Greylisting – Brace for Impact
By Dean Kietzmann - Engagement Professional
Irrespective of the FATF's decision next month, life for Financial Service Providers and Associated Non-Financial Services & Businesses is going to become more uncomfortable.
As the threat of South Africa being placed on the Financial Action Task Force (FATF) grey list next month draws closer, the South African government is still scrambling to make sufficient progress in meeting the actions that the FATF says must be taken in order to avoid being greylisted.
As well they should. Intellidex estimates that the economic cost to South Africa of being greylisted could be up to 3% of GDP. The loss would be attributed to international investors having to apply increased rigour and due diligence to South African investments, potential loss of international funding and increased bureaucracy.
But who exactly are the FATF and why does what they say matter so much?
The FATF was established in 1989 by the G-7 summit in “response to mounting concern over money laundering”. In 2001 the FATF developed standards in its fight against the financing of terrorist activities, and in 2012 added measures to counter the financing of production of weapons of mass destruction. It sets the global standards on stopping illicit finance.
There are currently 39 members of the FATF of which South Africa is one. In addition to these 39 members, the FATF relies on a strong global network of FATF-style regional bodies to achieve its recommendations. The FATF is an exclusive club including the G7, China and other main trading partners of South Africa. South Africa’s privileges resulting from this membership are now seriously under threat. ?
The October 2021 FATF Mutual Evaluation report lists the key deficiencies the FATF sees with South Africa when measuring compliance with the FATF’s 40 recommendations. Against the 40 recommendations, South Africa is rated as complying with 3, “largely compliant” with 17, “partially compliant” with 15, and non-compliant with 5.
Table 1. FATF’s 40 Recommendations and South Africa’s Technical Compliance Ratings
While bills were rushed to legislature late last year in an attempt to strengthen financial oversight and try ward off greylisting, the actions the FATF require extend beyond simply updating legislation.
Some of the issues raised by the FATF include that Law Enforcement Agencies lack the skills and resources to proactively investigate money laundering or terrorism financing, while the FATF also laments the fact that a risk-based approach to anti-money laundering/combating of financial terrorism (AML/CFT) is inadequately implemented in most smaller financial institutions and designated non-financial businesses and professions. In general, the FATF is of the opinion that only larger banks and ADLAs (Authorized Dealers with Limited Authority) are meeting requirements. ?Most other financial institutions (e.g., Insurers, Investment Managers and Collective Investment Schemes) and designated non-financial businesses and professions (e.g., car dealerships, estate agents, attorneys) favour a tick-box compliance approach, and are not actually identifying and understanding their AML/CFT risks. While basic customer due diligence is applied by Accountable Institutions as defined under the Financial Intelligence Centre Act (FICA), ultimate beneficial ownership requirements are only applied to a limited extent. Overall, the risk-based approach introduced a few years back has not been adequately implemented in a number of institutions. Further, some potentially high-risk sectors such as dealers in precious metals and stones are not regulated under AML/CFT save for the general reporting obligation.
领英推荐
The probability of South Africa being placed on the FATF grey list was placed at 85% by Business Leadership South Africa in a recent report. Indeed, as the 1-year period which the FATF had given South Africa had expired in October last year, and, with little evidence at the time to show that South Africa had made progress in meeting the actions required, greylisting may already be a done deal.
A recent special report from the Basel Institute on Governance on FATF grey listing in Sub-Saharan Africa highlights that strictly speaking, a country on the grey list is not subject to sanctions, but being on the grey list signals that there could be enhanced transaction risks in doing business with such a jurisdiction.
A 2021 working paper by the Internal Monetary Fund indicates that greylisting results in significant reduction in capital flows:
If South Africa is to become the 9th Sub-Saharan African country to be greylisted by the FATF, it would stick out like the proverbial “sore thumb” in any updated report:
In the event of South Africa being greylisted, the priority will then shift to how to exit this list as quickly as possible. Mauritius and Botswana both exited the grey list in 2021, after having being on the list for one year and four years, respectively. In order for South Africa to do the same, it would need to pursue successful prosecutions relating to State Capture, money laundering and terrorism financing, while making significant investments in the criminal justice system. .
More immediate action may and could be taken by the Financial Intelligence Centre (FIC) and Financial Services Conduct Authority (FSCA) and Prudential Authority.
In order to demonstrate that it takes the FATF recommendations seriously, the FIC may start to apply more pressure to those industries named by the FATF as not following a risk-based approach i.e. non-banking Financial Institutions and designated non-financial businesses and professions. This pressure may come in the form of warnings, or more likely financial fines. In the recent years, 2 rounds fines have already been imposed by the South African Reserve Bank (SARB) on the large banks while several large life insurers have also been penalised for not complying with FICA. It is not beyond possibility that such pressure will soon extend to smaller banks, collective investment schemes, Linked Investment Service Providers, and other accountable institutions.
Furthermore, those sectors that are subject to low levels of regulation may soon find themselves under increased scrutiny and higher levels of oversight. Crypto assets, which for a long time were mostly unregulated in South Africa (and specifically mentioned in the 2021 Mutual Evaluation as being unregulated), have come under increased oversight and regulation from December last year. Even the non-life insurance businesses, which are not accountable institutions under FICA, are likely to find themselves under closer examination to demonstrate that they have a sufficiently well understood and robustly implemented risk-based approach to anti-money laundering and the combating of financial crime, including identifying politically exposed persons.
Recent developments and presentations to the FATF by the South African government may yet earn South Africa a stay of execution and stave off greylisting for the time being.
However, irrespective of whether South Africa is greylisted or only placed on alert, all South African financial institutions and designated non-financial businesses and professions are highly likely to come under and remain under increased and sustained scrutiny, inspections and pressure from the regulators going forward.