How far is South Africa with getting off the greylist?

Global watchdog the Financial Action Task Force put South Africa on a greylist for failing to meet international standards regarding anti-money laundering, countering the financing of terrorism and proliferation financing. What progress has government and regulatory bodies made since then to get the country off the grey list?

 “Just like the news that our sovereign credit rating had been downgraded to junk status three years before, it hurt to know that other countries would now be wary of investing in our assets or doing business with us,” Hawken McEwan, director of risk and compliance at DocFox, says.

“Of course, we knew for a while that there were chinks in our armour. The Financial Action Task Force (FATF) warned us in a 2019 inspection that there were problems, but our efforts were arguably too little, too late, with proposed changes coming into effect literally weeks before the final review in 2023.”

The FATF highlighted that South Africa had to take a more risk-based approach to fighting financial crime and really understand who we are doing business with through more robust due diligence.

The watchdog also found gaps in intelligence that required more cooperation with other financial intelligence units and investigative authorities globally and expanding the reach of oversight across a broader base of non-financial businesses.    

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How did the FATF greylisting change the world’s perception of South Africa?

McEwan says the biggest cost has been reputational damage. “The rest of the world now sees South Africa as below par in countering financial crimes such as corruption, money laundering, terrorism financing and proliferation financing.”

According to the FATF, proliferation financing facilitates the movement and development of proliferation-sensitive items and as such, can contribute to global instability and potentially catastrophic loss of life if weapons of mass destruction are developed and deployed.

As set out in the PF Typologies Report, proliferators operate globally and mask their acquisitions as legitimate trade. They exploit global commerce, for example by operating in countries with weak export controls or using free-trade zones, where their illicit procurements and shipments are more likely to escape scrutiny.  

McEwan says the public proclamation of the flaws in our financial systems means other countries are going to be more cautious about engaging with South Africa.

“The greylisting means local individuals and businesses will be subject to more scrutiny regarding their source of funds, counterparties and reasons for transactions before international companies will do business with them.”

This additional due diligence will come at a cost, which will be passed on to consumers, whether it is through administration fees, reduced rates or increased prices. Therefore, compliance-related costs will increase and international deals may be delayed due to more red tape, he says.

Along with the news that South Africa received its worst score yet in the recent Corruption Perceptions Index by Transparency International, the greylisting has compounded our already reduced economic prospects and slow pace of job creation, McEwan points out.

ALSO READ: South Africa was greylisted due to endemic corruption

What must still be done?

South Africa accepted the FAFT’s report and has made progress in addressing its recommendations. These include broadening the types of businesses that must now comply with the Financial Intelligence Centre Act (FICA), such as credit providers, high-value goods dealers and companies that help others set up businesses and trusts.

McEwan says the idea is to put controls around industries outside the direct financial markets that money launderers can use in their schemes.

“However, while these new categories have been announced, much work must still be done to educate these sectors about the potential risk their businesses carry and how to implement appropriate controls and reporting processes.”

The introduction of the requirement for centralised beneficial ownership registers is another positive development, he says.

“It is now a requirement for the ultimate beneficial owners of all companies and trusts to register with CIPC or the master’s office to prevent them from being used to disguise the true identity of who is really behind them.”

However, McEwan points out, while this is a great step forward, access to this register is strictly limited to the authorities, meaning accountable institutions still have to duplicate the work in establishing the beneficial ownership of their legal person clients.

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What has the Financial Intelligence Centre done?

The Financial Intelligence Centre has also begun working more closely with other investigating units to share intelligence and ultimately support prosecutions, something that the FATF wanted to see.

McEwan warns that the period a country remains on the greylist depends on how quickly it resolves its shortcomings.

“This varies on average from five to ten years. A country is a big ship and big ships take time to turn.”

However, he says, it is quite possible to reverse the decision in a shorter time with commitment and tangible, sustained action.

“Mauritius, Iceland and Serbia were able to implement necessary reforms quickly and were delisted in one to two years. Other countries, where deficiencies are particularly serious or progress in rectifying them is slow, remained on the greylist for several years, including Yemen (since 2010), Syria (since 2013) and the Democratic Republic of Congo (since 2010).”

Government has stated that it expects to address the deficiencies by the end of January 2025, but McEwan says given the upcoming election, whether this will be possible remains to be seen.

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What can companies do?

McEwan points out that government alone is not responsible for turning the greylisting around. All companies have a role to play in combating money laundering, terrorism financing and proliferation financing by ensuring their products and services are not knowingly or unwittingly exploited by criminals.

He says it is understandable that there is apathy among many businesses to report suspicious activities. Why make the effort to report things when nothing seems to happen in terms of prosecutions?                   

“While it is tempting to succumb to the logic of this argument, companies and individuals must make a collective effort to fight financial crime by doing what is right, not what it easy. FICA and similar legislation around the world exist for a genuine purpose and while compliance may seem like a regretted burden, by understanding the risk in a business, implementing effective controls, adopting the right technology to support staff and reporting suspicions, companies really can play a part in turning the country around.

“After all, it is those on the front line that have the best view of what is really happening on the ground.”