Imminent FATF Grey Listing of South Africa | White & Case LLP

On 24 February 2023, the FATF will announce its decision regarding the likely grey listing of South Africa – if this transpires, the consequences for the already embattled South African economy could be severe.

South Africa faces imminent FATF grey listing, with potentially damaging consequences for the country’s financial and business sectors.

South Africa is widely regarded as being one of the primary financial hubs on the African continent. 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.

According to the comprehensive audit conducted in late 2019 and subsequent Mutual Evaluation Report issued by the Financial Action Task Force (“FATF“) in October 2021, South Africa falls short of the internationally recognised standards of due diligence required by the FATF.

The FATF and its Scope of Authority

The FATF, founded in 1989 as an intergovernmental organisation under the ambit of the G7, develops policies designed to combat international money laundering. In 2001, its focus was expanded to include measures identifying and combatting the financing of regional and global terrorism. The 39-member organisation also designs and monitors due diligence frameworks intended to prevent funding of activities as diverse as the illicit arms trade, cyber fraud and the drugs trade.

Thus, the FATF’s ability to designate a country or jurisdiction as being in good standing – or not – carries enormous weight.

The FATF’s Mutual Evaluation Report on South Africa

The Mutual Evaluation Report¹  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.²

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:

Loss of Capital Flow

• According to the IMF³, 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.
• Other general investment inflows are also likely to decline.

Perceptual and Reputational Damage⁴

• Foreign banks and investors may become reticent about doing business in South Africa, choosing rather to operate within other jurisdictions that present healthier risk profiles.
• Foreign companies wishing to do business in South Africa may face increased bureaucratic hurdles, costs of operation and onerous levels of scrutiny.
• Countries grey listed by the FATF are automatically considered high-risk jurisdictions by the European Union and the UK (in other words, they are considered jurisdictions with strategic deficiencies in their Anti-Money Laundering/Counter Terrorist Financing regimes that pose significant threats to the financial system).
• South Africa, as a brand, stands to be re-evaluated, and to drop in ranking within the global marketplace.⁵

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.

How Have Other Grey Listed Jurisdictions Been Affected?

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

Of these, some have seen negligible consequences as a result of FATF grey listing. 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.

What Steps has South Africa Taken?

Following the release of the FATF Mutual Evaluation Report, South Africa 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.

Our Recommendations to Clients in the Event of Grey Listing

In the event of FATF grey listing, there are some actions which businesses and HNW individuals could consider:

• Ensure familiarity with, and stringent adherence to, all legislative aspects pertaining to KYC and due diligence requirements relevant to your industry or sector.
• Obtain competent counsel in the event of entering into any cross-border transactions, or when seeking foreign funding.  
• Clearly outline all necessary legislative and procedural requirements to foreign trading partners in order to better equip them and to minimise delays or added costs due to unforeseen administrative hurdles.  
• Explore ways to expedite and consolidate compliance requirements in order to manage any increase in time and expenditure that may be incurred.

Particularly in the case of larger corporate entities, this may involve setting up an ancillary office in a non-grey listed jurisdiction (Mauritius, for example) in order to access funding and conduct trade, especially when dealing with clients or partners in the US, the EU and the UK. 

Should you have any queries regarding due diligence, AML/CFT legislation, or related matters, please not hesitate to contact us.

_{1 https://www.fatf-gafi.org/content/dam/fatf/documents/reports/mer4/Mutual-Evaluation-Report-South-Africa.pdf
2 Business Day, 6 February 2023
3 “The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning”, IMF Working Paper, Mizuho Kida and Simon Paetzold, 2021
4 Businesstech: Warning Over South Africa’s Greylist Rush
5 Jurisdictions under Increased Monitoring – June 2022}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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