From CompliNEWS | Financial Service Intelligence Watch
Full coverage of news reports on Greylisting incl ‘A damning indictment of SA’s criminal justice system’
In response to confirmation that SA has been grey listed by the Financial Action Task Force (FATF), Finance Minister Enoch Godongwana said the authorites would work to ‘swiftly and effectively address all outstanding deficiencies and strengthen the effectiveness of its anti-money laundering and counter-terrorist financing regime’. Fin24 reports the FATF has placed SA in the company of countries such as Syria, Haiti, Yemen and Mozambique. The watchdog’s decision signals to global banks, financial institutions and investors that the country is not fully compliant with anti-money laundering and terrorist financing standards. The group said SA has made significant progress on many of its recommended actions to improve its system. However, more work is needed to increase investigations and prosecutions of money laundering, as well as the seizure of assets due to crimes. Eight areas of improvement were identified. Friday’s decision was not unexpected. Fin24 notes that Godongwana said Cabinet has considered the action plan put forward by the FATF and had committed to actively work with the watchdog. ‘Government recognises that addressing the action items will be in the interest of SA, and that doing so is consistent with our existing commitment to rebuild the institutions that were weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption,’ he said in a statement.
The SA Reserve Bank said it acknowledges the decision made by the FATF to add the country to the list of jurisdictions currently under increased monitoring. ‘Going forward, SARB will further strengthen supervision and enhance the dissuasiveness and proportionality of administrative sanctions issued,’ it said. Momentum Investments economist Sanisha Packirisamy told Business Report that when the global FATF places a jurisdiction under increased monitoring, it means that the country is actively working with the FATF to address apparent strategic deficiencies in its regimes designed to tackle financial crimes. ‘In our view, much of the responsibility for the weakening of SA’s criminal justice system lies with the previous administration’s subversion of democracy. During this period, the capacity of SA’s tax authority, intelligence agencies and crime-fighting and law enforcement bodies were incapacitated. SA was given until November 2022 to prove it is remedying the country’s structural deficiencies when it comes to anti-money laundering and countering the financing of terrorism,’ she said.
Opposition parties said the development came as no surprise and is a reflection of a failing government. The DA said the move is a damning indictment against SA’s criminal justice system. ‘Approximately two years ago, SA was warned that it needed to ensure financial criminals were brought to account in particular, criminals involved in international terrorist financing and also money laundering, but very little action followed,’ said SA spokesperson Dion George. EWN reports that Action SA said despite ample warning, the government has yet again failed to act in the best interests of South Africans. Its director of policy, Johann Kriege, said the country being grey listed automatically means local businesses will likely face more growth barriers. The Citizen reports that the ANC called on government to implement strategies to prevent illicit money flows into the country. ‘The decision is based on the assessment by the FATF that SA has eight areas of strategic deficiencies related to the effective implementation of our anti-money laundering and combating the financing of terrorism laws that still require attention,’ the party said. It said SA has until November 2025 to address these deficiencies.
Dr Sanele Gumede, a lecturer in economics at the University of KZN, says the grey listing confirms that SA’s financial systems are not safe for investors. ‘There are loopholes in our systems. There are ways in which people can launder money and this is mainly looking into the illegal exchange of money as opposed to countries that are not grey listed,’ Gumede said. The Sunday Tribune reports he said that in terms of SA’s regulations and monitoring ‘our policies, we have let down our guard a lot’. ‘We have become complacent, meaning that we have become unsafe in terms of money and the stability of ensuring that everything is monitored accordingly.’ He said a prime example was the Phala Phala scandal which showed there were loopholes. ‘That is in the President’s space and obviously there are others. In the global outlook SA looks like an easy target for financial crimes.’
SA is likely to face a three-year slog to get itself removed from a global list of 25 countries deemed to have inadequate anti-money laundering and counter terrorist financing controls. Business Day reports that Nigeria was also grey listed, and the FATF suspended Russia’s membership. Pakistan endured more than four years on the list, Botswana three and Mauritius two, while Iceland had the quickest turnaround after spending just one year on the list. However, removal only comes after a final, on-site assessment when both FATF and the relevant country agree that all elements of a specific action plan have been largely or fully tackled. FATF will start with the next round of mutual evaluations in 2024, with the first mutual evaluation report from this round scheduled for its October 2025 plenary meeting. It is expected that SA will then be assessed again in the 2027/2028 round of mutual evaluations. ‘Ultimately, the length of SA’s stay on the greylist will depend on how seriously the recommendations are taken, and how effectively the deficiencies are addressed,’ said Sangeeth Sewnath, deputy MD of Ninety One.
An International Monetary Fund study estimates that once the Financial Action Task Force places a country on its grey list, it can face capital outflows equal to 7.6% of GDP. CityWire reports that last year, Futuregrowth Asset Management said that, once the FATF put South Africa on its grey list, it would impact capital flows to and from the country. A recent International Monetary Fund study estimated potential capital outflows of 7.6% of GDP based on the historical incidence of grey-listed countries, according to Futuregrowth. The asset management firm also believes that adding South Africa to the grey list, would also knock local investment returns. In addition, investors might factor in a risk premium for South African assets because of the increased level of compliance required.
