After years of corruption and a deficient AML/CFT system, South Africa faces the risk of being greylisted for its failure to properly comply with the FATF’s 40 Recommendations. In light of this possibility, this article explains the role of the FATF and what South Africa did wrong to face an 85% chance of being greylisted.
What is the FATF?
The Financial Action Task Force (FATF) is a leading intergovernmental organization founded to develop policies to combat money laundering. These policies are known as the FATF 40 Recommendations and are widely regarded as the global standard for anti-money laundering policy.
Due to its well-respected status and global presence, the FATF wields a significant amount of hard and soft political and economic power thanks to its capacity to sanction countries, businesses and individuals.
Much of the FATF’s power stems from the fact that the organization’s white, grey and black lists are used by many countries, watchdogs and institutions as accurate indicators of risk. This means that when the FATF assigns a certain country a designation – such as Iran’s blacklisted status – global capital flows will have to adjust their risk management protocols accordingly. When this happens, the sanctioned country can incur significant damage to its economy.
Now, South Africa is at high risk of being greylisted by the FATF.
What is Greylisting?
When a country is greylisted by the FATF, that country is subjected to increased monitoring of its anti-money laundering and countering the financing of terrorism system. This is done to account for the increased risk of money laundering posed by that country, most often due to notable deficiencies in the design and/or application of its AML/CFT regulatory framework.
The FATF describes increased monitoring and greylisting as the following:
“Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the greylist.” – FATF.
The FATF maintains a list of countries that are greylisted, which can be found here. Should South Africa be placed on this list, the country will appear alongside other greylisted jurisdictions that include Syria, Cambodia, Mali, South Sudan and Yemen. As a comparatively strong African economy with a mature financial system, South Africa will be an abnormal candidate for a greylisted status.
2019: FATF Begins Peer Review of South Africa’s AML/CFT System and Legislation
In 2019, the FATF began a two-year period of enhanced peer review, during which time the organization investigated and assessed the design, implementation and overall competency of South Africa’s anti-money laundering and combatting the financing of terrorism (AML/CFT) system.
October 2021: FATF Releases Mutual Evaluation Report on South Africa
In October 2021, the FATF released its Mutual Evaluation Report. The findings of the report were worrisome. The MER report evaluated South Africa’s AML/CFT practices, analyzed South Africa’s compliance with the FATF 40 Recommendations and criticized shortcomings and inconstancies.
The report also provided valuable recommendations regarding how the country’s current systems can be strengthened. The report particularly criticized South Africa’s inconsistencies in its requirements for businesses to monitor the threat of money laundering and report findings to the regulator. Some high-risk business sectors were found to scarcely report, while other sectors were not AML/CFT regulated at all and remain bound only by basic reporting obligations. Some financial institutions do not have a designated AML/CFT supervisor, while some correspondent banking services are not bound by any AML/CFT obligations.
Additionally, although South Africa’s larger banks and Financial Institutions (FIs) are focused on AML, smaller FIs are only focused on meeting the minimum requirements for regulatory compliance. This is understandable because smaller FIs do not have the same resources as major banks, but the report criticizes their failures to identify and actively understand risk nonetheless. Recognizing these flaws, the FATF advocates for the full adoption of a Risk-Based Approach to AML regulations.
The FATF also emphasized how South Africa’s ongoing public sector corruption continues to undermine national AML/CFT efforts. The period of State Capture undermined the functionality of South Africa’s key AML/CFT agencies, such as the Financial Intelligence Centre and the Financial Sector Conduct Authority.
The continuing issue of public sector corruption means that South Africa must deal with the threat posed by Politically Exposed Persons (PEPs). PEPs are broadly defined as any individual who is, or has in the past, been entrusted with prominent public-sector functions in a particular country. Because the proximity to political power increases the potential for corruption and money laundering activity, PEPs are subject to a specific AML regulation process.
However, even with clearly identified threats posed by Politically Exposed Persons (PEPs), South Africa was rated non-compliant with the FATF 40 Recommendations for PEPs. Due to SA’s lack of universal PEP-related obligations, the limited definition of a PEP, and the absence of properly executed risk management systems for monitoring and dealing with PEPs, significant improvements need to be made to upgrade this rating.
October 2021: One-Year Period of Increased Monitoring Begins
Having released its MER report on South Africa’s AML/CFT system and handed over its recommendations concerning critical shortcomings and how to address them, the FATF now began a year of increased monitoring during which time it assessed South Africa’s commitment to addressing its shortcomings, as well as its overall progress in doing so.
It was South Africa’s responsibility to demonstrate that it acknowledged the FATF’s report and was taking appropriate steps to address shortcomings and properly.
August 2022/October 2022: South Africa Reports on its Technical Compliance to the FATF
In August 2022, South Africa reported on its progress to the FATF. In October 2022, the period of increased monitoring by the FATF came to an end. In the following months, the FATF will assess South Africa’s progress in addressing the issues highlighted by the MER report and will come to the final decision that will be reported during the final FATF plenary in February 2023.
Upcoming Landmarks and Decisions for 2022 and 2023
In December 2022, the International Co-operation Review Group will submit a report on South Africa’s progress in addressing the identified shortcomings and implementing the necessary changes. Once submitted, there will be a period in which South Africa will be invited to respond to the report.
In January 2023, face-to-face meetings will be held between South Africa and other members of the FATF, during which time participants will discuss the progress that has been made and discuss what measures may be taken next.
Then, in February 2023, the final FATF Plenary will be held. It is during this meeting that the FATF will decide whether or not to greylist South Africa. Currently, analysts suggest that there is an 85% chance that the FATF will greylist South Africa.
What Will Happen if South Africa Gets Greylisted?
As with all predictions, the exact effects of South Africa getting greylisted remain uncertain for a number of reasons – South Africa is an unusual candidate for greylisting so there are few comparable case studies, while much of the economic impact varies depending on the exact reactions of businesses and financial institutions, which are by nature difficult to predict.
However, the most certain impact of greylisting will be increased transactional costs for financial institutions as they are forced to account for heightened due diligence requirements. This may lead businesses to withdraw from South Africa as profitability falls, while others may choose to withdraw as a means of de-risking their portfolios.
These eventualities may severely undermine South Africa’s economic growth. In the worst-case scenario, greylisting could wipe out up to 3% of SA’s GDP; in the best-case scenario, these estimates are less than 1% of GDP.
To read a detailed analysis of the effects of greylisting and understand how such an event would impact South Africa’s economy, click here.
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