Sword over SA’s head for non-compliance with anti-money-laundering, terror requirements

There is another sword hanging over South Africa’s head: non-compliance with the Financial Action Task Force (FATF) requirements to put measures in place to prevent money-laundering and combatting the financing of terrorism.

Non-compliance will mean that South Africa gets grey listed, which could affect the gross domestic product (GDP) in a limited or severe way depending on how the country reacts to the grey listing.  

The economic impact will primarily be due to higher transaction costs for cross-border payments and the general reputational impact. International financial firms, including banks, will be required to apply enhanced due diligence to any South African client and this would mean a more invasive and extensive process of assessing the source of funds and the integrity of clients.

Business Leadership South Africa (BLSA) commissioned researchers Intellidex to report on the prospect of South Africa being grey listed by the FATF and Intellidex puts the probability of grey listing at 85% when the FATF plenary is held in February next year.

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Sword of Damocles

In the report, titled Sword of Damocles: South Africa’s FATF Grey Listing, Intellidex estimates that the impact of grey listing will be under 1% of GDP if the country acts with swiftly, to 3% of GDP if the country is perceived as slow and unwilling to meet the standards set by FATF.

“BLSA is committed to improving the environment where businesses operate, which is why the FATF issue concerns us,” says Busisiwe Mavuso, CEO of BLSA.

“This report provides clear guidance on what we as a country must do to ensure that grey listing does not cause long-term damage to the economy.”

She says everyone must work together to ensure that South Africa’s commercial crime investigation and prosecution, as well as anti-money laundering and terrorist financing supervision are world class.

“That is in the best interests of South Africa anyway.”

Specific requirements vary between jurisdictions, but the United Kingdom and European Union both require banks and other accountable institutions to apply enhanced due diligence to any grey listed country.

As a result, some firms may elect not to do business with any South African company or individual to reduce costs and compliance risks. On the longer term, reputational effects will lead to a reduced appetite for investing in South Africa. Grey listing will also complicate access to bilateral and multilateral development funding.

ALSO READ: Government must pull up its socks if we wish to remain off the grey list

Consequences of grey listing

“If the remaining institutional fixes are addressed with urgency, global counterparts will be more willing to maintain their relationships with South African clients. However, if South Africa is grey listed for an extended period, counterparts will gradually reduce exposure to existing South African clients while refusing to enter new relationships,” Mavuso says.

The authors of the report, Stuart Theobald, Nxalati Baloyi and Peter Attard Montalto, identified three critical areas where South Africa has struggled to reach required levels of compliance:

• While legislation for the gathering and dissemination of data regarding beneficial owners of trusts and companies is progressing and the Companies and Intellectual Property Commission (CIPC) started to prepare to capture this information, the masters’ offices of the high courts have not made progress on an equivalent process for trusts.
• The Directorate for Priority Crime Investigation (the Hawks) made minimal progress in building the capacity to investigate money laundering and terrorist financing, as well as other commercial crimes.
• The Financial Intelligence Centre is envisaged to take on additional supervision responsibilities for the money laundering and terrorist financing oversight of non-financial institutions, including real estate agents, attorney firms, Krugerrand dealers and others. While the legislation is also progressing, the additional budgets and resourcing must still be developed.

According to the report, there was significant progress in many other areas, including the enrolment of 29 prosecutions related to state capture and freezing orders on over R5.5 billion. The SA Reserve Bank and Financial Services Conduct Authority both implemented new supervision processes to comply with FATF.

ALSO READ: FATF ‘grey list’ lessons for South Africa from Mauritius

Impressive joint programme progress

There were also impressive joint programmes to improve the investigation of corruption between the NPA, DPCI, FIC, SARS and other elements of the criminal justice system. “We applaud the considerable progress that has been made,” Mavuso says.

To limit the damage grey listing will have on the economy, the report recommends that:

• The Presidency set up an internal task team to lead the government response to grey listing, working with the Inter-departmental committee assembled by National Treasury. The task team must include people with the expertise to facilitate the change management and capacitation that must happen in key institutions, such as the Hawks and Financial Intelligence Centre. It must be able to focus on blockages and capacity constraints in partnership with the ministries of police, justice, home affairs, national treasury, Sars and others.
• Private sector companies and individuals must prepare for the enhanced due diligence that will accompany grey listing and should engage foreign service providers to establish how grey listing affects their risk rating, what enhanced due diligence measures will be taken, if any and how they can prepare.

Mavuso says grey listing is a consequence of the state capture era in many aspects. State capture saw the deliberate undermining commercial crime investigation and prosecution in particular.

“FATF’s action provides further impetus to address this legacy urgently. BLSA fully supports improvements in the criminal justice system and other institutions to better regulate, supervise and investigate commercial crime, including money laundering and terrorist financing.”

BLSA also entered into a memorandum of understanding with the NPA to support access to private sector investigation and analysis skills to improve capacity and has multiple engagements with the criminal justice system through its Business Against Crime initiative.