Tshepo Matseba

While South Africa is making steady progress in its efforts to be removed from the Financial Action Task Force (FATF) grey list, it will require “a significant effort” from all relevant authorities in the country to meet the deadline at the end of January 2025 to address remaining shortcomings identified by FATF, according to National Treasury.

South Africa’s grey listing woes started in 2019, when the global financial crime watchdog FATF red-flagged the country for high levels of corruption. This meant that South Africa had to address its partial compliance or non-compliance with 20 of the FATF’s “Forty Recommendations” by February 2023.

When the FATF performed its mutual evaluation (peer review) of South Africa in November 2019, only 21 months had passed since had Jacob Zuma resigned as president. “It was too soon for those conducting the peer review to come to any other conclusion, but that South Africa has a serious corruption problem,” Allan Gray portfolio manager Sandy McGregor wrote in the asset manager’s fourth-quarter 2022 Quarterly Commentary.

According to Transparency International’s 2023 Corruption Perceptions Index, South Africa ranked 83rd out of 180 countries and territories. The index scores them on a scale of zero (highly corrupt) to 100 (clean) with the average score just 43 out of 100. More than two thirds of countries scored lower gaan 50, as the majority of countries have made “no progress or declined in the last decade”. www.statista.com See “Where Corruption is Rampant” by Martin Armstrong.

In the 2022 Ibrahim Index of African Governance (IIAG), South Africa scored 67.7 out of 100.0 in overall governance, ranking 6th overall out of 54, and scoring higher than the African average (48.9) and the regional for Southern Africa (54.2). The IIAG, published every two years, is the most comprehensive dataset measuring African governance performance. https://iiag.online/locations/za.html

Despite the country’s ongoing efforts to combat corruption and other financial crimes, on 24 February 2023 the crunch came when South Africa was grey listed and placed on the global watchdog’s dirty money watchlist to denote the country’s shortcomings in tackling illicit financial flows and combating terror financing. At that time, 20 deficiencies were identified for not being fully complying with international standards around the prevention of money laundering, terrorist financing and proliferation financing.

The most significant implication to a country that is grey listed is the reputational damage to the country, as its effectiveness in combatting financial crimes like corruption and money-laundering, as well as terror financing, are deemed to be below international standard.

Among analysts’ responses, many emphasised that the consequences for South Africa could be far reaching and that higher compliance costs would imply less foreign investments flowing in, higher costs of borrowing for national entities and companies, and more transaction, administrative and other costs for doing business. This would happen at a time when the South African economy is already underperforming and facing both external and internal shocks. https://southafrica.un.org/en/247836-grey-listing-south-africa-note-possible-socioeconomic-implications

Indeed, grey listing has had a severe impact on South Africa, Compli-Serve SA compliance manager, James George, points out:

“South African entities, including businesses and government agencies, have struggled to access international finance at competitive or feasible interest rates during this period. The country's ability to secure favourable international loans and financing for critical infrastructure projects has been compromised to a certain extent.

“Reduced access to international markets and finance has hindered development and job creation, while increased scrutiny of cross-border transactions and financial activities affects the smooth flow of goods and services. This has an impact on the competitiveness of South African exports and imports on the global stage.”

“South Africa has also seen the potential loss of financial business to neighbouring countries or other financial centres that are not facing the same scrutiny. The tarnishing of South Africa's reputation as a global financial and business centre remains a significant challenge. Rebuilding trust and confidence in our financial system and regulatory framework is an ongoing process, far from an overnight solution.” https://www.fanews.co.za/article/compliance-regulatory/2/general/1082/a-year-in-review-south-africa-s-ongoing-journey-after-greylisting-by-the-fatf/38873

Addressing concerns

This said, since the threat of grey listing was first announced, authorities have put shoulder to the wheel in addressing various concerns and deficiencies raised by the FATF in its mutual evaluation report. Among other things, they submitted an action plan to this end, while also participating in regular follow-up evaluations to assess progress.

