SANISHA PACKIRISAMY: What a greylisting means for investors

It is hard to emphasise just how much is at stake as D-day looms for SA’s potential greylisting.

The government was put on notice in October 2021, when the Financial Action Task Force (FATF) released the findings of a mutual evaluation report, which pointed out SA’s persistent money-laundering risks, flagged gaps in the country’s ability to investigate and prosecute financial crimes, and highlighted insufficient monitoring of terrorist financing risks. 

SA was given until October 2022 to prove that it is remedying these structural deficiencies. And if we fail to demonstrate satisfactory progress on these remedial actions by February 2023, a plenary vote of the FATF members will determine whether the country is then greylisted. 

The FATF report showed there was a lot to fix. 

For a start, its assessment found that SA’s law enforcement agencies lack the skills and resources to proactively investigate money laundering and terrorist financing cases linked to narcotics, corruption and tax offences.

And, while large banks have adequate mitigation measures, supervision and compliance monitoring are inadequate when it comes to SA’s smaller financial institutions and nonfinancial businesses (such as estate agents, car dealers and lawyers).

Compounding this, opaque ownership structures, the FATF said, create an opportunity to disguise the proceeds of unlawful activity. While the FATF acknowledged the existence of SA’s financial intelligence framework, it pointed out that there is a lack of resources to proactively follow through on criminal investigations to trace assets.  

For anyone in SA, this wasn’t surprising.

The weakening of SA’s criminal justice system is part of the wider subversion of democracy during Jacob Zuma’s presidency. It was then that the capacity of the tax authority, intelligence agencies and crime-fighting bodies was severely hobbled.

Since then, the Fund for Peace research think-tank says, there has been a deterioration in the ranking of SA’s security apparatus — which stands in contrast to an improvement among our emerging-market counterparts.

Economic fallout

The question is, what does this mean for investors?

To some extent, local asset prices have probably already priced in a potential greylisting. 

This is partly because investors have been well aware of the backsliding in SA’s rule of law, institutional degradation and the vast array of allegations of corruption and state capture. Any formal designation by the FATF would simply put a rubber stamp on these well-known problems. 

But the damage won’t stop there. 

A greylisting would impair the economy’s links to the global financial system, raising SA’s cost of capital and creating an additional disincentive for offshore companies to deal with SA — beyond our often inept network industries, inflexible labour markets, energy shortages and policy uncertainty.

This possible greylisting is such a big deal precisely because that FATF watchlist is taken seriously by most global investors. Any negative mark hampers SA’s access to trade and financial systems and dampens our investment opportunities.

This isn’t something the country can afford right now. 

As it is, SA is ranked only 84th out of 190 countries on the World Bank’s ease of doing business index (and sixth in Africa, behind Mauritius, Rwanda, Morocco, Kenya and Tunisia).

A greylisting would probably make our ranking worse, as the increased regulatory red tape that would come with enhanced monitoring and lengthier transaction times would introduce more cholesterol into the system.

Political willingness

Yet, despite what is at stake, it’s unclear if the policymakers fully grasp the urgency of all this.

With the October deadline fast approaching, the National Treasury has presented urgent amendments to parliament to satisfy the FATF’s requirements.

The problem is that many of the issues raised by the FATF fall outside the Treasury’s reach: it relies on parliament, regulators and the criminal justice system to make changes. Only then will SA be able to take its place again as a well-respected partner in the global financial system, and remain a domicile of choice for cross-border investments into the continent.

The urgency of the response will be keenly watched. Besides the technical factors, any decision to ultimately greylist SA also depends on the FATF’s judgment of the government’s political willingness to address its concerns.

This warning ought to serve as a wake-up call for SA policymakers, regulators and law enforcement agencies.

And while SA sorts out its compliance framework, they’ll need to go the extra mile to convince our international counterparts that these grey skies are merely passing clouds, and not any reason to cut their economic ties to us.