South Africa has come under the FATF grey list. On February 24, 2023, the FATF, a global watchdog on anti-money laundering, added South Africa to its “Grey List” of countries due to its failure to effectively combat money laundering and terrorist financing. This setback affects the two largest economies in Africa. The African economy is addressing the shortcomings that are identified by the Global AML watchdog FATF. The FATF decision is regarded as a serious inference for the country as it has rapidly affected the financial services sector.
What is FATF?
The Financial Action Task Force (FATF) is an intergovernmental organization established in 1989 to combat money laundering, terrorist financing, and other threats to the integrity of the international financial system. The FATF sets international standards for anti-money laundering and counter-terrorist financing and conducts evaluations of countries’ compliance with these standards. It also promotes the effective implementation of legal, regulatory, and operational measures to combat money laundering and terrorist financing around the world.
In the financial sector, global bodies like FATF take the help of peer reviews to go through compliance as well as look after the international standards agreed by the member countries. FATF mutual evaluation is regarded as a peer review. Countries strengthen their financial systems by enhancing the integrity of the country and the entire global financial system.
What does the Grey Listing refer to?
The Grey List is a term used by the Financial Action Task Force (FATF) to refer to the list of countries that have deficiencies in their anti-money laundering and counter-terrorist financing (AML/CFT) regimes but have committed to resolving these issues. Countries that are added to the Grey List are considered to be at risk of being included in the FATF’s blacklist if these do not take sufficient actions to address the identified deficiencies.
The Grey List is also known as the “jurisdictions under increased monitoring” or the “list of countries with strategic deficiencies”. Being on the Grey List can have significant implications for a country’s reputation, as well as its access to global financial markets.
Why did the FATF add South Africa to the Grey List?
According to the country’s national treasury, it was observed that South Africa performed very poorly in the 2019 mutual evaluation by FATF that took place. It affected many institutions that were crippled by the state capture. Therefore, the FATF put South Africa under observation in the year 2021. The FATF gave time to South Africa to address all 67 recommendations.
In January 2023, South Africa had taken effective steps to address the 67 recommendations and the 8 deficiencies. So, FATF then took the decision to greylist South Africa until the deficiencies are addressed.
The 8 deficiencies in particular include the increased investigation and the prosecution of money laundering and terrorist financing activities. It’ll also enhance its capacity to identify, seize and confiscate the proceeds of such crimes.
In particular, the FATF’s assessment highlighted weaknesses in South Africa’s legal framework, the supervision of designated non-financial businesses and professions, the effectiveness of financial intelligence, and the implementation of targeted financial sanctions related to terrorism and terrorist financing. The FATF also noted that South Africa had not fully implemented its action plan to address the identified deficiencies.
South Africa also needs to enhance and improve the terrorist financing risk associated with the strategy to counter terrorism financing activities as a whole. Additionally, it is required to enhance effective steps in relation to the financial sanctions, and generate effective mechanisms for the identification of the individuals and organizations targeted by the sanctions.
Another implication that South Africa got grey listed that arose from the cross-border transactions, particularly by foreign banks providing the banking services.
The Consequences of Grey Listing South Africa
After FATF Grey Listed South Africa, the country may have faced threat in financial growth and status as a regional leader:
- Reputational Damage
The foreign banks as well as the investors would definitely become hesitant about doing business with South Africa. The foreign companies who wished to do business with South Africa may have faced bureaucratic hurdles. South Africa is regarded as a brand that needs to be reevaluated.
- Loss of Capital
Foreign investments are affected rapidly due to the greylisting. South Africa’s inclusion in the Grey List may reduce foreign investment, as investors may perceive the country as being higher risk and less stable. It also affects the portfolio inflows as they are declining.
- Strained diplomatic relations
South Africa’s inclusion in the Grey List could lead to strained diplomatic relations with other countries that are concerned about money laundering and terrorist financing.
South Africa’s effective steps to Get off the Grey List
The South African government has set a deadline of January 2025 to address the deficiencies highlighted by the FATF, with a potential goal of completing the task in 2024. South Africa’s removal from the Grey List will depend on a final on-site assessment, during which both the FATF and South Africa must agree that all elements of the action plan have been significantly or completely addressed. The country should also improve the application of the risk-based approach by obligated entities and supervisors.
The FATF has provided an eight-step action plan for South Africa to follow in order to be lifted from the Grey List. The action plan includes the following steps:
- Increase outbound mutual legal assistance requests that aid in money laundering and terrorist financing investigations and confiscation of different types of assets in line with South Africa’s risk profile.
- Improve the risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrate that all Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) supervisors apply effective, proportionate, and dissuasive sanctions for non-compliance.
- Ensure that competent authorities have timely access to accurate and up-to-date beneficial ownership information on legal persons and arrangements and apply sanctions for violations by legal persons to beneficial ownership obligations.
- Increase law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre (FIC) for its money laundering and terrorist financing investigations.
- Increase investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with South Africa’s risk profile.
- Enhance the identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with South Africa’s risk profile.
- Update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy.
- 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. Prioritize law enforcement initiatives where regulators are required to increase their level of supervision, ensuring that investigations are sufficiently and effectively supported, both locally and internationally.
