By Lehlohonolo Lehana.
South Africa faces imminent Financial Action Task Force (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.
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 Financial Action Task Force, which polices compliance with anti-money laundering and terror-financing measures, is expected to give its decision on Friday whether to include South Africa on its so-called grey list.
That’s after an evaluation carried out in 2019 following an era of endemic state corruption found Africa’s most-industrialized economy lacking in all 11 of its effectiveness measures to combat dirty-money flows.
“It is a very rule-driven system which means if you have any outstanding actions then you go onto the grey list, or what they call the observation list,” South African Revenue Service Commissioner Edward Kieswetter said in an online panel discussion hosted by PwC on Friday.
“We started with well over 130 outstanding actions, we are in low double digits now, so we’ve done remarkably well in terms of strengthening the system and I think that will begin to gain momentum.”
Being added to the list may have far-reaching consequences for South Africa’s financial system, cause it reputational damage and possibly lead to capital and currency outflows, the central bank said in May.
Finance minister Enoch Godongwana has already signalled that South Africa will likely be grelisted, and during his budget speech this week said that the country should be prepared for the possibility.
In the budget itself, National Treasury said that “over the longer term, government has asked the FATF to formally reassess South Africa’s compliance during its June 2023 plenary”.
This advance alert for another review has been taken by some investors to mean that a greylisting is now likely, and even expected by the government.
The FATF has been meeting this week and is expected to announce any greylisting actions in a media briefing after the close of the meetings. This is currently scheduled for 18h00 local time.
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 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.
- Other general investment inflows are also likely to decline.
Perceptual and Reputational Damage
- 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.
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.