In April 2022, the Investigating Directorate was established within the National Prosecuting Authority to prosecute individuals and entities that were involved in state capture. Moneyweb reports that South Africa submitted several reports to the FATF, prosecuted several money laundering offenders, and utilised extraditions to get fugitive offenders. National Treasury also moved quickly to enact necessary legislation.
On 22 December 2022, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act commenced after being signed by the president. The Act amends five pieces of legislation, including the Companies Act, 2008, the Financial Intelligence Centre Act, the Financial Sector Regulation Act, 2017, the Nonprofit Organisations Act, 1997, and the Trust Property Control Act, 1988.
On 23 December 2023, the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act commenced after being signed by the president. This Act expands the definition of terrorist activities, provides for crimes related to terrorist training, the joining of terrorist organisations, and the possession and distribution of publications with terrorism-related content.
In February 2023, South Africa made a high-level political commitment to work with the FATF and ESAAMLG [Eastern and Southern Africa Anti-Money Laundering Group] to strengthen the effectiveness of its AML/CFT [anti-money laundering and counter financing of terrorism] regime. Since the adoption of the Mutual Evaluation Report (MER) in June 2021, South Africa has made significant progress on many of the MER’s recommended actions to improve its system, including by developing national AML/CFT policies to address higher risks and newly amending the legal framework for TF [terrorist financing] and TFS [targeted financial sanctions], among others.
The economic consequences of greylisting can be summarised as follows.
1. Less capital flows into South Africa
According to a report by the International Monetary Fund (IMF), greylisting leads to a significant decrease in capital inflows. For vulnerable countries, this could result in a balance of payments crisis. This is because greylisting entails that all transactions of South African companies and individuals will be seen as high-risk transactions, resulting in complicated compliance and administrative duties, and likely disincentivising investment into and trade with South Africa.
2. Economic penalties might be imposed on South Africa
FATF member states and other international bodies might impose economic penalties and similar measures against South Africa. International finance flows to and from SA will entail higher compliance obligations and transaction costs.
3. Less foreign direct investment (FDI)
Greylisting will discourage FDI in South Africa and reduce capital inflows.
4. Decrease in South Africa’s external reserves
If there are lower capital inflows and FDI into South Africa, this could reduce external reserves as there will be less tax revenue.
5. Difficulty obtaining financing on the international market
Given the implications of greylisting, South African companies will find it harder to obtain financing from foreign lenders on the international capital markets, and from multilateral lenders such as the World Bank.
6. Decreased competitiveness of SA companies in the global economy
As reported by Bitcoin.com News, a South African financial industry regulator designated crypto as a financial product after the FATF reportedly voiced its concerns over the lack of regulation of such assets. At the time, some commentators suggested that this move would help South Africa avoid getting grey-listed.
However, in its statement of 24 February, the South African Reserve Bank (SARB) seemingly acknowledged that the country has not done enough to avoid getting grey-listed. The bank nevertheless vowed to ‘strengthen its supervision and further enhance the dissuasiveness and proportionality of administrative sanctions issued.’
According to a Reuters report, being on the FATF’s grey list could potentially make it hard for South Africa to secure loans from foreign banks perturbed by the watchdog’s move. The report also quotes an International Monetary Fund document from 2021 which suggested that countries on this list will sometimes see the flow of capital into their respective economies getting disrupted.
Business Day asks how negative the consequences of the greylisting will prove for business and investment is the subject of debate. Combined with all SA’s other woes, the damage to confidence and the country’s reputation as an investment destination and financial hub could be significant.
Crucially, the eight remaining boxes are all about the effectiveness of our ability to investigate and successfully prosecute financial crime and catch and sanction the money launderers and terror financiers — not about the legislative or regulatory framework. That in turn reflects the dysfunctional state of SA’s police, crime intelligence and prosecuting agencies, despite promises to turn them around and repair the damage done to them in the state capture years.
Law firm Webber Wentzel said subjecting South African companies to higher levels of due diligence will not only be administratively burdensome but will also create unforeseen costs and delay the execution of transactions. This will harm the competitiveness of local companies in the global market.
Its assessment of the implications of greylisting was not as positive as Treasury’s. Greylisting will have a significant impact on South African financial institutions that rely heavily on global trade in their treasury departments.
It said the insurance industry will particularly be impacted.
Moonstone reports that several South African insurers are heavily reliant on reinsurance programmes concluded with foreign reinsurers. With South Africa being placed on the grey list, foreign reinsurers in, among other places, the European Union, United Kingdom, and the United States, are likely to impose additional and more intrusive enhanced customer due diligence on South African insurers. These additional measures will likely increase the costs of compliance and potentially the cost of reinsurance for local insurers.
‘South African insurers should anticipate greater and further know-your-client requirements from their foreign reinsurers when they come to renew their reinsurance programmes while South Africa remains on the FATF’s grey list. In addition, South African insurers, as accountable institutions, will need to reconsider their own risk management and compliance programmes and risk management framework in light of South Africa’s greylisting,’ Webber Wentzel said.
Asisa believes South Africa can ill afford the reputational damage due to the greylisting. Sunette Mulder, an Asisa senior policy advisor, said in the past that the local collective investment scheme industry had been resilient during various shocks.
‘I’m hoping we will see that with these current shocks,’ she added.
‘It will be interesting to see how the greylisting will come through in the market. Whether it is going to have an impact on investment flows again, it’s difficult to say. I think many companies have already priced it into how they do business,’ Mulder said.