Is it a “done deal” that South Africa will be placed on the Financial Action Task Force’s grey list next year? There are those who think it is, and therefore advisers should engage with their clients now to mitigate the potential inconvenience.
National Treasury acting director-general Ismail Momoniat told Business Day in July that the country’s grey-listing was not a fait accompli, and South Africa could succeed in remedying its regulatory deficiencies before the deadline.
“It is going to be an uphill battle, but I am confident we can perform a miracle and avoid grey-listing,” Momoniat was quoted as saying.
“We also don’t have to solve everything by February 2023 – we just need to show we’ve made sufficient progress to address each effectiveness measure and make changes to our legislation to comply with the 40 FATF recommendations.”
Although Momoniat was confident South Africa could make the progress required to comply with FATF’s 40 recommendations, he acknowledged that the 11 immediate outcomes outlined by the group might be more difficult to achieve, particularly for smaller financial firms, estate agents and legal practitioners.
He told the publication that FATF could opt to place South Africa on “enhanced follow-up”, which would buy the country more time to achieve higher levels of compliance.
Not everyone shares Momoniat’s optimism. Old Mutual Investment Group’s chief economist, Johann Els, told a media briefing this month that grey-listing was probably a fait accompli because of the “hoops” South Africa must jump through to avoid it.
However, Els differs from commentators who believe that grey-listing will be worse than a sovereign downgrade. He believes the financial markets have largely priced in a grey-listing.
Worse than a downgrade?
It seems the view that grey-listing would be “worse than a downgrade” first emerged in February, when the Financial Intelligence Centre and National Treasury briefed Parliament’s Standing Committee on Finance on FATF’s Mutual Evaluation Report, which was published in October last year.
Read: Clock is ticking for SA to avert something ‘worse than junk status’
This view has been echoed by a number of commentators, including some of the country’s top business leaders.
“The consequences of being grey-listed are worse than downgrading,” Standard Bank chief executive Sim Tshabalala said on The Clement Manyathela Show on Radio 702 in July.
“The rand will weaken, inflation will spike, interest rates will go up […] It will be more expensive to buy food, pay for petrol, buy homes, buy cars. The country can’t afford it.”
However, Tshabalala said the country would be able to avoid grey-listing if it approached the issue with sufficient urgency to ensure legislation was passed that tightened the laws against money laundering and terrorist financing before October 1.
He said the Financial Intelligence Centre and the relevant government ministries understood what needed to be done.
Report: Standard Bank, Nedbank will suffer most
Tshabalala has good reason to hope that the government and Parliament move with sufficient speed to avoid grey-listing: according to a report by RMB Morgan Stanley, Standard Bank and Nedbank are the lenders whose earnings are likely to suffer the most in the event of grey-listing.
A report in Business Day stated:
“Though RMB Morgan Stanley says South Africa will be somewhat insulated from the negative effect of grey-listing due to its deep capital markets, well-developed financial system and orthodox monetary and fiscal policies, it does expect some bank-level risks to portfolio flows as well as trade-related bank revenues. That’s likely to affect Standard Bank’s global markets business, which is engaged in financial markets trading, as well as the trade finance revenue it earns from funding large corporate activity across Africa.
“Nedbank is heavily reliant on the trading activity of its corporate and investment banking unit, which accounts for about half its earnings. Absa is also at some risk due to the rest of Africa operations it inherited after its separation from Barclays.”
Equity analyst James Starke and economist Andrea Masia wrote in the report: “In terms of potential impact, our illustrative analysis suggests a reduction in capital flows would affect Standard Bank and Nedbank’s earnings the most, given their larger proportional trading revenues.
“Standard Bank and Absa have the largest reliance on trade finance, which is sensitive to import/export disruption, but also incremental compliance costs, given the cross-border nature, which carries inherently higher money laundering/terrorism financing risk.”
More red tape when investing offshore
Among those who don’t share Momoniat’s optimism that South Africa will avoid grey-listing, albeit by the skin of our teeth, is Yolande Butchart, foreign exchange consultant at Brenthurst Wealth in Mauritius.
(As an aside, Mauritius was placed on the grey list in February 2020, but it was removed in less than two years after taking remedial action. On average, it takes countries between five and 10 years to get off the grey list.)
Writing in Brenthurst’s July client newsletter, Butchart said individuals should assume that South Africa will be placed on the grey list and prepare themselves for administrative delays and disruptions.
“The increased scrutiny that follows being grey-listed means that every counterpart across the world will have to apply higher levels of due diligence to South African businesses and individuals with offshore interests,” she said.
Restrictions don’t mean exclusion from international markets and banking systems, but they do add layers of complexity, bureaucracy and inconvenience.
“You will still be able to invest offshore and open bank accounts, but this will come with enhanced due diligence that is more vigorous than the usual Know Your client checks.
Butchart said it might be opportune to initiate international investments and financial matters prior to the February 2023 deadline, to circumvent delays and administrative headaches. Although this won’t avoid the future scrutiny of facilities that are opened pre-grey-listing, it will remove some of the initial hassles.
These could include being subjected to due diligence checks by financial institutions as often as twice a year, depending on your risk profile. South Africans who have international business interests or structures, such as trusts, can expect to have to undergo more regular checks on compliance with international practices, Butchart said.
