On 24 February 2023, South Africa was put on a grey list by the Financial Action Task Force (FATF) for falling short of certain international standards for the combating of money laundering and other serious financial crimes.

The greylisting of South Africa as a “jurisdiction under increased monitoring” has caused much concern about the state of our financial institutions, law enforcement agencies and investment environment.

South Africa did poorly in its 2021 mutual evaluation, which was conducted in 2019 when many institutions (especially law enforcement agencies) were at their weakest following State Capture.

South Africa being greylisted mainly has consequences of reputational damage to the country, as its effectiveness in combating financial crimes like corruption and money laundering, as well as terror financing, are deemed to be below international standards.

A related implication arises from consequential action taken with regard to cross-border transactions, particularly possible action taken by foreign banks that provide correspondent banking services.

The government says there has been “significant” positive progress since the initial evaluation in 2019. For example, in an effort to address significant weaknesses in the legal framework, amendments to laws on anti-money laundering and combating terrorism financing have been enacted.

There has been legislative reform and strengthening of state institutions to combat complex financial crime through the state’s ability to detect, investigate and prosecute such crimes.

The government insists they have restored credibility to key institutions like the SA Revenue Service (SARS) and the National Prosecuting Authority (NPA) to enable them to fulfil their mandates.

This has been achieved by bolstering the powers of the Special Investigating Unit (SIU) by establishing a Special Tribunal to recover public funds stolen through corruption and fraud, and an Investigative Directorate in the NPA to investigate serious corruption.

Further, Minister of Finance Enoch Godongwana announced in the Budget that additional funds would be allocated to the police, NPA, SIU and Financial Intelligence Centre (FIC) to strengthen the fight against crime and corruption.

The government also notes that it established a multidisciplinary “Fusion Centre” in 2020 to combat money laundering and other financial crimes.

The Fusion Centre brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, the State Security Agency and the Financial Intelligence Centre (FIC).

According to the government, since its inception, the work of the Fusion Centre has led to the preservation and recovery of around R1.75-billion in criminal assets.

Jurisdictions under increased monitoring are expected to actively work with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing. In other words, South Africa has committed to resolve the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring.

Visit Daily Maverick’s home page for more news, analysis and investigations

According to President Cyril Ramaphosa, the country’s action plan to address these deficiencies is aligned with the work being done to implement the recommendations of the State Capture Commission “as outlined in our submission to Parliament in October last year”.

Government ought to share a clear plan with the public to increase public confidence following great concern regarding the economic impact the FATF decision will have on the country.

South Africa is expected to address the eight areas of strategic deficiency identified by the FATF by no later than the end of January 2025.

However, the South African government hopes to address them sooner, possibly in 2024.

During the period of the review, South Africa will need to do the following:

1. Demonstrate a sustained increase in investigations into outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) and confiscations of different types of assets in line with its risk profile;
2. Improve risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrate that all anti-money laundering and counter-terrorism financing (AML/CFT) supervisors apply effective, proportionate and effective sanctions for noncompliance;
3. Ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violations by legal persons to BO obligations;
4. Demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for its ML/TFML/TF investigations;
5. Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile;
6. Enhance its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;
7. Update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy; and
8. Ensure the effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.

It takes from one to three years for countries to address the deficiencies and to be taken off the grey list, something that occurs after a final, on-site assessment when both FATF and the relevant country believe that all elements of the action plan have been largely or fully addressed.

South Africa is not the only country on the continent on the grey list . Others include Mozambique, Tanzania, Uganda, DRC, Mali, Senegal, South Sudan and Burkina Faso.

To get off the grey list and to avoid being “blacklisted” – formally known as high-risk jurisdictions subject to a call for action – South Africa can learn from other jurisdictions on the continent that have been greylisted before and have subsequently been removed, ie Botswana, Mauritius, Zimbabwe and Morocco.

South Africa should take the following steps:

1. Although South Africa has adopted the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act 23 of 2022, it is more important to demonstrate whether there is, or will be, cooperation and, where appropriate, coordination between relevant authorities when implementing the provisions of these statutes. South Africa is brilliant at adopting legislation to respond to emerging issues; however, the country is not the best at putting effective systems in place to ensure effective implementation, monitoring and learning. The creation of effective regulatory bodies or units is going to be crucial to the effective implementation of these amendments.
2. Similar to Botswana, South Africa’s anti-money laundering/financing of terrorism legal and compliance framework needs to have targeted financial sanctions related to terrorism and terrorist financing, and targeted financial sanctions related to proliferation of financial crimes in both public and private sector. Corporate criminal accountability and individual criminal liability needs to be clear and institutions need to comply with financial due diligence that should be set by the government.
3. South Africa ought to better regulate virtual assets and virtual assets service providers by identifying and assessing the money laundering and terrorist financing risks emerging from virtual asset activities (such as Bitcoin, crypto assets, virtual currencies) and the activities or operations of virtual assets service providers, and whether virtual assets service providers are required to take appropriate steps to identify, assess, manage and mitigate their money laundering and terrorist financing risks.
4. Similar to Mauritius, South Africa needs to enhance the transparency of legal persons and enlisted national coordination, as well as regional and international cooperation, which means authorities should be working closely together to combat money laundering and financial crime. A big part of that is increasing training, capacity and raising awareness to ensure all stakeholders are working in accordance with anti-money laundering/combat the financing of terrorism obligations.
5. The use of technology is going to be crucial in addressing money laundering and combating the financing of terrorism in South Africa. For example, Mauritius implemented an anti-money laundering/combat the financing of terrorism data collection system, which aims to continuously improve on risk detection. South Africa needs to develop digital platforms or systems that identify, assess, manage and mitigate money laundering and terrorist financing risks.
6. Mauritius has improved the process of detecting threats of fraud, prosecuting criminals, and confiscating illegal proceeds. South Africa ought to put into place better systems to enable the detection of fraud (in both public and private sector), prosecuting criminals (especially those who hold public office) and confiscating illegal proceeds. Although the Zondo Commission on State Capture was a positive step in revealing the impact of State Capture, it is futile if there are no or few prosecutions of those implicated in corruption.
7. Some of the reforms which Zimbabwe instituted that South Africa could adopt include developing a risk-based supervision framework for financial institutions and designated non-financial businesses and professions, including through capacity building in the supervisory authority, and developing adequate risk mitigation measures for financial institutions. These include applying proportionate and dissuasive sanctions for breaches, creating mechanisms to ensure that competent authorities have access to timely and up-to-date beneficial ownership information and addressing remaining gaps in the targeted financial sanctions framework.
8. In the case of Morocco, raising awareness in exchange offices to bring foreign exchange operators up to speed was the priority. The country brought structure to frameworks for foreign exchange operators and companies were helped to implement control procedures with internal control procedure guides.
9. Another strategy that helped Morocco was building strong international relations with another country (Spain) that involved effective regulation and compliance, featuring an anti-money laundering and financing of terrorism framework.
10. The most important step that South Africa must take is to combat political instability and improve accountability in governance. The combating of money laundering and financial crimes requires governments and institutions that have political will. Further, it requires ethical and law-abiding leaders who are accountable.

South Africa should take this greylisting as an opportunity to do better to combat money laundering and other serious financial crimes. This is especially so in light of the amount of corruption and mismanagement of public funds that we know to be prevalent. DM

Karabo Mokgonyana is a legal and development practitioner at Re4m Envoy (Pty) Ltd and Conflict Check (Pty) Ltd who focuses on intersectional human rights protection, effective implementation of international law and peacebuilding.