Greylisting basically means that a country has been identified as having compliance issues, but has committed to address strategic deficiencies to counter money laundering and terrorist financing within a specific timeframe. 

As at June this year, there were 23 countries on the Financial Action Task Force’s (FATF’s) grey list, including Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Türkiye, Uganda, United Arab Emirates and Yemen.

Intellidex estimates that the economic impact of greylisting could be limited at under 1% of GDP lost from higher costs to international transactions over 18 to 24 months, if South Africa is perceived to be far advanced in addressing concerns of the FATF. 

However, this shifts to an estimated up to 3% of GDP lost from higher costs to international transactions over a five-year period, with a gradual recovery if the country is perceived to be slow and unwilling to take the required actions. 

The FATF is an international body that sets standards and promotes effective implementation of legal and operational measures for combating money laundering, terrorist financing and proliferating financing of weapons of mass destruction. 

The economic impact would primarily arise from the increase in transaction costs for cross-border payments, as well as the general reputational impact. 

Financial firms around the world, including banks, will be required to apply enhanced due diligence to any South African client, which would mean a more invasive and extensive process of assessing the source of funds and probity of clients.

While the specific requirements vary between jurisdictions, both the United Kingdom and European Union require banks and other accountable institutions to apply enhanced due diligence to any greylisted country. 

As a result of this increased compliance burden, some firms may elect not to do business with any South African company or individual to reduce costs and compliance risks. Longer-term, reputational effects will lead to a reduced appetite for investment exposure to South Africa. Greylisting will also complicate access to bilateral and multilateral development funding.

Speaking at a Nedgroup Investments’ conference last month, Ofentse Theledi, Nedbank’s head of anti-money laundering, said the FATF report of October 2021 did not place South Africa in a good light.

South Africa’s effectiveness of policies and laws was measured by utilising the FATF-identified 11 immediate outcomes. None of the outcomes were found to be operating effectively and most of them were found to have  low to moderate levels of effectiveness.

“What this means is that South Africa will be expected to produce a progress report by the end of December 2022 which must show how the country has stacked up against the recommendations and action items that came out of the assessment. 

“Post that, a decision will be made in February 2023 to determine whether South Africa has made significant improvements in remediating the findings,” he says.  

The key findings of the report were that, although South Africa displays an understanding of money laundering threats from a domestic perspective, the understanding of the vulnerability scale from a foreign perspective is limited. 

South Africa’s law enforcement agencies were found to be wanting from a skillset and competency level, in relation to investigating money laundering and terrorist financing cases. 

Theledi adds it was no surprise that the infamous State Capture featured in the FATF report, saying this raised questions on South Africa’s ability to prosecute such matters.

SA at 85% risk of being greylisted, so determined political will needed – and learning from Mauritius: report

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Other findings from the FATF report included an assessment of the country’s Targeted Financial Sanctions regime which was found to be lacking. 

The larger banks were found to have a developed understanding of money laundering risks and to have put adequate measures in place to mitigate such risks. However, earlier this year, Nedbank was fined R35-million by the South African Reserve Bank for contravening the Financial Intelligence Centre (FIC) Act. 

The bank was found guilty of, among other charges, not applying diligence controls, not keeping records as per the FIC Act, failing to report a significant number of cash transactions over R25,000 each, and the inability to prove that senior management approval was obtained for customer due diligence requirements.

Theledi warns that if a greylisting materialises, South Africa would be deemed to pose a much higher money laundering, terrorist financing and proliferation risk, and could face the following consequences:

• High-risk classification by the EU and UK.
• Downgrade in investment grade ratings.
• Potential de-investment.
• Increased monitoring by the FATF.
• Adverse economic consequences for trade and transactions.
• Impacts to correspondent banking relationships, and possible restrictions on banks in the US, UK and EU from transacting with South African banks.

“The implications of this are that global correspondent banks and other intermediary financial institutions involved in transactions with South African entities are likely to demand a higher level of due diligence and may reprice businesses, or as a last report, de-risk South African exposures. Clearly this is something we need to work to avoid,” he says.

The authors of the Intellidex report – Stuart Theobald and Nxalati Baloyi – contend that there are three critical areas where South Africa has struggled to reach required levels of compliance: 

1. The gathering and dissemination of data regarding beneficial owners of trusts and companies. While legislation to this effect is progressing, the Masters’ offices of the high courts have not made progress on an equivalent process for trusts.
2. The Directorate for Priority Crime Investigation (the Hawks) have made minimal progress in building capacity to investigate money laundering and terrorist financing, as well as other commercial crimes. The Hawks have been slow to take on more staff as recommended, specifically forensic accountants and financial investigators.
3. The Financial Intelligence Centre is envisaged to take on additional supervision responsibilities for the money laundering and terrorist financing oversight of non-financial institutions, including real estate agents, attorney firms, Krugerrand dealers and others. While the legislation to give effect to this is in progress, the additional budgets and resourcing still need to be developed.

The Intellidex report recommends:

• The Presidency set up an internal task team to lead the government response to greylisting, working with the Inter-Departmental Committee assembled by National Treasury. The task team must be resourced with expertise to facilitate the change management and capacitation that must happen in key institutions such as the Hawks and Financial Intelligence Centre. It must be able to focus on blockages and capacity constraints in partnership with the Police Ministry, Justice Ministry, Home Affairs, National Treasury, SA Revenue Services and others.
• Private sector companies and individuals must prepare for the enhanced due diligence that will accompany greylisting. They should engage foreign service providers to establish how their risk rating is affected by greylisting, what enhanced due diligence measures will be taken (if any), and how they can prepare.

Theobald says while it could take several years for South Africa to complete all the required changes, the government has demonstrated its commitment to adopt key recommendations in line with the United Nations international conventions and standards. 

Most recently, the National Prosecuting Authority (NPA), Directorate of Priority Crime Investigation, Department of Justice  and the South African Revenue Service, led by the Financial Intelligence Centre and operating under the auspices of the Anti-Corruption Task Team, collaborated on a joint project to deprive those who support their lifestyles with ill-gotten gains from their unexplained wealth. 

The law enforcement agencies will use existing asset recovery legislation to secure appropriate orders issued by the courts to confiscate unexplained wealth, thereby enabling authorities to recover suspected ill-gotten gains.

Business Leadership South Africa chief executive Busi Mavuso says the organisation is committed to improving the business environment. 

“We have entered a memorandum of understanding with the NPA to support access to private sector investigation and analysis skills to improve capacity. We also have multiple engagements with the criminal justice system through our Business Against Crime initiative,” she says. BM/DM