By Linda Stonier
The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. Countries who fail the evaluation are grey listed. Being on a grey list indicates that a country’s flaws pose a risk to the global financial system. Such a country faces increased scrutiny and unfavourable economic repercussions for its trade and business dealings with other nations.
In October 2021, FATF published an evaluation of South Africa’s anti-money laundering measures and found that South Africa was partially compliant with or noncompliant with 20 of the FATF’s 40 recommendations.
This assessment uncovered issues mostly associated with state capture and the nation’s incapacity to prosecute criminals. At its meeting in February 2023, the international organization will determine whether to greylist South Africa in this regard.
What will happen if we are greylisted?
If this happens, it will be necessary for other countries to do more thorough due diligence on South African citizens and enterprises, as well as more frequent and intrusive examinations for the risks associated with anti-money laundering and terrorism funding.
The findings of international investigations on the effects of FATF’s greylisting or blacklisting on other countries economies are conflicting. This makes it difficult to assess the economic impact it may have on South Africa. Some have suggested greylisting may reduce South Africa’s GDP by 1% to 3% since it will deter international investors from conducting business here.
Additionally, many international institutions, particularly those in Europe and the United Kingdom, would assign South African clients a higher risk rating and hence premium. Additionally, due to high costs, South African banks will have to spend more money managing their connections to international infrastructure suppliers and correspondent banking relationships.
Broadly speaking, the integrity of South Africa’s banking system will suffer from a greylisting, which may impact on the economy, bonds and currency. However, many foreign investors have already factored in the risk of doing business within the South African financial system. For example, many investors are cautious of doing business in South Africa because of the State Capture era. Thus, the impact of an official greylisting may not be that significant. This may be similar to when a sovereign credit rating was downgraded –it did not have a material economic, or market reaction given that the build up to the event had already priced in the risk.
What are we doing to avoid being greylisted?
In an urgent attempt to prevent the greylisting, the South African government is making changes to the financial regulatory system, by presenting bills (anti-greylisting measures) to parliament and for public comment. They may have missed the cut off.
One of the proposed laws is intended to impose controls on industries like estate agents and attorneys who are not currently under the Financial Intelligence Centre’s purview. In addition, the South African Police Service’s Directorate for Priority Crime Investigation (DPCI), Hawks and the National Prosecuting Authority (NPA) have taken steps to recruit more forensic accountants and detectives to counteract these crimes.
Conclusion
The government’s sense of urgency will be tested, nevertheless, before the FATF plenary meeting in February 2023. It seems that it is most likely that South Africa would be greylisted following the plenary session. If this happens, perhaps it can be seen as South Africa’s much needed wakeup call.
Should we be greylisted, one hopes that South Africa acts promptly to ensure that we are withdrawn from the list, much like Mauritius did. Mauritius was greylisted in February 2020 however swiftly implemented the necessary reforms. It has since been removed from the greylist and is now attracting significant growth and development opportunities. An important point to take away is that the much-needed reforms were welcomed and seen favourably by investors.
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