The Financial Action Task Force (FATF) conducted a mutual valuation, which was concluded in October 2021. The valuation found holes in South Africa’s strategic systems to combat money laundering and terrorist financing. This was due to low levels of transparency and inadequate internal capabilities and systems, which led South Africa to be placed under review by the FATF and on the brink of being greylisted.
What is Greylisting?
Greylisting essentially means that a country has been recognized as having compliance issues but has committed to address strategic inadequacies to counter money laundering and terrorist financing within a given timeframe.
When a country is put on the grey list, the country is closely monitored by the FATF, and stringent regulations are imposed on them. A country being placed onto the greylist faces serious potential problems such as lack of trade opportunities, a downgrade of ratings, and a subsequent shrinking economy.
Greylisting will most likely damage the country’s reputation and can make it extremely difficult to do business for anyone operating financial accounts abroad or dependent on foreign financial services providers.
What is the Financial Action Task Force (FATF)?
The Financial Action Task Force (FATF) is the global money laundering and terrorist financing supervisory body. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
How did South Africa find itself on the verge of being greylisted?
In October 2021, the FATF published an evaluation of South Africa’s anti-money laundering measures, which found holes in the country’s policies and efforts to combat money laundering and terrorist financing, notwithstanding its financial system being highly vulnerable to these crimes.
Busi Mavuso the “Business Leadership South Africa (BLSA)” CEO expressed that South Africa found itself on a verge of being greylisted largely due to the collapse of commercial crime investigation and prosecution during the State capture period. South Africa is facing the consequences for its failure to implement effective prosecutions for crimes like money laundering and terrorist financing, she emphasized.
Potential impact of Greylisting
If South Africa is included in the list, it will mean that all transactions of companies and individuals from South Africa will be seen as high-risk transactions, prompting difficult administrative and compliance obligations, and may reduce international trade with South Africa.
Busisiwe Mavuso explained that the economic consequence will be that should South Africa be put on the grey list, SA’s biggest traders such as the UK will immediately impose a high risk category on the country, which will have a negative impact on investment flows.
Investment flows are important, because it is through foreign direct investments that the country is able grow its economy and combat high levels of unemployment.
The greylisting will affect South Africa’s attractiveness to foreign direct investment. Stanlib’s Chief Compliance Officer, Njabulo Duma, expressed that the country already experiences numerous obstacles with regards to the state of its attractiveness, this is inclusive of electricity supply, inefficient network industries and rising costs. He further expressed that being greylisted by the FATF could further erode the country’s ability to attract foreign investment.
Any extra money that the country pays as a result of the risk premium imposed by the global Development finance institutions (DFIs), could have been used to address South Africa’s developmental needs such as health care, education and infrastructure.
How likely is it that South Africa will be greylisted?
According to Mail & Guardian, around June 2022 the acting treasury director general Ismail Momoiat expressed that his department and the Financial Intelligence Centre (FIC) are very worried about the potential of South Africa being put on the grey list.
Business Leadership South Africa (BLSA) commissioned a report that reported an 85% probability of South Africa being greylisted.
According to Business Tech, South Africa is running out of time to fast-track legislation that could possibly prevent South Africa from being greylisted. Finance minister Enoch Godongwana proposed an Anti-Money Laundering and Combating Terrorism Financing Amendment Bill to try and align the country with some of the recommendations made by the Financial Action Task Force (FATF), but the process behind its refinement has been questioned.
On the other hand, Ismail Momoniat told Business Day in July that the country’s grey listing was not set in stone, and South Africa could succeed in remedying its regulatory deficiencies before the deadline.
How long does greylisting last?
Around June this year there were 23 countries on the Financial Action Task Force’s (FATF’s) grey list, including Albania, Burkina Faso, Haiti, Jamaica, Mali, Morocco, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates and Yemen.
If greylisting of South Africa was to happen, it should have happened in October 2022, but it has been postponed to February 2023 for a decision to be made.
The average time spent under greylisting is three years, but the range is very wide, from a minimum of one year to a maximum of seven years.
Business Tech wrote that “While no country would ever want to be on the Financial Action Task Force’s (FATF) ‘grey list’, falling foul of the group could kick-start and accelerate much-needed reforms to counter fraud, corruption, and terrorism financing in South Africa.”
James George, compliance manager at professional services group Compli-Serve SA, said that this is one of the more positive outcomes of falling onto the grey list, adding that these comprehensive changes were seen in Mauritius, which was able to get off the list in under two years.