It has been a little over a year since the Financial Action Task Force (“FATF”), an international initiative established to combat money laundering published its Mutual Evaluation Report (“MER”) on South Africa in which it identified major “weak spots” in our compliance processes. The FATF gave the country a deadline of February 2023 to remedy all the deficiencies or face possible grey listing.

If South Africa does not implement the necessary measures to remedy the weak spots identified by the FATF before the deadline, the consequences could be dire. According to the International Monetary Fund (“IMF”), a grey listed country can expect an average decline in capital inflow of 7.6% of gross domestic product (“GDP”), a decrease in foreign direct investment (“FDI”) of 3% of GDP, and a decrease in portfolio inflow of 2.9% of GDP.

Being grey listed would likely further impair the economy’s links to the global financial system, raise the country’s cost of capital and create an additional disincentive for offshore companies to deal with South Africa. The country could also face international restrictions imposed by other jurisdictions, leading to additional barriers to doing business in the country.

The international economic impacts may include an increase in the regulatory burden imposed on both South African entities and their foreign counterparties, economic restrictions from international funders such as the IMF or World Bank and restrictions imposed by individual banks and businesses in doing business with South African entities.

Countries that have been grey listed in past have suffered long terms effects; in Botswana, asset managers were not able to transact directly with pension funds containing an offshore portfolio – and FDI in the diamond sector was affected as the repatriation of profits from Botswana to the origin was impacted. The grey listing of Pakistan, which began in 2008 and ended in 2019, is estimated to have led to cumulative real GDP losses of approximately $38 billion. Findings from market research and analytics group Intellidex showed that Pakistan’s grey listed status between 2012 and 2015 triggered a cut in economic growth of between 1% and 2%.

Should South Africa be added to the grey list, according to National Treasury, it will take a number of years to fall of the list and could have a long lasting devastating impact on the economy for years to come.

According to the FATF, South Africa has major deficiencies in the following areas, among others;

• The prosecution of State Capture crimes and convictions;
• identification of terrorist financing (“TF”) and money laundering (“ML”);
• the ability to predict and prepare for offences; and
• the management of know-your-customer (“KYC”) and politically exposed people (“PEP”) protocols.

The years of “State Capture” put South Africa on the radar of the FATF.  Corruption flourished during State Capture which  generated substantial corruption proceeds and undermined key agencies with roles to combat such financial crimes. Global regulators took anti-money laundering actions against Gupta related funds and assets in New York and London several years ago, whilst the South African government was criticised for its failure to take action at the time. 

In addition, the use of cash in South Africa is widespread and it has been assessed as high risk for ML and TF, including cross-border movement. Detecting and recovering cash proceeds of crime remains challenging and efforts to detect and confiscate falsely or undeclared cross-border movement of currency needs substantial improvement.

We have also implemented Targeted Financial Sanctions (“TFS”) for proliferation financing fairly well, however significant improvements are needed.

Since the FATF report was published, South Africa has taken a number of steps in a bid to prove to global financial bodies that it is capable of fighting money laundering and other forms of corruption and to address the shortcoming, these include;

• Cabinets approval of the General Laws (Anti-money laundering and combating terrorism financing) amendment bill which is currently sitting in parliament;
• The establishment of the AML Desk under the jurisdiction of the National Prosecuting Authority (“NPA”);
• The introduction of a new legislative tool by the South African Revenue Services (“SARS”) to investigate unexplained wealth;
• the proposed amendments to various pieces of legislation to comply with the FATF recommendations; And,
• An additional bill on its way is the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill, 2022. If passed will introduce sweeping changes to various statutes including: 
  • Trust Property Control Act;
  • Non-profit Organisations Act;
  • FIC Act; and
  • Companies Act.

Whether the implementation of these measures is too little too late remains to be seen. But should the country get grey listed, the process to get off the list must be fast tracked and we can learn from Mauritius.  Mauritius was initially grey-listed in February 2020 for several reasons, (which were markedly similar to South Africa’s shortcomings) including a lack of effective risk-based supervision, limited access to beneficial ownership information, and insufficient oversight of non-profit organisations that may be subject to terrorist financing. There was also a general ineffectiveness in conducting money laundering investigations.

They rapidly;

• implemented a comprehensive risk-based supervision framework as a strategy to monitor financial institutions and designated non-financial businesses, such as real estate brokers, banking and securities, and jewellery stores;
• enhanced the transparency of legal persons and enlisted national coordination, as well as regional and international cooperation, which means authorities are working closely together to combat money laundering and financial crime;
• improved the process of detecting threats of fraud, prosecuting criminals, and confiscating illegal proceeds; and
• implemented an anti-money laundering and counter financing terrorism data collection systems, which aims to continuously improve risk detection.

We might not be as fortunate as Mauritius who got off the grey list  quickly, however we can adopt some of the measures they put in place to get off the list a quickly as possible.

Steven Powell

HOD Forensics

[email protected]