The Financial Action Task Force (FATF) is an intergovernmental organization that works to combat money laundering, terrorist financing, and other financial crimes around the world. In February 2023, the FATF announced that South Africa has been placed under its greylist due to significant shortcomings in its anti-money laundering and counter-terrorism financing (AML/CFT) framework.
What’s Greylisting?
Jurisdictions under increased monitoring, or as it is more colloquially known as, greylisting is a term used by the Financial Action Task Force (FATF) to identify “countries that are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing”. The FATF has conducted reviews of 125 countries and jurisdictions as of February 2023, and publicly disclosed the identities of 98 of them. Out of these 98, 72 have successfully implemented the required reforms to address their anti-money laundering and counter-terrorist financing weaknesses and have been removed from the review process.
Why has South Africa been greylisted?
South Africa has been a member of the FATF since 2003 and in June 2021, it underwent a Mutual Evaluation Review (MER) which concluded that the country has made significant progress on many of the recommended actions to improve its AML/CFT system. However, the FATF's report issued in October 2021 found that South Africa received a low compliance rating for all 11 immediate outcomes that test the effectiveness of its frameworks.
The report recommends that South Africa take more proactive measures to pursue money laundering and terrorist financing, such as improving the detection and seizure of illicit cash flows and strengthening the availability of beneficial ownership information. It also suggests that authorities make better use of the financial intelligence provided by the country's financial intelligence unit and improve the application of the risk-based approach by obligated entities and supervisors. The report acknowledges that South Africa has made some progress in implementing the necessary reforms, but more work needs to be done to address the identified deficiencies.
So, what does this mean in practice?
The FATF's decision to list South Africa as a "high-risk jurisdiction" puts the country under increased scrutiny from the international community, making it more difficult for South Africa to conduct international transactions. This can lead to increased costs and processing times for transactions, and can affect South Africa's reputation and investor confidence. It also has political implications, potentially leading to increased pressure on the South African government to address its AML/CFT weaknesses. South Africa's situation is different from other countries previously greylisted by the FATF, as it has a more globally integrated financial system and greater foreign investor participation. Research by the IMF4 shows that previous greylisting of emerging and developing countries led to a drop in capital flows equal to 7.6% of GDP over nine months.
The economic impact of South Africa's greylisting will depend on the seriousness with which authorities address the FATF's concerns, and can include suspended or deferred foreign investments, tougher checks on transactions, increased monitoring costs, negative impact on the stock market, and a stigma effect on the country's reputation.
All hope is lost… or is it?
The duration of a country's placement on the FATF grey list depends on how swiftly it addresses the deficiencies identified in its AML/CFT framework. Mauritius, Iceland, Serbia and Malta were delisted within one to two years and South Africa is expected to follow a similar trajectory. However, some countries with serious shortcomings or slow progress have remained on the grey list for several years. Yemen, Syria, and the Democratic Republic of the Congo have been on the greylist since 2010 and 2013, respectively.
South Africa has made a high-level political commitment to work with the FAF and Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) to strengthen its AML /CFT regime and has already made significant progress on many of its recommended actions to improve its system. South Africa has also committed to implementing its FATF action plan, which includes increasing outbound MLA requests, improving risk-based supervision of designated non-financial businesses and professions, ensuring competent authorities have timely access to accurate and up-to-date beneficial ownership information, increasing investigations and prosecutions of serious and complex money laundering and terrorist financing, and updating its TF risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy.
Greylisting: Make-or-break?
In conclusion, South Africa's placement on the FATF greylist has significant implications for the country's economy, reputation, and political landscape. However, the country has already taken steps to address its AML/CFT weaknesses and has committed to implementing a plan to improve its system. If South Africa can demonstrate sustained progress in implementing these reforms, it can regain its position as a trusted and reliable international partner in the fight against money laundering and terrorism financing.
Some Recommendations
Within a FATF grey listing scenario, some action points of note for businesses and HNW individuals are the following:
- Expect higher scrutiny from an AML and CFT perspective from regulated entities such as banks and corporate service providers, amongst others. Becoming more aware of these processes within a context of jurisdiction, customer and industry risks, can help facilitate navigation through complex customer due diligence processes and re-assessments, which will ensure smoother business continuation;
- Being pro-active in terms of the first point above, will also reduce added bureaucracy, added cost and delays in relation to foreign trading partners.
- Seek advice with respect to cross-border transactions and potential re-structuring.
- Consider increasing the links with non-grey listed jurisdictions, such as Malta, to carry out trade, particularly within areas such as the EU, which require higher levels of transparency, by for example – opening branches and/or offices and adding substance, and effectively increasing personal links with non-grey listed jurisdictions.
