contracting 8.9% in 2020 and growing youth unemployment and inequality.

Before the pandemic, Botswana was characterized by strong economic growth, averaging 5% per year over the past decade. There are already signs of recovery. At the end of 2020, Botswana was forecasting growth of 7.7% in 2021 thanks to the recovery of the diamond industry. This recovery is now stronger than expected, with growth projected at 9.2% by the IMF.

Botswana is ranked third in sub-Saharan Africa in the UN’s 2020 Human Development Index, behind Mauritius and the Seychelles. It has become an upper middle-income economy and aims to transition to a high-income economy by 2036.

A $ 250 million loan from the World Bank in July and a $ 137 million loan from the African Development Bank in September boosted Botswana’s efforts to recover from the pandemic.

As the country is expected to implement new programs to attract investment and the government takes action to protect investors, staying off the lists of uncooperative jurisdictions is now a key condition for the success of these programs.

This is likely to be an ongoing challenge and Botswana will need to continue to work with ESAAMLG to further improve its legal basis for tackling financial crime.

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