NEWS ANALYSIS
When Cyril Ramaphosa became president five years ago, his reform agenda had two big targets: addressing the legacy of state capture and reviving the economy. The greylist, which South Africa is now on, represents how entangled these two priorities are — and of how much work still lies ahead.
Despite the government’s reform efforts — some made at the eleventh hour — South Africa has been greylisted by the Financial Action Task Force (FATF).
This reality puts the country in the company of South Sudan, the Cayman Islands, Haiti, Panama and others, which are each under increased monitoring by the Paris-based international financial crimes watchdog for failing to meet standards to tackle money laundering and terrorist financing.
In late 2021, the FATF found that South Africa failed in 20 of 40 standards and in all 11 of the measures to combat money laundering.
At the root of South Africa’s greylisting is state capture, which hollowed out a number of state institutions, including the National Prosecuting Authority (NPA). It also ravaged the country’s economy, going for its backbone: state-owned entities.
In its announcement on Friday, the FATF noted that South Africa has made “a high-level political commitment” to work with the watchdog as well as the Eastern and Southern Africa Anti-Money Laundering Group to strengthen its regime to tackle money laundering and terrorist financing.
The FATF acknowledged South Africa’s “significant progress” since 2021 and also set out an eight-point action plan, which the country will have to implement if it hopes to be taken off the grey list.
Under this plan, South Africa will have to increase investigations and prosecutions of serious and complex money laundering cases and enhance efforts to seize the proceeds of financial crimes.
A number of commentators, including lawmakers and South Africa’s biggest banks, have warned that greylisting could have dire consequences for the country’s already hamstrung economy, by raising its risk profile and hampering investment and international financial transactions in the country.
The longer the country is under increased monitoring the worse off it will be.
Responding to the greylisting, LexisNexis Risk Solutions in South Africa said on Friday that the FATF’s decision “has direct implications for businesses in South Africa which transact internationally”.
“Those firms will now need to examine how they conduct anti-money laundering checks and adapt to more stringent compliance requirements on cross-border transactions,” the global data and analytics company said.
“Our proprietary research shows financial crime compliance costs in South Africa increasing by 65% since 2019. FATF’s grey-listing suggests that trend may not abate in the near-future.”
Maarten Ackerman, chief economist at Citadel, said the greylisting is a major impediment for the country’s struggling economy, which the treasury has forecast will grow a paltry 0.9% in 2023.
“Being greylisted now will only add to [our] list of challenges, especially for business … So overall, the implication is that the greylisting will add to slower growth, which has already brought the budget and the fiscal framework that we heard about earlier this week under pressure. And some of the numbers are probably not going to look as promising as [Finance Minister Enoch Godongwana presented in his budget speech],” Ackerman.
In its statement, released minutes after the FATF published its announcement, the treasury said: “Government recognises that addressing the action items will be in the interest of South Africa and that doing so is consistent with our existing commitment to rebuild the institutions that were weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption.”
After the release of the FATF’s 2021 evaluation, South Africa had an 18-month period to respond to its recommendations.
But it was only in December last year that two key pieces of legislation — the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act — were enacted. These addressed 15 of the 20 shortcomings flagged by the FATF.
The treasury added that it expects the greylisting will have limited effect on South Africa’s financial stability and costs of doing business with the country. “This will, however, be monitored closely. Importantly, the costs of increased monitoring will be substantially lower than the long-term costs of allowing South Africa’s economy to be contaminated by the flows of proceeds of crime and corruption.”
The South African Reserve Bank (Sarb) was also quick to respond to Friday’s news, emphasising its willingness to cooperate with the FATF’s plan and get the country off the list.
The Prudential Authority and the Reserve Bank’s financial surveillance and national payment system departments are responsible for providing anti-money laundering and terrorist financing supervision across financial service providers.
“The Sarb expects banks and other financial institutions within its purview to comply fully with all their obligations and applies a high standard of supervision that is necessary to safeguard and protect the integrity of the financial system,” the bank said.
“These actions, when coupled with measures and actions undertaken by law enforcement and other authorities within South Africa, serve to achieve an effective AML/CFT/CPF [anti-money laundering/countering financing of terrorism/countering proliferation financing] system.”
The FATF’s finding comes as little surprise, with Godongwana saying in his budget speech that the country should brace itself for greylisting.
In October last year, Intellidex warned that there was an 85% probability the country would find itself in the watchdog’s crosshairs.
In its benign scenario, Intellidex estimated that less than 1% of GDP a year will be lost during the greylisting period. In a severe scenario, in which South Africa is perceived as being inactive in addressing the FATF’s concerns, the estimated loss would be up to 3% of GDP a year.
In the event that greylisting is sustained, the report noted, and global confidence in South African efforts to address FATF recommendations is low, the reputational damage will have a material effect on investment flows and financing costs. International banks will also be more likely to reject South African clients on compliance cost and risks.
Intellidex recommended that stakeholders ought to build confidence that South Africa’s grey listing will be short-lived.
“Should South Africa effectively deliver, the FATF grey listing experience may well prove
a long-term positive legacy for the country, providing the impetus to make considerable improvements in its overall commercial crime investigation and prosecution architecture, as well as the appropriate supervision of higher risk institutions,” Intellidex said in its report.
On Friday, Ackerman emphasised that the greylisting does not spell “game over” for South Africa, pointing to how Mauritius was able to claw its way back to compliance in under two years.
After its listing in February 2020, Mauritius — just as South Africa now has — made a high-level political commitment to the FATF to address the flaws in its deficiencies. The island nation’s prime minister, Pravind Jugnauth, headed a committee that was assembled to accelerate the implementation of its FATF action plan and secure removal from the greylist by September 2021. In October 2021, the FATF announced that it had removed Mauritius from the list.
“If you continue to do the right work and get your ducks in a row, one can be removed from that list,” Ackerman said.
