Why should an ordinary South African care about the possibility of SA being greylisted by the global AML/CFT watchdog in a few months’ time?

Why should an ordinary South African care about the possibility of SA being greylisted by the global AML/CFT watchdog in a few months’ time?

The unwelcome news about the probability of SA being greylisted by the Financial Action Task Force (FATF) in February 2023 should be of grave concern to an ordinary South African. Especially considering the other economic headwinds and that SA could have avoided the situation.

SA Greylisting
Njabulo Duma

Njabulo Duma

STANLIB Chief Compliance Officer

The unwelcome news about the probability of SA being greylisted by the Financial Action Task Force (FATF) in February 2023 should be of grave concern to an ordinary South African. Especially considering the other economic headwinds and that SA could have avoided the situation.

 

The FATF, a global money laundering and terrorist financing watchdog which sets international standards to prevent illegal activities, released a Mutual Evaluation Report on 7 October 2021. The report identified deficiencies in SA’s anti-money laundering, counter-financing of terrorism and counter-financing of proliferation (AML/CFT/CPF) regime. SA was required to address these deficiencies within 18 months and file a report by the end of October 2022 showing full remediation. Failure to do so to the satisfaction of the FATF is grounds for greylisting.

 

The FATF maintains two public lists of countries with weak AML/CFT regimes: “jurisdictions under increased monitoring” (called the “greylist”) that are actively working with the FATF to address strategic deficiencies in their regimes; and “high-risk jurisdictions subject to a call for action” (the “blacklist”) that are not actively engaging with FATF to address these deficiencies. There are only two countries on the blacklist: Iran and North Korea. The greylist currently contains about 23 countries, like Syria and Haiti.

 

The report’s assessment was based on forty recommendations that a country requires for a comprehensive AML/CFT/CPF framework. There are also eleven Immediate Outcomes (IO), applied to assess the country’s effectiveness in implementing the AML/CFT/CPF measures. Compliance with each outcome is assessed as either “substantial,” “moderate” or “low”. Below shows how SA performed.

HE

IO achieved to a very large extent. Minor improvements needed.

SE

IO achieved to a large extent. Moderate improvements needed.

ME

IO achieved to some extent. Major improvements needed.

LE

IO not achieved or achieved to a negligible extent. Fundamental improvements needed.

National Treasury, which chairs an interdepartmental committee of AML/CFT/CPF that is overseeing and co-ordinating a comprehensive response plan in this regard, indicated that these weaknesses are relatively easy to address as they relate to changing laws and putting systems in place. From a risk mitigation standpoint, a scenario of assuming the worst when this event materialises, remains a plausible course of action for both fiduciaries of clients’ monies and clients themselves.

 

There is reasonable anticipation for economic and non-economic effects to kick in (prior, during and after the announcement) when this event occur. Market forces in this scenario generally assume that

  • An event of this nature feeds into the narrative of a failed state given everything happening in the country
  • The country is pretty much at a point of no return from an AML/CFT/CPF fight standpoint, and
  • The exclusionary approach applied by the likes of the European Union in respect of greylisted countries will bear significant consequences for South Africa.

These are reasonable assumptions and direct impact on the pockets of ordinary South Africans should be enough course for concern.

 

1. SA’s attractiveness as an investment destination

SA already presents various obstacles to the state of its attractiveness, e.g., electricity supply, inefficient network industries, and rising costs. Being greylisted by the FATF could further erode the country’s ability to attract global investment.

 

2. Capital Flows

A paper released by the IMF in May 2021 showed that, among a sample of 89 emerging and developing countries between 2000 and 2017, greylisting had a significant negative impact on a country’s capital flows. A negative effect averaging 7.6% of GDP was noted, although this varies by type of capital flows. It creates considerable uncertainty among foreign investors, especially at first, when foreign investors are unsure how domestic firms will cope and how other investors will respond. It limits the investment landscape and choices of asset allocators, something that erodes the value of South Africans’ hard-earned savings. The data shows a historical negative effect on capital flows of about 7.6% of GDP; gross inflow declines of over 6% of GDP (average); FDI inflow declines of about 3.2% of GDP on average; and portfolio inflow declines by about 3.3% of GDP, among others.

 

3. Ease and Cost of Doing Business

The FATF calls on other countries to apply enhanced due diligence and countermeasures to countries on the greylist. Ease of doing business as a result of onerous and costly due diligence processes (largely as a result of insistence by global counterparties); terms of supranatural organisations which are exclusionary against high AML/CFT risk jurisdictions and their impact to access to international finance and trade, all become the norm. This does not only raise the cost of doing business with those countries and significantly reduce the country’s efficiency in processing transactions and delivering service quality, it also is a significant disincentive for offshore counterparties to engage with a country in a greylist.

 

4. Access to international trade and financial systems

Various constrains inherent in greylisted countries’ ability to freely trade with other countries, coupled with the standards applicable to the global financial system in advancement of AML/CFT/CPF efforts, Complications as a result of not being able to fairly participate in these global financial markets and systems would be tantamount to quasi-exclusion in these arrangements for South Africa.

 

5. Cost of capital going up

Any extra rand that the country pays as a result of the risk premium levied by owners of capital and other global DFIs could have helped to address the developmental needs of the country like housing, education, etc. The funding needs of many State-Owned Entities are met by the global wholesale markets.

 

Of course, we hope that this greylisting is avoided. If it does, organising your financial affairs properly with the help of your financial adviser will ensure that you can neutralise the effects on your financial position.

This article was published in Business Day on the 4th of August 2022. Click here to view it. 

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