Counting the cost of SA’s greylisting

In a dynamic financial landscape marked by shifting regulatory sands, South Africa finds itself at the centre of international attention due to its greylisting by the Financial Action Task Force (FATF). This decision, made in February of 2023, has significant repercussions for the nation's financial system and its broader economy.

The increased scrutiny of South African banks by international financial institutions could lead to delays in processing transactions, increased compliance costs, and added complexity for financial institutions operating in South Africa.

So, what is the impact of greylisting South Africa?

South African entities, including businesses and government agencies, may struggle to access international finance at competitive or feasible interest rates. The country’s ability to secure favourable international loans and financing for critical infrastructure projects is, to a certain extent, already being compromised.

Reduced access to international markets and finance can hinder development and job creation. This, in turn, may lead to social and economic challenges, potentially affecting the overall well-being of the population.

In addition, increased scrutiny of cross-border transactions and financial activities can affect the smooth flow of goods and services. This could affect the competitiveness of South African exports and imports on the global stage.

South Africa could lose financial business to neighbouring countries or other financial centres that are not facing the same scrutiny. Revenue and opportunities might be lost to countries that are perceived as having more stable and compliant financial frameworks.

A lengthy presence on the grey list can tarnish South Africa’s reputation as a global financial and business centre. Rebuilding trust and confidence in the country’s financial system and regulatory framework becomes an imperative. This is not an overnight process.

That is because prolonged greylisting could deter investors, both domestic and foreign, from engaging with the South African market. Investors are typically hesitant to commit capital to a country under scrutiny, as they seek stability and confidence in the regulatory environment. The ripple effect, again, spreads to economic growth and job creation.

To meet FATF recommendations and address deficiencies, South Africa may need to enact stricter regulations and enforcement measures.

While this is necessary to enhance the country’s anti-money laundering and combating funding of terrorism framework, it also adds to the regulatory burden on businesses and financial institutions. Compliance costs can increase, as businesses and financial institutions in South Africa will need to invest in enhanced anti-money laundering and combating funding of terrorism compliance measures. This includes implementing advanced technologies for monitoring and reporting suspicious activities. The associated costs can strain corporate budgets and operational efficiency and increase the cost of doing business in South Africa.

South African regulatory authorities may face mounting pressure to address anti-money laundering and combating funding of terrorism deficiencies and work towards international compliance. This pressure may lead to more rigorous oversight and enforcement, potentially affecting the operational autonomy of financial institutions.

While progress is being made, there is still much work to be done to address the deficiencies and restore the nation’s financial integrity and international standing. With continued collaboration and commitment, South Africa aims to emerge from the grey list by early 2025, showcasing its dedication to a strong and transparent financial system.

Finance minister Enoch Godongwana highlighted the significant regulatory reforms thus far, and noted the combined efforts required in this quest.

The National Treasury is actively collaborating with various government agencies and entities, including the Hawks, the National Prosecuting Authority, the Special Investigating Unit, the South African Reserve Bank, the Financial Sector Conduct Authority, and the South African Revenue Service, to address the concerns raised by the FATF.

Several deficiencies have already been partially resolved and in others substantial headway has been made, particularly when it comes to technical compliance standards.

The critical question is whether demonstrable progress can be showcased before the next meeting with the FATF, while most work is in the outcomes. Action plans have been drawn up, but progress depends on the degree of compliance and enforcement of regulations.

Challenges remain in areas such as investigating and prosecuting complex money laundering and terrorism financing cases, identifying informal channels for global money remittance, and recovering assets lost to crime and corruption.

Continuous education, training, and awareness-raising have been emphasised as key components in addressing these challenges. The financial services industry plays a pivotal role in identifying and reporting suspicious activities, necessitating ongoing capacity building and knowledge sharing. Additionally, the adoption of innovative technologies and data analytics could enhance the detection and prevention of illicit financial flows.

To emerge successfully from the grey list by early 2025 and regain the trust of international financial regulators and investors, South Africa needs to take several key actions and demonstrate its commitment to addressing the concerns raised.

* George is a compliance manager at Compli-Serve SA