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Picture: GCIS
Picture: GCIS

The probability of SA being greylisted by the Financial Action Task Force (FATF) in February should be of grave concern to ordinary South Africans, especially considering the other economic headwinds the country is facing and that SA could have avoided the situation.

The FATF, a global money laundering and terrorist financing watchdog that sets international standards to prevent illegal activities, released a Mutual Evaluation Report on October 7, which 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 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 contains about 23 countries, like Syria and Haiti.

The report’s assessment was based on 40 recommendations a country requires for a comprehensive AML/CFT/CPF framework. There are also 11 immediate outcomes, applied to assess the country’s effectiveness in implementing the AML/CFT/CPF measures. Compliance with each outcome is assessed as “substantial”, “moderate” or “low”. The table shows how SA performed.

The 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 occurs. Market forces in this scenario generally assume an event of this nature feeds into the narrative of a failed state given everything happening in the country, that the country is pretty much at a point of no return from an AML/CFT/CPF fight standpoint, and that the exclusionary approach applied by the likes of the EU in respect of greylisted countries will have significant consequences for SA. These are reasonable assumptions and the direct impact on the pockets of ordinary South Africans should be enough cause for concern.

The fallout will affect:

  • SA’s attractiveness as an investment destination. The country already presents various obstacles to the state of its attractiveness, including electricity supply, inefficient network industries and rising costs. Being greylisted by the FATF could further erode the country’s ability to attract global investment.
  • 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 effect on a country’s capital flows. A negative effect averaging 7.6% of GDP was noted, though 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); foreign direct investment inflow declines of about 3.2% of GDP on average; and portfolio inflow declines by about 3.3% of GDP, among others.
  • 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 that are exclusionary against high AML/CFT risk jurisdictions, and their impact to access international finance and trade, all become the norm. This not only raises the cost of doing business with those countries and significantly reduces the country’s efficiency in processing transactions and delivering service quality, it is also a significant disincentive for offshore counterparties to engage with a country on a greylist.
  • Access to international trade and financial systems. Various constraints inherent to 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 from these arrangements for SA.
  • Cost of capital going up. Any extra rand the country pays as a result of the risk premium levied by owners of capital and other global DFIs could have helped address the developmental needs of the country, such as housing and education. The funding needs of many state-owned entities are met by the global wholesale markets.

Of course, we hope this greylisting is avoided. If it is not, individuals organising their financial affairs properly with the help of their financial adviser will ensure they can neutralise the effects on their financial position.

• Duma is Stanlib chief compliance officer.

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