“Greylisting” is all the buzz at the moment, but how did we get here and more importantly how do we get out?
International money laundering and terrorist financing watchdog, the Financial Action Task Force (“FATF”) announced on Friday, Feb 24, 2023 that South Africa has been included on its greylist along with a few other jurisdictions who have shortcomings in tackling financial crime; the likes of Nigeria, who are Africa’s biggest economy, the United Arab Emirates, Turkey and the Philippines, to name a few. FATF, the influential intergovernmental global standard-setting body for anti-money laundering (AML) and combating the financing of terrorism and proliferation (CFT/CPF), listed South Africa as a 'jurisdiction under increased monitoring'. This means that South Africa has made a commitment for swift resolution of the gaps identified within an agreed timeframe.
Quite plainly, South Africa has been greylisted because of the deficiencies in our AML/CFT policies that require remedial action. The country scored poorly on the prevention, monitoring and prosecution of terrorism finance as well as transparency around politically exposed persons and the beneficial ownership of companies and trusts, amongst other factors.
According to the comprehensive audit conducted in 2019 and subsequent Mutual Evaluation Report issued by the FATF in October 2021, South Africa fell short of the internationally recognised standards of due diligence required by the FATF.
South Africa made significant progress during the observation period, passing two major Amendment Acts in 2022, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act. You can read more about the important Amendments here. South Africa made strides in its progress since the initial assessment, they were able to reduce 67 Recommended Actions to 8 strategic deficiencies.
It is worthwhile noting that while South Africa has been greylisted, FATF has recognised the significant work and effort already made by the country since 2021.
What are the 8 strategic deficiencies identified by the FATF that need to be addressed by the end of January 2025?
ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violations by legal persons to BO obligations;
demonstrate a sustained increase in outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile;
improve risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrate that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for noncompliance;
demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for its ML/TF investigations;
demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile;
enhance its identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;
update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy; and
ensure the effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.
The implications for South Africa are both reputational and economic. It is important to note that greylisting does not mean there is a ban on doing business with South Africa, but there may prove to be several adverse knock-on effects as a result of the new status.
South Africa may be downgraded by credit rating agencies, which would affect the country's ability to borrow on the international capital markets.
According to the International Monetary Fund (IMF), greylisting leads to a significant decrease in capital inflows. Capital flows will be subjected to more complex due diligence at a cost. Where capital inflows reduce, it will have an adverse effect on the Rand.
Transactions of South African Companies and individuals will likely be considered high risk by foreign countries and entities, countries being greylisted by FATF are automatically considered high-risk jurisdictions by the European Union and the UK.
The financial cost of additional compliance and administration is subsequently increased, which affects transactional costs at a customer level. South Africans who hold offshore accounts will also now be considered higher-risk clients.
Businesses will face additional requirements for source of funding, delaying transactions and increasing screening and monitoring against clients.
South African financial intermediaries operating across jurisdictions also have their work cut out for them, their controls and frameworks need to be aligned with global standards. Auditing costs will also increase as a result of greylisting.
State-Owned Enterprises that are likely to be most affected are the likes of Eskom and Transnet because of their reliance on offshore debt capital markets for funding, which would translate into higher hard currency borrowing costs.
Just to provide a small glimpse of greylisting’s initial impact, the Rand was 0.31% weaker to the Dollar at R18.41 in afternoon trade on Friday when the news broke. JSE-listed bank stocks were over 2% weaker following the news.
In terms of getting “off” the list, public and private partnerships will be required, and efficient cooperation will be a necessity between the government, prosecuting authorities, police and asset forfeiture bodies to ensure that FICA, amongst other Acts, is not rendered a paper law but that its consequences are feared and swiftly executed. On average, countries take between 5 and 10 years to have themselves removed from the greylist by the FATF. However, Mauritius was able to do it in less than 2 years, so it is possible to do this in a shorter time. “Jurisdictions under increased monitoring are actively working with the FATF to address the strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing,” the FATF said.
Increased monitoring should give assurance to markets that remedial steps are likely to be implemented, thereby limiting the risk of doing business with that jurisdiction. Therefore, instead of less investment and more adverse economic effects, conversely, foreign countries and entities may wish to invest and transact with South African firms more regularly, being assured that deficiencies are being addressed and adequately monitored by the FATF. Companies and Intellectual Property Commission (“CIPC”) will implement a Beneficial Ownership Register from 1 April 2023 to ensure that money launderers and terrorist financiers are less willing and able to hide behind complex entity structures to obscure their true identities. Finance Minister Enoch Godongwana, said in his Budget speech on 22 February, that the outstanding deficiencies would be addressed through regulations and the eight actions summarised above. There is an active plan in progress and now all that is required is effective and efficient implementation.