In an unfortunate, but expected turn of events, global money-laundering and terrorist-financing watchdog – the Financial Action Task Force (FATF) – announced on Friday 24 February that it has added South Africa to its “grey” list – as a jurisdiction under increased monitoring.
What does this mean, how did we get here, and how does it affect the country?
What is grey-listing?
The FATF develops international standards intended to prevent money laundering and terrorist financing. Jurisdictions found to have strategic deficiencies in their regimes are publicised in either of two lists:
- High-risk jurisdictions subject to call for action (the “black list”) which identifies countries with strategic deficiencies to counter money laundering, terrorist financing and financing of proliferation; and
- Jurisdictions under increased monitoring (the “grey list”) which identifies countries actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing.
South Africa has been placed on the latter. On a (somewhat) brighter note, grey-listing does accept that the country has committed to resolving the identified strategic deficiencies within agreed timeframes, and is subject to increased monitoring.
How did we get here?
In its 2021 Mutual Evaluation Report on South Africa’s anti-money laundering (AML) and counter-terrorist financing (CTF) measures (2021 MER Report), the FATF acknowledged that South Africa has a good framework for combatting money laundering and terrorist financing, but significant shortcomings remain in amongst others, the following areas:
- Corruption, tax and fraud are understood as the main domestic ML threats by authorities, but understanding of the scale of the threats and the vulnerabilities or channels exploited to launder proceeds is limited.
- Certain high-risk sectors are not yet captured by South Africa’s AML/CTF regime.
- A lack of skills and resources by enforcement agencies to proactively investigate money laundering and terrorist financing.
- Investigation and prosecution of money laundering activity is only partly consistent with the country’s risk profile.
- Challenges in detecting cash proceeds of crime.
- Inability of enforcement agencies to obtain accurate and updated beneficial information.
- An inadequate focus by accountable institutions to implement a risk-based approach to money laundering and terrorist financing, and to obtain ultimate beneficial ownership when conducting customer due diligence.
- Insufficient inspections and monitoring on sectors that are not banks.
What has been done thus far?
Subsequent to the FATF’s 2021 MER Report and in an effort to avoid grey-listing, South Africa implemented the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2001 (Amendment Act) to address deficiencies and improve the country’s AML and CTF regime. Unfortunately, this was too little too late (and too limited).
The Amendment Act was enforced to amend the Trust Property Control Act, 1988, the Non-profit Organisations Act, 1977, the Financial Intelligence Centre Act, 2001 (FICA), the Companies Act, 2008 and the Financial Sector Regulation Act, 2017.
Central to the amendments is the focus on beneficial ownership, including provision of information to regulators and access to that information by enforcement agencies.
The amendments to FICA are (understandably) the most comprehensive.
- They incorporate, amongst other things – enhancing the powers of the Financial Intelligence Centre, promoting information sharing between investigative bodies, enhancing due diligence measures and risk management and compliance programmes, and aligning the definitions of public officials with the more common-international terminology of politically exposed persons.
- Notably, FICA’s schedule of “accountable institutions” has been replaced with a more comprehensive list, requiring companies in previously unregulated sectors to register with the Financial Intelligence Centre and comply with FICA’s risk-based approach to AML and CTF.
The amendments, however, only addressed a handful of the FATF’s recommendations. Alongside the fact that the amendments were introduced at a late stage (with insufficient time for the FATF to conduct a proper reassessment before its February Plenary), it is not surprising that South Africa found itself under increased monitoring.
In its statement dated 24 February 2023, the FATF acknowledged South Africa’s progress since the 2021 MER Report was published, as well as the high-level political commitment to work with the FATF to further strengthen the effectiveness of its AML/CTF regime. Eight areas have been highlighted for the country to implement its FATF action plan.
Effects of grey listing
An immediate concern is the negative profile and reputational damage to the country. This then filters down into hurdles – faced by the international community, with a resultant impact on the monitored country.
Cross-border transactions will see significant impact.
- Foreign companies and persons conducting or wanting to conduct business may be subject to more stringent regulations from their governments when dealing with South Africa. This does not only make the administrative exercise more burdensome, but also results in unforeseen costs. Local companies will consequently be subject to additional checks and balances from international business partners.
- South African persons and companies doing business abroad or intending to do business abroad may also face similar administrative hurdles in setting up foreign operations, with regulators likely to place enhanced scrutiny on the South African operations, beneficial ownership and governance structures.
The administrative red-tape may consequently impact trade, investment and reliance on offshore funding. Borrowing costs may raise, not only affecting local private businesses, but state-owned enterprises reliant on foreign funding.
International banks and financial regulators likely have already placed or will now also look to place South Africa under a higher risk category.
Working towards compliance with the FATF’s recommendations will be a mammoth, but necessary task. Considering the efforts already made towards enhancing its AML/CTF regime – and the FATF’s acknowledgement of those efforts, we (cautiously) remain hopeful that enough will be done to get South Africa off the grey-list.