CASEY DELPORT: How greylisting will affect SA and its financial sector

In October 2021, the Financial Action Task Force (FATF), an intergovernmental policy-making body combating all forms of money laundering and terrorism financing, published an evaluation of SA’s anti-money laundering measures.

Through a peer review process facilitated by the FATF, SA was evaluated for a period in 2019 on its anti-money laundering and combating the financing of terrorism systems.

The evaluation is a twofold assessment of the adequacy of SA’s legal framework and the efficiency with which legislation is implemented. The review did not go well. The published report outlined serious shortcomings in SA’s policies and efforts to combat money laundering and terrorist financing. Worryingly, the FATF has raised more serious concern about SA than it did about the United Arab Emirates (UAE), which was greylisted earlier in 2022.

To be greylisted by the FATF means a country’s shortcomings threaten the international financial system and it is a serious blow to a country’s reputation. Such a country is subjected to increased monitoring and has to deal with adverse economic consequences for trade and transactions with other countries. The list essentially warns of the significant danger of money laundering and terrorism financing that a particular nation holds in global dealings.

As identified by the FATF, SA’s three most critical weaknesses are customer due diligence; terrorist financing offences; and targeted financial sanctions for terrorism and terrorist financing.

In addition to the UAE, the FATF’s greylisted countries include Cambodia, the Cayman Islands, Burkina Faso, Albania, Yemen, Pakistan and Syria. Blacklisted countries — at this stage only North Korea and Iran — are officially considered high-risk jurisdictions.

SA has until February to show the Paris-based FATF that it has made sufficient progress in remedying the identified deficiencies. If it fails to convince, SA could become the second G20 nation after Turkey to be added to the watchlist of what the FATF calls “jurisdictions under increased monitoring” — one step before being formally placed on the greylist in a follow-up review. 

What are the implications for the financial sector and the greater SA economy?

The results of global empirical studies of the impact of greylisting or blacklisting by FATF are mixed, which demonstrates the difficulty in accurately estimating the economic implications of the FATF’s greylisting. This is arguably at least partly because, unlike the specific event of an adverse listing, the fundamentals that inform such listing typically deteriorate or become greater over time. Thus, investors would typically react to these fundamentals independently, and not only to the listing status itself.

For instance, global investors would already have been more cautious about their transactions with SA during the state capture era, rather than waiting for an adverse listing of the country by the FATF. Plainly speaking, many international investors would have already priced in the risk of transacting with and within the SA financial system. This mirrors the dynamic of a sovereign credit rating downgrade, which does not necessarily cause a material and persistent economic and/or market reaction because the relevant, weak fundamentals are typically discounted in advance.

Nonetheless, it is safe to assume that landing on the greylist will be detrimental to the integrity of the SA banking system and jeopardise the country’s relationships with overseas banks. Regulators from some of SA’s main trading partners, such as the US, UK, China and Japan, may restrict their banks from transacting with SA banks. Of those able to transact, the associated costs will be raised significantly. This in turn may have a material adverse effect on capital flows and subsequent growth, as well as on the currency and bond markets. Furthermore, it will become increasingly difficult to invest offshore, even for the wealthiest investors.

How do we get out of this mess?

Significant progress would need to be made in a short period to avoid such an adverse outcome of the FATF process that is under way. While an adverse outcome is not inevitable, recent assessments by the National Treasury and SA Reserve Bank concluded there is a “high” probability of such an outcome.

While it is plausible (even if unlikely) that parliament will be able to process the necessary legislative reforms by the end of this year, other aspects of the FATF review will require a broader political response to correct. In particular, the SA authorities will need to fully assure the FATF that collectively SA is capable of upholding and properly implementing the necessary legal framework (particularly with regard to state-capture and corruption-related offences) and recouping the funds looted from state institutions by those implicated in high-level state capture offences.

Could this be the wake-up call SA needs?

While no country would ever want to wind up on the FATF’s greylist, doing so could kick-start and accelerate much-needed reforms to counter fraud, corruption and terrorism financing in SA. Such was the case for Mauritius — the country was able to get off the greylist in under two years, much to its longer-term economic benefit. After quickly and proactively implementing the necessary reforms, the country’s financial sector is beginning to stand out for all the right reasons — attracting significant international growth and development opportunities. SA would do well to take note.

• Delport is investment analyst: fixed income at Anchor Capital.