Nicki Guleš, journalist

The ‘grey list’, on which the Financial Action Task Force (FATF) places countries with strategic deficiencies in anti-money laundering prevention, is a bleak place to be, with its consequences of reduced trade opportunities, a downgrade of credit ratings and a shrinking economy.

It is a fate that South Africa had hoped to avoid, but in February it joined 22 other countries, including Nigeria, Uganda and Burkina Faso, on the FATF’s list. 

‘The country is expected to address deficiencies by no later than the end of January 2025′

In announcing its decision, the intergovernmental watchdog recognised the ‘significant and positive progress’ the country had made in addressing 67 recommended actions or deficiencies previously highlighted, but pointed to eight areas related to the effective implementation of anti-money laundering/combating the financing of terrorism (AML/CFT) laws where further progress is needed (see panel).

Outstanding issues

While the country has tackled many of the Financial Action Task Force’s areas of concern around anti-money laundering/combating the financing of terrorism (AML/CFT), eight key issues remain. In order to exit the grey list, South Africa must:

  • demonstrate a sustained increase in outbound mutual legal assistance requests that help facilitate AML/CFT investigations and confiscations of different types of assets
  • improve risk-based supervision of designated non-financial businesses and professions, and show that all AML/CFT supervisors can act against non-compliance
  • ensure that authorities have timely access to accurate and current information relating to beneficial ownership of legal persons and are able to act on any violations
  • show a sustained rise in law enforcement requests for information from the Financial Intelligence Centre for AML/CFT investigations
  • increase investigations and prosecutions of serious and complex AML/CFT cases
  • be better able to seize the proceeds of a wider range of predicate crimes
  • update its terrorism financing risk assessment to inform a national strategy to tackle the problem
  • ensure the effective implementation of targeted financial sanctions against those involved in crimes.

South Africa’s National Treasury is optimistic about the country’s chances of keeping its stint on the list short. ‘The country is expected to address deficiencies by no later than the end of January 2025,’ it said in a statement.

In this it will hope to emulate Mauritius, which was taken off the FATF grey list after only 20 months, thanks to a concerted effort led by its presidency that saw it substantially strengthen the effectiveness of its regulatory regime (see the AB article ‘Committed to clean’).

Government commitment

Busisiwe Mavuso ACCA, CEO of Business Leadership South Africa, says the country ‘simply cannot afford’ an extended stay on the list. ‘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,’ she says.

Last year, South Africa’s parliament pushed through an ‘omnibus’ bill amending laws governing trusts, non-profit organisations and the financial sector as well as the Financial Intelligence Centre Act and the Companies Act. These moves addressed many of FATF’s earlier concerns.

‘We expect an impact on GDP of less than 1% as a result of higher international transaction costs’

Meanwhile, the country’s prosecutors, along with the police, the justice department, the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC) ‘have collaborated on the joint project to deprive those who support their lifestyles with ill-gotten gains from their unexplained wealth’, Mavuso says, adding that the government has also sought advice from the World Bank and the European Union to learn lessons from other countries on how to strengthen the AML/CFT system to better tackle financial crimes and corruption.

Economic impetus

Mavuso underscores how important swift action is to avoid economic damage. ‘The economic impact of grey listing depends substantially on the seriousness with which South Africa is perceived to be acting to address FATF’s concerns,’ she says. ‘We expect an impact on GDP of less than 1% as a result of higher international transaction costs. Over the longer term, though, in a severe scenario where we remain on the grey list for an extended period, we could see an impact of 3% of GDP.’

According to Stuart Theobald, chairman of financial services and capital markets thinktank Intellidex, the agencies tasked with implementing FATF’s recommendations and enforcing compliance currently lack sufficient capability. ‘Quite a lot of work needs to be done to build capacity – not just in terms of people but also processes,’ he says.

‘The grey listing experience may well prove a long-term positive legacy for the country’

Mavuso agrees. ‘We need to build institutional capacity, processes and systems in key parts of the supervisory, investigation and prosecution services,’ she says. ‘We also require coordinated action across government and to focus on blockages and capacity constraints in partnership with the police ministry, justice ministry, SARS, FIC, National Treasury and the South African Reserve Bank.’

Avoiding adverse impacts

In its February announcement, National Treasury noted that FATF’s action plan includes no items relating directly to preventative measures concerning the financial sector. ‘This reflects the significant progress made in the application of a risk-based approach to the supervision on banks and insurers,’ it said. ‘National Treasury therefore expects that the increased monitoring will have limited impact on financial stability and costs of doing business with South Africa.’

Bongiwe Kunene, managing director of the Banking Association South Africa (BASA), says that FATF’s decision ‘could make it more onerous and costly to do business with South Africa, and will detract from its reputation as an investment destination’. However, she says, ‘South African banks already follow global best practice, and they will not be shut out of international markets.’

FATF’s recognition that South Africa had made a high-level political commitment to strengthen the effectiveness of its AML/CFT regime is, Kunene says, encouraging. ‘BASA is looking forward to engaging with the National Treasury on the National Action Plan to ascertain how we can be of assistance, with other private and public institutions, to achieve this,’ she says.

Positive legacy

‘Should South Africa effectively deliver, the FATF grey listing experience may well prove a long-term positive legacy for the country, providing the impetus to make considerable improvements in its overall commercial crime investigation and prosecution architecture, as well as the appropriate supervision of higher risk institutions,’ Mavuso says.

‘This would be highly positive for the business environment, giving business a clear interest in motivating and supporting FATF compliance.’