Member Article

Grey-listing by the Financial Action Task Force (“FATF”) has major implications for countries and companies alike. These implications include reputational damage, economic consequences, and increased compliance costs, which can lead to restricted foreign investment and reduced capital inflows. While legislative reforms can help address the shortcomings identified by the FATF, broader political responses are often required to restore confidence in a country's ability to combat money laundering offenses.

We previouslywroteabout South Africa’s grey-listing by the FATF on 24 February 2023. The implications of the grey-listing for South Africa and entities operating in South Africa, including banks and other financial services providers, are reputational and economic.

The reputational damage from the grey-listing may lead to a downgrading by credit-rating agencies, which would affect South Africa’s ability to borrow on the international capital markets. We are already seeing the impact of this with the latest downgrading from S&P Global Rating agency which recently downgraded South Africa’s economic outlook from positive to stable. While many factors go into the decision to downgrade a country, the recent grey-listing did not help.

Grey-listing has significant economic consequences, including the complexity of compliance and administrative duties for South African companies and individuals, as all their transactions will be seen as high-risk from a money laundering, terrorist financing, or proliferation of weapons of mass destruction perspective. This is likely to discourage investment and trade with South Africa, leading to reduced capital flows that could result in a balance of payments crisis. Additionally, FATF member states and other international bodies may impose economic penalties and other measures against South Africa due to the higher compliance obligations and transaction costs associated with international financial flows to and from the country.

In addition, grey-listing may also result in foreign regulators imposing restrictions on their banks' transactions with South African banks, further hindering business and foreign investment. Moreover, the increased due diligence required by international counterparts when dealing with South African entities may lead to higher transaction costs, making it more expensive to do business in the country and discouraging foreign investors from investing in the economy. As a result, it is likely to discourage foreign direct investment and reduce capital inflows.

The implications will make it more challenging for South African companies to obtain financing from foreign and multilateral lenders, such as the World Bank. Enhanced monitoring will impose stringent requirements on South African companies to prove their funding sources, leading to higher transaction costs and delayed execution of transactions. This will ultimately reduce the competitiveness of South African companies and South Africa as a whole in the global market. Lastly, grey-listing may lead to South African banks being unable to maintain correspondent banking relationships with offshore institutions. The impact will consequently lead to increased compliance costs being passed onto consumers and have a knock-on effect on the financial well-being of South Africans. Other implications of a grey-listing for consumers would include limited investment choices.

Arecent IMF studyestimates that capital inflows typically decline by 7.6% of GDP at the time of a grey-listing. Those who are more optimistic argue that the grey-listing would not have such a severe impact on the country because global investors would already have been more cautious about their transactions with South Africa during the state capture period instead of waiting for a grey-listing. This would have led to international investors having already priced in the risk of transacting with and within the South African financial system.

The obvious question is how does South Africa get off the grey-list?

We have already made strides by amending key legislation, including the Financial Intelligence Centre Act, 2001 (“FICA”), to address some of the “technical” shortcomings identified by the FATF. However, legislative reforms by themselves will not be sufficient as other aspects of the FATF review will require a broader political response. In particular, the authorities will need to show FATF that South Africa is capable of implementing the statutory reforms and governance institutions can hold those responsible for transgressing these accountable. Confidence in South Africa’s capacity to deliver accountability for state capture and other money laundering offences must be restored.

It is therefore expected that Regulators, such as the Financial Intelligence Centre and the Financial Sector Conduct Authority will step up enforcement action.

ENSafrica can assist with all forms of anti-money laundering compliance initiatives, including providing advice to companies on the amendments required to existing documents in terms of the recent statutory amendments, including risk registers and risk management and compliance programmes. For more information please contact:

 

Angela ItzikowitzExecutive Banking and Finance[email protected]

 

Era GunningExecutive Banking and Finance

[email protected]

 

Link to article