South Africa is under watch, and will be judged next month

As the South African government scrambles to make the necessary regulatory changes to keep the country off the global ‘grey list’ of countries at high risk for money laundering and terrorism financing, analysts and economic experts say that it may already be too late.

Intellidex co-founder and chairman, Stuart Theobald, said that chances of South Africa avoiding the greylisting are dwindling, and even if reforms from National Treasury take place in time, other departments and agencies that need to take action have so far been incredibly slow to act.

The threat of the greylisting comes from the Financial Action Task Force (FATF) – an international body for setting standards and promoting anti-money laundering and counter-terrorism financing (AML/CFT) systems – which evaluates countries on 40 recommendations that should be in place to combat illicit financial flows.

South Africa has been a member of the FATF since 2003, and an assessment done on the country in 2019 raised many red flags and put the country in a very poor light. The 2021 assessment found the country lagging in 20 of the recommendations.

The key findings of the report were that although South Africa displays an understanding of the money laundering threats from a domestic perspective, the understanding of the vulnerability scale from a foreign perspective is limited.

South Africa’s law enforcement agencies were found to be wanting in a skillset and competency level in relation to investigating money laundering and terrorist financing cases – and the country’s capacity to prosecute such matters has also been brought into question.

The country has until the end of October 2022 to prove to the FATF that it has policies to meet the recommendations. The group will meet in February 2023 to determine whether South Africa will be added to the list.

South Africa will be expected to produce a progress report by the end of December 2022, which needs to show how the country has stacked up against the recommendations and action items that came out of the assessment.

What does it mean for South Africa?

Broadly, the result of being added to the grey list is that it will increase the cost of doing business for local companies with foreign trading partners.

According to Theobald, however, the greylisting will affect any businesses or individual that transacts with international counterparts, as they will be subject to additional due diligence – and it will impact the country as a whole by denting its reputation and adding further risk factors into assessments done by banks and businesses when looking to trade in the country.

“The EU is particularly stringent in its response — it designates countries on the grey list as high risk and requires member states to require entities to apply ‘additional mitigating measures’, including enhanced due diligence,” Theobald said.

“What this means in practice varies from state to state, but typically banks and other multinationals will increase the frequency and stringency of their due diligence review of clients.”

For example, he said that a South African multinational now doing business in European markets would have to provide detailed information on its activities to banks there and its procedures to mitigate possible money laundering and terrorist financing.

Before, it would have done this at a fairly high level every three years, but now it will be required to produce more detailed evidence and be reviewed annually.

“While the EU is explicit in this requirement, many other jurisdictions also use FATF greylisting as a factor for risk assessment, and many global banks incorporate it into their risk analysis too.”

Ofentse Theledi, head AML/CFT and Sanctions at Nedbank, said that if a greylisting materialises, South Africa would be deemed to pose a much higher money laundering, terrorist financing and proliferation risk and could face the following consequences:

  • High-risk classification by the EU and UK
  • Downgrade in investment grade ratings
  • Potential de-investment
  • Increased monitoring by FATF
  • Adverse economic consequences for trade & transactions
  • Impacts to correspondent banking relationships, and possible restrictions on banks in the US, UK & EU from transacting with South African banks.

“The implications of this are that global correspondent banks and other intermediary financial institutions involved in transactions with South African entities are likely to demand a higher level of due diligence and may reprice businesses or, as a last resort, de-risk South African exposures. Clearly, this is something we need to work to avoid,” said Theledi.

Taking action

The risk of being added to the FATF’s grey list is not new or sudden – yet it has only been in the last few months that the government has taken action to do anything about it.

Theobald said that the South African Reserve Bank’s and National Treasury’s omnibus of regulation changes have been effective in amending its bank supervision processes to comply with the recommendations.

However, he said there are far more tricky areas of the recommendations and immediate outcomes the FATF expects where South Africa will struggle.

“For example, the country needs the Hawks to become an effective investigator of sophisticated money-laundering crimes, which will require teams of financial forensic investigators to be appointed. That could take years, and so far, the Hawks have not shown any interest in getting going,” he said.

“We also need to implement effective regulation of non-financial institutions that deal in large amounts of money, such as real estate agents, casinos and Krugerrand dealers. If we expect the Financial Intelligence Centre to do that job, it will need double the staff and budget it now has. Getting it into the right shape could take a long time.”

Theobald said that if South Africa is perceived to be a long-term member of the grey list, other countries will be less willing to put up with the trouble of conducting enhanced due diligence to do business here.

He said companies need to start gearing themselves up to conduct enhanced due diligence and get their documents in order. The government, he said, needs to double down on its messaging to show it is taking the matter seriously.

“Ultimately, South Africa will need to convince the world that greylisting will be short-lived and that their relationships with SA companies are worth the hassle,” he said.


Read: Greylisting could be the wake-up call South Africa needs