The government hopes to have South Africa taken off the Financial Action Task Force’s grey list before the 2025 deadline for addressing deficiencies in its anti-money laundering and counter-terrorism financing (AML/CTF) regime.
The FATF expects South Africa to address the eight “strategic” deficiencies by the end of January 2025. The government “hopes to address them sooner, possibly in 2024”, National Treasury said in a communication on Friday. (See below for the FATF’s eight-point plan of action.)
The communication, titled “FATF grey-listing fact sheet”, was one of two statements released by Treasury immediately after the grey-listing announcement.
Read: Treasury responds to FATF action plan for SA to fix its ‘dirty money’ problems
Treasury said it usually takes from one year to three years for countries to address deficiencies identified by the FATF and to be taken off the grey list.
Iceland got off the list after only a year. Botswana was grey-listed for three years and Mauritius for two. But Pakistan remained on the list for more than four years.
Removal from the list occurs after a final assessment when both the FATF and the relevant country believe all the items on the FATF’s plan of action for that country have been largely or fully addressed.
The FATF will start the next round of mutual evaluations in 2024, with the first mutual evaluation report scheduled for its October 2025 plenary meeting. It is expected that South Africa will be assessed again during the 2027/28 round of mutual evaluations.
Treasury’s view of the implications
A section of the fact sheet addresses the implications for “a country” that is grey-listed.
Treasury said the most significant implication is the damage to a country’s reputation because its effectiveness in combating financial crimes – corruption, money laundering and terrorism financing – is deemed to be below international standards.
The second, and related, impact is on cross-border transactions, particularly the action that might be taken by foreign banks that provide correspondent banking services to respondent banks in this country. (The most common services provided by a correspondent bank are currency exchange, handling business transactions and trade documentation, and money transfers.)
Treasury said the FATF does not mandate the application of enhanced due diligence measures on grey-listed countries. Nevertheless, it expects that certain foreign institutions will undertake more enhanced monitoring, because their internal policies require it or because the jurisdictions in which they operate have stricter due diligence regulations when transactions are conducted with grey-listed countries.
Similarly, local institutions that engage in cross-border trade and other activities may be subject to higher levels of customer due diligence by foreign financial institutions. In practice, this means more thorough vetting of clients and understanding the sources of their funds.
“However, if a country has demonstrated that it has taken strong and credible steps to prevent or get off the grey list, the costs of grey-listing will likely be reduced,” Treasury said.
In the case of South Africa, none of the eight items on the FATF’s action plan relates directly to preventive measures in respect of the financial sector.
“National Treasury, therefore, expects that if South Africa continues to make significant improvements in effectiveness and swiftly exits grey-listing, it will have a limited impact on financial stability and costs of doing business with South Africa.”
‘Insurance industry will particularly be impacted’
Law firm Webber Wentzel said subjecting South African companies to higher levels of due diligence will not only be administratively burdensome but will also create unforeseen costs and delay the execution of transactions. This will harm the competitiveness of local companies in the global market.
Its assessment of the implications of grey-listing was not as positive as Treasury’s.
Grey-listing will have a significant impact on South African financial institutions that rely heavily on global trade in their treasury departments. “Trading offshore will come with higher due diligence hoops to jump through and more red tape. Trading revenue is therefore going to decline,” Webber Wentzel’s finance team said.
It said the insurance industry will particularly be impacted.
“Several South African insurers are heavily reliant on reinsurance programmes concluded with foreign reinsurers. With South Africa being placed on the grey list, foreign reinsurers in, among other places, the European Union, United Kingdom, and the United States, are likely to impose additional and more intrusive enhanced customer due diligence on South African insurers. These additional measures will likely increase the costs of compliance and potentially the cost of reinsurance for local insurers.
“South African insurers should anticipate greater and further know-your-client requirements from their foreign reinsurers when they come to renew their reinsurance programmes while South Africa remains on the FATF’s grey list. In addition, South African insurers, as accountable institutions, will need to reconsider their own risk management and compliance programmes and risk management framework in light of South Africa’s grey-listing,” Webber Wentzel said.
It said the other economic consequences of grey-listing include:
- South African companies will find it harder to obtain financing from foreign lenders on the international capital markets and from multilateral lenders, such as the World Bank.
- Higher transaction costs, because of the increased due diligence requirements, will make foreign investors reluctant to invest in the economy, resulting in less foreign direct investment and a reduction in capital inflows.
- Some international financial institutions have policies that prevent them from doing business with grey-listed countries or at least, limit the scope of business that can be conducted. Such restrictions will further impede business and foreign investment.
- Regulators in the US, EU, and the UK might place restrictions on their banks regarding transacting with South African banks. Some international financial institutions have policies that prevent them from doing business with grey-listed countries or at least limit the scope of business that can be conducted. Such restrictions will further impede business and foreign investment.
Read: How is grey-listing likely to affect South Africa?
‘Committed to a swift resolution’
Treasury said the FATF recognised that South Africa has made “significant and positive progress” since the intergovernmental organisation conducted its mutual evaluation of South Africa in November 2019.
A mutual evaluation is a peer review to assess compliance with the FATF’s standards, which consist of 40 Recommendations, and an assessment (11 “immediate outcomes”) of how effectively a country implements those standards.
In October 2021, the FATF placed South Africa under a one-year observation period, giving the country time to implement 67 “recommended actions” to address deficiencies in its AML/CFT regime. These 67 recommended actions have been reduced to eight strategic deficiencies, where more progress is required.
Treasury said grey-listing means that a country is actively working with the FATF to address its strategic deficiencies, and the country has committed to resolving swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring in the interim.
The eight strategic deficiencies identified by the FATF
Over the next two years, South Africa needs to:
- Demonstrate a sustained increase in requests to foreign countries for legal assistance that will help to facilitate money laundering/terrorism financing (ML/TF) investigations and the confiscation of assets.
- Improve the risk-based supervision of non-financial businesses and professions (for example, trust and company service providers, lawyers, estate agents) and demonstrate that all the country’s AML/CFT supervisors apply effective, proportionate and effective 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.
- Demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for ML/TF investigations.
- Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities.
- Enhance its identification, seizure and confiscation of the proceeds of a wider range of predicate crimes. (The FATF’s list of predicate crimes includes corruption and bribery, fraud, organised crime, and terrorism financing.)
- 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.
‘Not merely to please the FATF’
Treasury said that, apart from addressing the eight deficiencies, the authorities will continue to strengthen their capability to fight money laundering, terrorist financing, corruption, and other financial crimes. This is principally for the benefit of the country, its economy, its financial system, and for the safety and security of the country’s citizens.
It said continuously improving the integrity of the financial system “is not merely a FATF exercise” but was part of the government’s objectives for the regulation of the financial sector.
Treasury would strengthen and expand its AML/CFT systems to minimise perceived risks relating to the financial sector. This is because the biggest economic risk of being grey-listed is the withdrawal of banking and payments services necessary for trade, remittances, and other transfers and economic growth.
Read: EXPLAINER: How did South Africa end up on the grey list?
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