Imminent FATF grey listing of South Africa is 'likely' says global law firm

The Financial Action Task Force (FATF) decision expected later today (24 February) on the "likely grey listing of South Africa" will lead to "severe consequences" for the already embattled country's economy, global law firm White & Case said in a briefing note yesterday.  

Other African countries already on the FATF grey list include Mozambique, Tanzania, Uganda, DRC, Mali, Senegal, South Sudan, Burkina Faso and Morocco.

London-based partner Antony Colegrave and Ewa Orpen, partner in Johannesburg commented that "South Africa faces imminent FATF grey listing, with potentially damaging consequences for the country's financial and business sectors."

They said South Africa is widely regarded as being one of the primary financial hubs on the African continent, and with that comes the expectation that State and private institutions adhere to globally acceptable standards of governance and oversight with regard to financial matters - particularly concerning the implementation of AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism) measures.

But "According to the comprehensive audit conducted in late 2019 and subsequent Mutual Evaluation Report issued by the FATF in October 2021, South Africa falls short of the internationally recognised standards of due diligence required by the FATF."

The FATF's Mutual Evaluation Report on South Africa details a lack of due diligence, persistent failure to implement AML/CFT identification mechanisms, holes in legislative and executive structures, lack of staffing and training in key sectors (including law enforcement) and pervasive corruption.  

Some of the key points include:

• Money laundering crime threats are reasonably well understood, but their scope within South Africa is underestimated by both government and the private sector.
• The understanding of terrorists financing threats is largely absent or, at best, inadequate.
• A major contributing factor is the sustained period of "State Capture" that South Africa has endured, compounded by notable failure to identify perpetrators or initiate prosecutions.
• Inadequate risk profile reporting within several high-risk financial sectors (although the larger banks and financial institutions are performing these duties very well).
• A high volume and intensity of crime, especially financial crime. This is exacerbated by a large informal economy and large quantities of undeclared cash and goods regularly crossing borders outside of regulated frameworks.
• South Africa's failure to develop coordinated and holistic national AML/CFT policies informed by the actual risks assessed as part of the Mutual Evaluation Report.
• South Africa's failure to demonstrate that it is effectively identifying, investigating or prosecuting terrorism financiers.

S&P Global Ratings says SA's failure to address the issue of State Capture, as well as government efforts to downplay or conceal the extent of illicit cross-border payments, are instrumental factors in the FATF's appraisal of the country's deficiencies in combating money laundering and the financing of terrorism in the region.

The White & Case briefing note further set out the consequences of grey listing for South Africa "in essence, the possibility of a FATF grey listing may present a threat to South Africa's financial growth and status as a regional leader".

According to the IMF, countries grey listed by the FATF typically suffer an average net loss of 7.68% of capital flow into their states relative to GDP.

The domestic financial cost of subsequent compliance can be significant - coupled with the fact that it often takes 2-5 years for a country to be removed from the grey list once the mandated requirements are duly satisfied and accepted by the FATF.

Grey listing discourages foreign investment, and South Africa stands to suffer foreign direct investment shrinkage as a consequence. 

Portfolio inflows stand to decline and other general investment inflows are also likely to decline, the law firm said. 
Foreign banks and investors may also become reticent about doing business in South Africa, choosing rather to operate within other jurisdictions that present healthier risk profiles, it said. 

"South Africa, as a brand, stands to be re-evaluated, and to drop in ranking within the global marketplace."

White & Case pointed out that some commentators believe the cost of grey listing has already been factored into much of the South African market, but even if this is the case, the true impact of FATF grey listing remains to be seen.

Some of the other countries grey listed in Africa had seen negligible consequences as a result of FATF grey listing, the firm said, but It could be argued that some of these countries are seemingly unaffected due to already impoverished economic conditions and are states which, in any case, do not ordinarily attract the same level of foreign economic investment as a country like South Africa.

"Nevertheless, some countries have experienced significantly adverse consequences. Several of these countries have similar characteristics as South Africa in certain areas: large informal cash-heavy economies, immature AML/CFT monitoring frameworks, under-resourcing within the judiciary and law enforcement branches and unclear state and private sector due diligence policies. 

"Some of these countries have implemented deadline-driven action plans to achieve delisting and regain international acceptance while unlocking long-term growth through better financial security."

As to what steps South Africa has taken, it said that following the release of the FATF Mutual Evaluation Report, the country had an 18-month period of grace within which shortcomings has be addressed in order to prevent it from being grey listed. 

Commentators point out that it was only in December 2022 that two key pieces of legislation were signed into effect by the President:

• The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act No 22 of 2022, and
• The Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act No 23 of 2022.

These laws are broad in scope and are intended to, inter alia:

• Amend five existing Acts which govern trust property, non-profit organisations, companies, the financial sector and financial intelligence.
• Establish clear definitions, enforce due diligence requirements and mandate procedural frameworks to be adopted within these sectors.
• Strengthen the provisions of existing anti-terror legislation and expand it to include aspects like cyber-terrorism while providing for the imposition of more stringent financial sanctions where warranted.

Then, on 13 January 2023, a high-profile delegation led by the National Treasury's acting director General, Ismail Momoniat, met with the FATF's Joint Group in Rabat, Morocco. 

This was intended to present a summary of progress made in addressing the deficiencies identified in the Mutual Evaluation Report. 

"Whether this will suffice to prevent FATF grey listing remains to be seen", the firm commented.