Dec 12

Forty Shades of Grey Listing?

An article by Ian Kilbride

The consensus is that South Africa is about to be ‘grey-listed’ by the international Financial Action Task Force, of which, ironically, it is a member. It’s not as if we weren’t warned. The FATF South African Mutual Valuation Report published in 2021 found that South Africa had yet to develop coordinated and holistic national anti-money laundering/combatting the financing of terrorism (AML/CFT) policies informed by ML/TF risks. While acknowledging existing policies or measures to mitigate some aspects of the risks, the report noted that significant ML risks remained largely unaddressed for beneficial owners of legal persons and trusts, and cross-border movement of cash. Most notably, criminal justice efforts were not yet directed towards effectively combating higher risks such as ML related to corruption, narcotics, and tax offences.

South Africa is compliant with a mere 15 of the 40 recommendations and standards for AML/TL and deficient on all 11 of the immediate outcomes of the Mutual Valuation Report. It is estimated that South Africa has achieved satisfactory progress on just two of the 12 priority action points to meet the required standards for technical compliance and effectiveness.

Yet, for the calendar year ending August 2022, South African banks reported almost 400,000 suspicious transactions and nearly five million large cash transactions to the Financial Intelligence Centre. This translates into 200 suspicious transactions each working hour of the year and in excess of 2,000 large cash transactions during the same period. This makes us either a nation of crooks, or illustrates vigilance and compliance on the part of the banks, or both! Given the dearth of money laundering prosecutions and terrorism funding prosecutions (to date just one), however, the statistics suggest that compliance is not the problem. Rather, it points to a deeper issue which is the lack of law enforcement capacity or political will by the authorities. This is an area that requires urgent attention from the FATF review being conducted currently, rather than focusing on the banks and financial institutions.

Given the FATF’s forty shades of risk and compliance, what would grey listing mean for South Africa? After all, we only have to look at the experience of other members of the ‘naughty club’ to anticipate our own fate.

At the macro level, Business Leadership South Africa estimates that grey-listing could reduce the country’s GDP in a band of <1% to 3%. What is clear is that in addition to reputational harm, grey-listing has a negative impact on the risk rating agencies apply to sovereign debt. As an increasingly indebted nation, this is something the South African Treasury can ill-afford. An IMF working paper suggests that grey-listing can also reduce capital flows by as much as 7,6%. It also makes accessing commercial and international loans more difficult and expensive, together with greater conditionality. Grey-listed countries have also experienced a weakening of their currency, accompanied by increased pressure on their balance of payments. Operating in a grey-listed jurisdiction, the South African banking system (and their counterparties) would incur higher international transaction, compliance and auditing costs, all of which will be passed onto the consumer.

At both the individual and institutional levels, grey-listing will increase the frequency and invasiveness of due diligence checks and requirements, all of which will lengthen transactional timelines and increase costs.

If there are any positives to be derived from this process, it is that should South Africa meet or at least make significant progress on the balance of the 40 criteria on which it is currently failing, it will avoid black-listing and can eventually be taken off the grey-list.

In February 2023 the FATF meets in plenary and South Africa will hear its fate. Rather than waiting for the inevitable sanction, it behoves government to fast-track the adoption and implementation of all 40 risk requirements and close the chapter on this book of horrors.