YANGON/TAIPEI -- In another setback to the Myanmar military's minimal credibility, an international watchdog has placed Myanmar on its blacklist for terrorism financing alongside Iran and North Korea.

The Financial Action Task Force was set up in 1989 by the Group of Seven advanced economies, initially to counter money laundering. It has since expanded its mandate to countering terrorist financing and the proliferation of weapons of mass destruction.

FATF has recommended that Myanmar be blacklisted immediately and be subject to enhanced due diligence by member states. Officials familiar with its decision in Paris told Nikkei Asia that it stemmed mainly from concerns over Myanmar's casinos and illicit cross-border trade. These have worsened since the military ousted an incoming elected civilian government in February 2021. The increase in transnational criminal activities includes the export of synthetic drugs and online gambling.

"This is for failing to address a large number of strategic deficiencies in its anti-money laundering and counter terrorist-financing systems... As a result, FATF calls on countries to apply enhanced due diligence to business relations and transactions in relation to Myanmar," said Raja Kumar, a Singaporean official who took over the FATF presidency on July 1.

"However, this enhanced due diligence must not negatively impact humanitarian assistance. Countries must ensure there are no blanket measures that disrupt the flow of humanitarian funds or remittances, or harm funding for legitimate NPO [nonprofit organization] activity."

The blacklisting is a further demonstration of how the Myanmar military has set the country back. It had been on the blacklist for years until it was moved to the gray list in February 2016, and then further delisted in June 2016 -- the year President Thein Sein's quasi-military government handed power to Aung San Suu Kyi's elected government -- in acknowledgment of progress made on criminalizing terrorism financing.

On Friday, Pakistan was removed from the FATF's gray list with the statement saying the South Asian country "addressed technical deficiencies to meet the commitments of its action plans regarding strategic deficiencies."

Myanmar is now back with the likes of North Korea and Iran, and banks will impose additional due diligence requirements for transactions that involve the crisis-torn country.

A Burmese financial analyst called the reversal "a damning indictment of the Burmese military's credibility as a party to govern the country and the economy, and a reflection of how the generals are mismanaging the central bank."

The move will further complicate foreign aid distribution and burden companies still in the country trying to operate responsibly. The business community had already been appalled by the jailing of the prominent foreign business advocate Vicky Bowman, a former U.K. ambassador to Myanmar, and her husband Htein Lin, a renowned artist.

"Essentially, Myanmar is on a par with North Korea and Iran as a money laundering and terrorist financing threat to the world," said Michael Ng, former deputy director of the Hong Kong government department responsible for Hong Kong-Myanmar relations.

"The blacklisting imposes another hurdle -- on top of the junta's foreign exchange control and other hostile policies -- for foreign companies and investors to do business," said Ng. "For international corporations, maintaining relations with blacklisted Myanmar may involve increased reputational, sanctions and consumer boycott risks."

The World Bank has predicted that Myanmar's economy will stagnate this year after shrinking by almost a fifth in 2021. In its July 2022 report, the bank warned that a spike in inflation had disrupted the operations of all businesses. Consumer inflation accelerated to 18.2% in May year on year. Increases in global oil prices, the Burmese kyat's depreciation and supply chain disruptions have led to price hikes for a wide range of imported inputs, squeezing already thin profit margins, according to the bank's report.

The National Unity Government, a parallel entity set up by ousted lawmakers, said the blacklisting deepens the regime's international isolation. "It sends a very strong signal that Myanmar is not a reliable place to do business as long as this crisis goes on," said Sasa, the NUG's international cooperation minister and spokesperson. "Investors should see that nothing is functioning properly under the military regime."

Ng said the blacklist will further undermine confidence among Asian and Western investors, but China might prove the exception. Amid ongoing U.S.-China tension and Russia's invasion of Ukraine, Chinese financial institutions and state-controlled investors have become more ready to decouple with the international financial and regulatory systems, he said.

"FATF's designation is less important to Chinese investors. Working with the military to secure China's infrastructure projects in Myanmar to access the Indian Ocean is their key priority," the ex-trade official told Nikkei. Over the past year, China has gradually resumed infrastructure projects in Myanmar that were planned before the military takeover. Chinese companies have remained in Myanmar's energy market as others pulled out, and they are pushing ahead with the proposed deep-sea port in Kyaukphyu, a key component in Chinese President Xi Jinping's Belt and Road Initiative.

The latest multinational companies to pull out of Myanmar are Beiersdorf Myanmar, a Germany-headquartered manufacturer for beauty product Nivea, and Ooredoo, a Qatar-based telecom giant. Beiersdorf said in August that the current market made it "impossible to continue operating."

"The precise impact on the broader economy is difficult to predict and will depend on how the international banks and their regulators react," a senior Western economist following Myanmar told Nikkei. "But a blacklisting would likely increase the time and costs involved in moving money into and out of the country, including for trade and remittance payments." The economist predicted "further shifts toward informal, unregulated channels for international payments, and towards the use of bank accounts set up outside Myanmar."

"Initial estimates suggest it will have a pretty huge impact," a Western official in Yangon's foreign aid community told Nikkei. Continued aid deliveries will require new financial and operational modalities.