PODCAST | Greylisting SA: too close to call

Should SA not meet the international standard and compliance rules on money-laundering as set by the Financial Action Task Force (FATF), it could be added to the FATF “greylist” as early as April. This could hit investment and businesses, but more importantly, will certainly knock SA’s global reputation and standing.

Business Law Focus host Evan Pickworth interviews Steven Powell, Era Gunning and Amelia Warren from ENSafrica about the risks and whether enough progress is being made to prevent this.

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Preventing greylisting through legislative amendments

In November, SA is expected to present a report to the FATF on the steps it has taken to address the shortcomings identified in the Mutual Evaluation Report concluded in 2021.

Two such steps include the General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Bill (“General Laws Amendment Bill”) and the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill (“POCDATARA Amendment Bill”). In this article, we explore the impetus for these legal amendments and the consequences that SA may face if they are insufficient in the eyes of the FATF.

The FATF is the global anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) watchdog. The members of the FATF have collectively set international standards for measures that countries should implement to combat money laundering and terrorist financing. SA became a member in 2003. As part of FATF membership, countries are subject to Mutual Evaluations (“MEs”). These are peer reviews that assess a country’s level of compliance with the AML/CTF standards, as set out in the 40 FATF Recommendations.

In 2021, the FATF released an ME Report of SA’s AML/CTF system. The ME Report found significant weaknesses in the country’s system, with 20 technical deficiencies being identified. Due to these poor results, SA was required to take remedial steps within 18 months. SA cannot apply for an extension of this period. If SA fails to take sufficient remedial action within this time frame, it may face being “greylisted” by the FATF.

The term “greylisting” refers to the measure of risk that the rest of the world attaches to a country’s companies and individuals as counterparties to transactions. When a country is greylisted, enhanced due diligence must be conducted to do business with the citizens or businesses of the country, and more intensive AML/ CTF evaluations must be undertaken. Greylisting has the effect of increasing the administrative burden (and costs) associated with doing business with a country — which ultimately discourages foreign investment.

To avoid greylisting, SA must demonstrate improvement in two areas: first, in its legal framework (known as “technical compliance”), and second, in its effectiveness in combatting financial crimes. Therefore, legislative amendments alone cannot prevent greylisting; enforcement action must also be taken. Nevertheless, legislative change remains  a necessary condition to prevent greylisting. Furthermore, merely showing that SA is in the process of implementing legislative changes is insufficient. The amended legislation must be in force to be considered an improvement in technical compliance.

What are SA’s next steps?

SA is expected to present a report to the FATF on the remedial steps it is taking to address the deficiencies identified. The report will be referred to a review panel consisting of other FATF member countries. Following a meeting with members of the review panel, the FATF will decide whether SA has taken sufficient remedial action to avoid greylisting.

If SA has not addressed the material findings in the ME Report, it will be greylisted. The greylisting may last anywhere from one to three years, depending on what action must be taken and at what point it can convince the FATF that the issues have been dealt with.

Legislative amendments

SA hopes to address its technical deficiencies in the form of the General Laws Amendment Bill and the POCDATARA Amendment Bill (collectively, “the Bills”). The Bills are aimed at tightening existing laws to curb money laundering and the financing of terrorism.

The General Laws Amendment Bill amends are five pieces of legislation, namely the Companies Act, 2008; Financial Intelligence Centre Act, 2001; Financial Sector Regulation Act, 2017; the Non-Profit Organisations Act, 1997; and the Trust Property Control Act, 1988.

The General Laws Amendment Bill seeks, among other things, to enhance the powers and procedures for regulatory authorities, and to provide for the disclosure of the beneficial owners and the ultimate controllers of trusts, companies and non-profit organisations.

The POCDATARA Amendment Bill updates the Protection of Constitutional Democracy against Terrorist and Related Activities Act, 2004 by, among other things, including cybercrime within the definition of “terrorist activity”, and by bringing the Act in line with international conventions and standards.

Both Bills are currently under consideration by the National Assembly and it remains to be seen whether they will achieve the level of compliance required by the FATF, and whether SA can take sufficient enforcement action to avoid the outcome of greylisting.