Kevin Lings: SA ‘grey listed’ by FATF, as expected. Yet another challenge added to SA’s long, self-inflicted list.

By Kevin Lings – STANLIB Chief Economist

The Financial Action Task Force (FATF) has added South Africa to the global list of nations that have failed to adequately tackle illicit financial flows. In other words, South Africa has been “grey listed” by FATF, which was widely anticipated. (SA become a member of FATF in 2003). While the SA government made some progress in trying to avoid “grey listing”, their effort was not comprehensive enough, with many ‘issues’ still outstanding at the time of the FATF decision on 24 February 2023.

In the immediate aftermath of the decision the Rand weakened by around 1.5%, but is now slightly off the lows. It seems fair to argue that the ‘grey listing’ has been largely priced into markets, although this view can only be fully assessed over the next few weeks. The decision also hurt the SA equity market, although the unexpected increase US core PCE inflation for January had a much larger impact on SA market on the day.

There are now a total of 25 countries (including South Africa) on the grey list, although two of these (Cambodia and Morocco) are no-longer subject to increased monitoring. Three additional countries are “blacklisted”, namely North Korea, Iran and Myanmar. (In total, more than 200 countries and jurisdictions have committed to implement the FATF’s standards – and most of them are able to comply with the standards).

(Out of interest, FATF was founded in 1989 as an intergovernmental organisation under the ambit of the G7, in order to develop policies designed to combat international money laundering. In 2001, its focus was expanded to include measures identifying and combatting the financing of regional and global terrorism as well as measures to prevent the funding of activities as diverse as the illicit arms trade, cyber fraud and the drugs trade). Example of countries that are “grey listed” include South Sudan, Panama, Nigeria, Mozambique, Mali, Haiti, Burkina Faso, Albania, Senegal, Syria, Yemen, Uganda and Turkey.

In making the decision to ‘grey-list’ South Africa, FATF acknowledged that the country has made a high-level political commitment to work with FATF to strengthen controls, and has made progress in resolving the long list of failing identified in the 2021 report (Mutual Evaluation Report). There is no reason to expect that this progress will not continue – although the timeframe for South Africa to address all the outstanding issues is very unclear, but it would be expected to take a couple of years. 

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Some of the key points/failing highlighted by FATF in the 2021 report regarding South Africa include:

  • Money laundering crime threats are reasonably well understood, but their scope within South Africa is underestimated by both government and the private sector.
  • The understanding of terrorists financing threats is largely absent or, at best, inadequate.
  • A major contributing factor is the sustained period of “State Capture” that South Africa has endured, compounded by notable failure to identify perpetrators or initiate prosecutions.
  • Inadequate risk profile reporting within several high-risk financial sectors (although the larger banks and financial institutions are performing these duties very well).
  • A high volume and intensity of crime, especially financial crime. This is exacerbated by a large informal economy and large quantities of undeclared cash and goods regularly crossing borders outside of regulated frameworks.
  • South Africa’s failure to develop coordinated and holistic “national anti-money laundering and combated terrorism funding policies”
  • South Africa’s failure to demonstrate that it is effectively identifying, investigating or prosecuting terrorism financiers.

Following the release of the FATF Mutual Evaluation Report, South Africa had an 18-month period of grace within which shortcomings had to be addressed to prevent the country from being “grey listed”. However, it was only in December 2022 that two key pieces of legislation were signed by the President, namely the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act No 22 of 2022, and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act No 23 of 2022.

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On 13 January 2023, a high-profile delegation led by the National Treasury’s acting Director General, Ismail Momoniat, met with the FATF’s Joint Group in Rabat, Morocco. This was intended to present a summary of progress made in addressing the deficiencies identified in the Mutual Evaluation Report.  Clear this was not comprehensive enough to prevent the ‘grey listing’ going ahead.

Although South Africa would be regarded as the primary financial hub on the African continent, the country’s efforts to implement anti-money laundering measures as well as measures to combat the financing of terrorism has been severely lacking. In a prior statement S&P Global Ratings said that SA’s failure to address the issue of State Capture, as well as government efforts to downplay or conceal the extent of illicit cross-border payments, are instrumental factors in the FATF’s appraisal of the country’s deficiencies in combating money laundering and the financing of terrorism in the region.

There has been some wild speculation as to the implications of a ‘grey-listing’ for South Africa. Some of this speculation has been driven by an earlier IMF report, which argued that countries “grey listed” by the FATF typically suffer an average net capital outflow of 7.68% of GDP – which is very substantial. While this has been the case for some countries, South Africa is unlikely to experience similar outflows given the good compliance within the banking, asset management, and insurance sectors. However, the financial cost of further and ongoing compliance by a wide range of institutions and businesses is likely to be significant – coupled with the fact that it often takes 2–5 years for a country to be removed from the grey list once the mandated requirements are duly satisfied and accepted by the FATF.

Furthermore, countries grey listed by the FATF are automatically considered high-risk jurisdictions by the European Union and the UK (in other words, they are considered jurisdictions with strategic deficiencies in their Anti-Money Laundering/Counter Terrorist Financing regimes that pose significant threats to the financial system).

All of this means that South Africa, as a brand, continues to be re-evaluated. The country will drop in ranking within the global arena, will take a step backwards as a possible investment destination or a destination for foreign business and will lose some of its shine as the most well-developed financial hub on the African continent.

Read more: Financial watchdog puts South Africa, Nigeria on dirty-money gray list

Given all the other obstacles the South African economy has encountered in recent years (persistent electricity outages, high levels of violent crime, extensive corruption, difficulties with water supply, breakdown on rail and port capacity, credit rating downgrades to junk status, weak consumer and business confidence, falling income per capita, extremely high unemployment and income equality) the ‘grey listing’ simply adds to the long list of challenges the South African economy has to overcome, making it even more difficult for South Africa to lift its economic performance and gain some momentum.

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