By Soria Hay
Bravura Holdings Ltd
On 7 May 2020, Mauritius was added to the European Commission’s (EU) draft list of High-Risk Third Countries, which includes those jurisdictions deemed to have strategic deficiencies in their Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regimes and thus posing significant threats to the financial system of the 27-nation bloc. Soria Hay, head of Corporate Finance at Bravura, outlines both the anticipated impact of its inclusion and the required remedial actions.
While the draft list still requires European Parliament and Council approval, and is set to apply only from 1 October 2020, inclusion on such a list presents Mauritius with both reputational risk and other financial implications.
Mauritius is currently the most compelling investment destination on the African continent according to the World Bank’s recently released flagship report, “Doing Business 2020”. Mauritius remains the top investment destination in Africa, and moved up seven places in its worldwide ranking to the thirteenth place for the best destination for doing business. In comparison, South Africa is ranked in the 87th place in the report.
As of 1 April this year, credit ratings agency Moody’s changed Mauritius’ sovereign credit rating from investment grade Baa1 with a stable outlook to a negative outlook, largely resulting from the anticipated impact of the Covid-19 pandemic. The short-term rating is Prime-2 which signifies a high ability to repay short-term debt. This stands in stark contrast to South Africa’s credit ratings, with Moody’s downgrade in early April to Ba1 with a negative outlook; a speculative or non-investment grade (otherwise known as “junk”) that denotes a significant credit risk and no rating within the prime (short-term lending) categories. At the end of April this year, S&P downgraded South Africa’s long-term foreign-currency credit rating to BB-, three notches below investment-grade, from BB.
Why was Mauritius added to the EU’s high-risk list?
Inclusion in the “grey list” of the Financial Action Task Force (FATF) in February this year has resulted in Mauritius being included on the EU’s high-risk list.
FATF is the global money laundering and terrorist financing watchdog which sets international standards that aim to prevent these illegal activities and the harm they cause to society. (The FATF currently comprises 37 member jurisdictions and two regional organisations, representing most major financial centres in all parts of the globe.)
The grey list includes those jurisdictions that, although under increased monitoring, are also actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.
In other words, being on the grey list means that the country in question has committed to swiftly resolving the identified strategic deficiencies with an agreed action plan and within agreed timeframes.
What are the consequences for Mauritius investors?
The financial services sector accounts for 11.7% of Mauritius’ GDP which stands just behind manufacturing as the biggest sectoral contributor to the country’s growth.
Under the EU’s Fourth Anti-Money Laundering Directive, banks and other “obliged entities” such as credit institutions, banks, insurance companies, investment firms, trust and company service providers in the EU are required to apply enhanced customer due diligence on transactions and business relationships involving those countries listed as high-risk third countries.
Accordingly, transactions originating from or going to Mauritius would be subject to enhanced scrutiny, which could mean longer timelines towards completion and more frequent risk assessment reviews of the relationships.
Persons and entities deploying EU funding or budgetary guarantees shall be prohibited from entering into new or renewed operations with entities incorporated or established in Mauritius, except when an action is physically implemented in Mauritius. In other words, while EU development finance institutions could continue to meet existing obligations to Mauritian-domiciled funds, they would be prevented from investing in any new Mauritian fund structures (or through Mauritian entities) until the AML/CFT compliance issues are resolved.
Fund managers involved in capital raising from EU development finance institutions might have to investigate alternative, similar jurisdictions in which to temporarily accommodate the funds.
How can Mauritius get de-listed from the EU’s high-risk list?
Once a country has been de-listed from the “grey list” of the Financial Action Task Force, the EU Commission will assess whether the reasoning for de-listing is also sufficiently comprehensive from the EU’s point of view.
According to the FATF Action Plan, Mauritius does not have technical compliance issues given that the AML/CFT legal framework has been extensively revamped and Mauritius is largely compliant or compliant with 35 out of the 40 recommendations.
However, Mauritius is still to demonstrate an increased level of effectiveness of its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) systems. Of interest is that there are other countries which have so far been assessed, including FATF members, which are yet to achieve a high or substantial level of effectiveness in the same areas.
The Mauritian authorities have already delivered on their commitments and a first progress report was sent to the FATF on the agreed date. Technical assistance has been obtained from the EU funded AML/CFT Global Facility and the German government through the German Development Agency, in order to support the implementation of the FATF Action Plan.
What is the timeline for de-listing from the EU’s high-risk list?
Once a country is no longer considered by the FATF as presenting strategic deficiencies that pose a risk to the international financial system anymore (in other words, once that country has been de-listed from the FATF “grey list”), there is no longer a basis to consider that the country presents a risk to the EU financial system.
In this situation, the EU Commission will review available information from the FATF and if confirmed, the country will be de-listed from the EU high-risk list through the adoption of a delegated act.
Consequently, Mauritius would be removed from the EU list without the need for additional verification on other elements not covered by the FATF action plan. Similarly, there is no need for extra requirements to be fulfilled on top of the completion of the FATF Action Plan.
The EU Commission will adopt regularly delegated acts taking into account the calendar of the FATF Plenary meetings which are held three times a year in October, February and January.
On 13 May, the Mauritius Minister of Financial Services and Good Governance said that the government was determined to complete the implementation of the FATF Action Plan and reiterated the country’s high level of commitment to its implementation so as to enable de-listing from both the FATF and the EU lists.
This is a critical step in order for the Mauritian government to safeguard the country’s robust economy while reassuring the global investment community that Mauritius remains a credible and trusted jurisdiction.
Bravura Holdings Limited is an investment banking firm specialising in corporate finance and structured solutions services. In 2019 Bravura was awarded Best Independent Advisory Firm by Africa Global Funds Awards (AGF). Bravura Holdings has a primary listing on the Stock Exchange of Mauritius and a secondary listing on the NSX. It has offices in Mauritius, South Africa and Namibia.
* Published in print edition on 5 June 2020