In its plenary held on 21 October 2021 in Paris, the Financial Action Task Force (FATF) removed Botswana from its grey list of jurisdictions.
The intergovernmental body concerned with money laundering, terrorism financing and other illicit money flows cited improvements in Botswana’s handling of its anti-money laundering (AML) and counter-terrorist financing (CTF) regimes, having initially grey-listed the country in October 2018.
That listing prompted Botswana to make a high-level commitment to work with the FATF to strengthen its AML and CTF regimes and address further technical deficiencies identified by the organisation. The commitment to bring its regulations in line with world standards was brought about by the establishment of a new legal framework.
That led the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which implements FATF recommendations in the region, to complete its assessment of Botswana’s systems, prompting the FATF to remove the country from its grey list.
Implications for foreign investment
Botswana’s removal from the grey list will come as a relief to the government. The grey-listing by the FATF meant automatic inclusion in the European Union’s list of non-cooperative jurisdictions and the United Kingdom’s list of high-risk countries.
With all transactions linked to Botswana requiring extra scrutiny, the listing had implications for the country’s foreign investment environment. Cross-border transactions were impacted, with foreign businesses needing to consider the risks of working with Botswana banks and other businesses.
“NGOs for example had to send more know-your-customer [KYC] documents to their donors who were vigilant and had increased the degree and nature of the monitoring of Botswana-based NGOs and were reluctant to send money to Botswana to avoid potential sanctions,” says Thuto Senwedi, head of risk and compliance at Bookbinder Business Law.
“The listing constrained the efforts of attracting foreign businesses into Botswana, cross-border transactions, and financial transactions flows, and increased the costs of local financial institutions doing business with international banks and other organisations due to the higher due diligence that is applied to them.”
Botswana’s removal from the grey list also decreases the chance of future sanctions from other multilateral organisations. FATF grey-listing can be the first step in a series of increasingly stricter sanctions from the World Bank, the IMF and the European Bank for Reconstruction and Development.
Instead, the FATF’s decision should lead to an exit from the EU’s non-cooperative list and the UK’s list of high-risk countries. Gaborone has been putting pressure on the European Commission to remove it from the EU list given the dampening effect on foreign direct investment and the impact on the creation of a business-friendly environment.
“Since both the EU and the UK benchmark on the FATF action plan implementation, it should be a matter of time before Botswana is removed from the UK and EU blacklists”, says Senwedi.
Diversifying the economy
The listing is a major obstacle to attracting foreign investors and companies, and a removal from the EU and UK lists would give the government of Botswana more room for manoeuvre in its effort to diversify the economy.
That bodes well for Botswana’s economy, which relies heavily on diamond mining but is keen to grow the financial sector and local stock exchange. The mining sector accounts for around a fifth of gross domestic product and diamond production constitutes 80% of exports.
“The financial sector was identified as a conduit for economic diversification and under the Economic Diversification Drive strategy, Botswana aspires to be a regional financial centre”, explains Thapelo Tsheole, CEO of the Botswana Stock Exchange.
The government has also adopted a strategy including tax incentives, government support for export promotion activities and the establishment and expansion of special economic zones. The country is also looking to diversify mining away from diamonds, including by exploiting its valuable copper reserves.
“The country has numerous assets in the mining sector that it intends to use to shift away from its dependence on diamonds,” says Charles Siwawa, CEO of the Botswana Chamber of Mines. “A number of companies are investing in expansion and development of coal, nickel, manganese, iron ore and silver mines.”
Rare earth metals are also found in abundance and Botswana plans on taking advantage of the rise of electric cars and subsequent high demand for battery minerals as part of its effort to attract non-diamond extraction.
Recovery from pandemic
Diversification is critical if the country is to emerge from the economic disruption of the global Covid-19 pandemic. Botswana’s economy was dragged into a severe recession due to the pandemic-induced economic crisis, with a GDP contraction of 8.9% in 2020 and the worsening of youth unemployment and inequality.
Before the pandemic, Botswana was characterised by strong economic growth, averaging 5% a year over the past decade. There are already signs of a recovery. At the end of 2020, Botswana projected 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 as the third-placed sub-Saharan African nation 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 $250m loan by the World Bank in July and a $137m loan by the African Development Bank in September have boosted Botswana’s efforts to bounce back from the pandemic.
With the country expected to implement new programmes attracting investment and the government taking action to protect investors, staying off the lists of non-cooperative jurisdictions is now an essential condition to ensure the success of these programmes.
It is likely to be an ongoing challenge and Botswana will have to continue to work with ESAAMLG to improve further its legal foundation to fight financial crime.