Investigations that result in prosecutions that lead to those found guilty of money laundering and terrorism financing being put in prison is the test that South Africa must pass to get off the Financial Action Task Force’s grey list, says Intellidex chairman Stuart Theobald.
He was speaking at an event titled “Beyond the grey list: mapping South Africa’s recovery”, which was hosted by the Association of Black Securities and Investment Professionals and Standard Bank on 24 March.
The keynote speaker was Finance Minister Enoch Godongwana, who said the state’s security cluster had to be strengthened if the country was to exit the grey list.
“We have got to strengthen that cluster because most of our challenges arise out of that cluster,” he said.
The FATF put South Africa on its grey list on 24 February. It has given the country until the end of January 2025 to fix eight “strategic deficiencies” relating to its anti-money laundering/combating the financing of terrorism regime.
‘No surprise’ considering the state capture report
Godongwana said the FATF’s findings did not come as a surprise in view of what the commission into stated capture, headed by Judge Raymond Zondo, uncovered, describing the commission’s reports as “a testimony” to some of those findings.
Crime and corruption are constraints on economic growth, he said.
The FATF presented South Africa with 67 recommended actions in October 2021. Godongwana said the authorities had acted with “unprecedented” speed to address those of the 67 recommendations that related to weaknesses and loopholes in the regulatory framework. This included enacting the General Laws (Anti-Money Laundering and Counter-Terrorist Financing) Amendment Act, which amends five pieces of legislation, and the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Act, which addresses shortcomings linked to terrorist financing.
Legislative and regulatory changes addressed 62 of the 67 recommendations. The five outstanding issues relate to loopholes in implementation in the security cluster.
“We have got to deal with the security cluster effectively,” he said.
National Treasury has allocated about R14 billion to support, over the medium term, the implementation of the Zondo Commission’s recommendations and address the weaknesses identified by the FATF, Godongwana said.
This allocation included R1.3bn to the National Prosecuting Authority, R985 million to the Directorate for Priority Crime Investigation, and R265m to the Financial Intelligence Centre (FIC). The South African Police Service was given funds to employ 10 000 people in the year to the end of March and another 5 000 from 1 April.
All these efforts were to ensure that South Africa exited grey-listing “as quickly as possible”, said Godongwana, who told Moneyweb last month that South Africa could get off the grey list by mid-2024.
In addition, Godongwana said he will table a new procurement bill before Parliament at the end of March that will better ensure that procurement processes are transparent and meet all the constitutional requirements, as well as address transformation.
“We are doing everything possible. We are putting resources […] to get out of grey-listing. It is not where we want to be,” he said, adding he was more concerned about grey-listing than the country’s credit rating.
Skilled people are critical
Theobald said the challenges in the criminal justice system require more than money.
“Allocating money does not recruit the kind of skills that we need The FIC needs to double its staff. It needs to hire forensic analysts, people who can do huge data analysis.” People with these skills were scare, and they were being sought by the banks and other institutions, he said.
The state’s agencies needed capable people to increase money-laundering investigations and prosecutions.
Demonstrating effectiveness to the FATF meant investigations that led to prosecutions that put people in jail. “That has to be the standard that we’re judged on, and at the moment we are falling far short,” Theobald said.
Intellidex was concerned that, “even in the year or two years that we have ahead of us, these are going to be huge obstacles to overcome”.
The Minister of Finance can create the resources, but urgent action is required by many other parts of government working in concert, as well as with the private sector, he said.
Economic impact is difficult to quantify
Theobald said it was difficult to make reliable estimates of the economic impact of grey-listing, “and anyone who is giving you numbers is giving you false confidence”.
South Africa is not the biggest economy to be grey-listed. But in terms of domestic equity market capitalisation, it has a far more sophisticated financial system than any other market that has been grey-listed, he said.
On the one hand, that sophistication means South Africa has multiple channels for financial flows, and not all of them will be affected by grey-listing. And those that are affected will have a “displacement effect”. If the country cannot borrow money from banks, it can issue bonds through its capital markets, for example, Theobald said.
On the other hand, South Africa is very internationally connected. The country’s financial system is globally integrated, which means grey-listing will affect it in those international relationships.
Theobald said he could not say which of the above two factors will be dominant.
A much-cited International Monetary Fund study in 2021 of 89 countries that were grey-listed between 2000 and 2017 found a big dip in capital flows into a country shortly before and after grey-listing, but capital flows subsequently recovered.
“I don’t think South Africa has experienced this big dip, and that indicates that our economy is quite different to those that have come before us,” said Theobald, adding Intellidex did not think the study’s findings applied to South Africa.
He referred to a research report Intellidex published last year, which estimated that grey-listing would cost South Africa 3% of GDP in a worst-case scenario, which was as an environment in which the country does not respond to grey-listing but shrugs it off.
Read: Research report advises South Africans to prepare for grey-listing
The benign scenario, where less than 1% of GDP is lost because of higher transactional costs, applies where South Africa is perceived to be taking grey-listing very seriously and working hard to get off the grey list.
“That’s the scenario we want the rest of the world to see. It requires all of us as ambassadors of our financial system to make sure that is the reality we communicate to our global counterparts. If we get that right, people will put up with the inconvenience of doing business with us, and the economic impact will be minimal,” Theobald said.
Opportunity or avoidable crisis?
Theobald agreed with Godongwana and President Cyril Ramaphosa that grey-listing presents the country with opportunities to effect fundamental changes to the criminal justice system.
Crime and corruption are an economic cost to doing business, and they were hard problems to solve because they run throughout institutions in the private and public sectors. Grey-listing creates “a burning platform and a spur to action” that otherwise would not exist, he said.
But Cas Coovadia, the chief executive of Business Unity South Africa, disagreed.
“We need to stop in this country waiting for crises to become opportunities before we do anything.,” he said during the panel discussion.
“There are parts of government that don’t actually recognise the sensitivity of some of the actions taken elsewhere have on the financial sector […] and, as a result, on the economy.”
South Africa did not try hard enough to avoid grey-listing, which could have been avoided, Coovadia said.
However, he recognised that, when FATF raised concerns about the country’s anti-money laundering regime, South Africa experiencing state capture.
“The financial sector and the Reserve Bank started raising the flags, started talking to FATF about it, but other parts of government just did not see it as a priority. It was a crisis then. We didn’t have to wait for it to play out, and that’s why I don’t see this as an opportunity. We shouldn’t have to wait for grey-listing to deal with the significant challenges we have in law and order,” Coovadia said.