Promptly after FATF announced South Africa’s grey listing in 2023, pres Cyril Ramaphosa responded by emphasising that “Government is determined to address concerns raised by the Financial Action Task Force as quickly as possible with the fundamentals in place to get off the ‘grey list’”

“As a country that both values and enforces the rule of law, the grey listing is an opportunity for us to tighten our controls and improve our response to organised crime. This will ultimately place us on a stronger footing to effectively fight these damaging and dangerous crimes,” the president said, welcoming the intensified monitoring by FATF.

“Our action plan to address these deficiencies is aligned with the work we are doing to implement the recommendation of the State Capture Commission as outlined in our submission to Parliament. We have restored credibility to key institutions like SARS and the NPA to enable them to fulfil their respective mandates. We have bolstered the powers of the Special Investigating Unit (SIU) by establishing a Special Tribunal to recover public funds stolen through corruption and fraud, and an Investigative Directorate in the NPA to investigate serious corruption,” he added.

Some of the key actions co-ordinated by various stakeholders since 2021 include:

• Passing several pieces of legislation aimed at improving the country’s financial crime laws, including the General Laws (Anti-Money Laundering and Counter Terrorist Financing) Amendment Bill in December 2022.
• The mandate of the Financial Intelligence Centre Act (FICA) has already been widened to include more effective monitoring and detection capabilities.
• The establishment of the Fusion Centre, which brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency and the FIC. Since its inception the work of the Fusion Centre has led to the preservation and recovery of approximately R1.75 billion in criminal assets.
• In the Mid-Term Budget Policy Statement, Treasury made R14bn available to capacitate agencies that are critical in the fight against crime, including those that fight financial crimes. https://www.investec.com/en_za/focus/economy/its-official-south-africa-greylisted-.html
• “The South Africa Anti-Money Laundering Integrated Task Force was set up in 2019 as a partnership between the banking sector and government regulatory authorities. Between the beginning of 2020 and the end of March 2022 successful interventions by the Task Force led to the preservation of criminal assets worth R86 million.
• One of the country’s most effective tools for combating money laundering and other financial crimes is the multidisciplinary Fusion Centre, established in 2020.The Centre brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency and the FIC. Since its inception the work of the Fusion Centre has led to the preservation and recovery of approximately R1.75 billion in criminal assets. https://www.sanews.gov.za/south-africa/sa-has-action-plan-get-grey-list

In March 2023 the IMF also commented favourably on South Africa’s efforts to address FATF concerns, but with a proviso: “FATF has recognised that South Africa has made significant progress on many of the recommended actions to improve its system including the passage of two key Acts of Parliament addressing technical compliance deficiencies, demonstrating the authorities’ strong political commitment.

“Exiting the grey list will require South Africa to continue to implement the agreed FATF implementation action plan in a timely manner. International experience suggests that the adverse impacts of grey listing increase the longer a country remains on the list. Therefore, the mission encourages stakeholders to continue working together to exit the list as quickly as possible, and closely monitor the impact of the grey listing on capital flows and the financial system. https://www.imf.org/en/News/Articles/2023/03/21/mcs032223-south-africa-2023-article-iv-mission

The strides authorities have made in addressing deficiencies over the past year, paid dividends as FATF has formally re-rated 18 of South Africa’s 20 deficiencies, according to a FATF report in November 2023. Of these, 15 were upgraded to be no longer deficient, 14 recommendations had been fully or largely complied with, and one was rated as not being applicable to South Africa.

With the FATF-deadline less than a year away, South Africa needs to buckle up, not only to ensure that it successfully deals with the remaining deficiencies on the FATF list, but that it also ensures that SA adheres to, and complies with international standards of the monitoring and management around the prevention of money laundering, terrorist financing and proliferation financing.

Tshepo Matseba is the Managing Director at Reputation 1st Group and Strategic Partner at Ebony + Ivory Integrated Advertising Agency. He writes in his personal capacity.

MORE ABOUT FATF

An intergovernmental global organisation founded in 1989 by the Group of Seven (G7) countries - Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States - FATF was established to set standards and policies on money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction.

Since then, the organisation has grown to include 39 member countries, along with several observer organisations, including the International Monetary Fund. The 39 members account for more than 90% of global GDP. https://www.moonstone.co.za/explainer-how-did-south-africa-end-up-on-the-grey-list/