Treasury officials said that they are making progress on 17 of the 22 action items that the Paris-based Financial Action Task Force (FATF) asked South Africa to attend to and the Treasury officials said they expect compliance by early 2025.
Finance Minister Enoch Godongwana in his speech said that the government expected to address all the deficiencies identified by the FATF by early 2025.
The FATF warned on October 28, 2023 that unless South Africa showed consistent improvement in the regulation of anti-money laundering and terrorist financing standards, the country would remain on its grey list, but this issue was not addressed in the Medium-Term Budget Policy Statement (MTBPS) documentation given to the media before the speech.
Instead, the media have an opportunity to speak with Treasury officials during lock-up and this is when I posed the question and received the answer.
Greylisting means that institutions based in a greylisted country engaging in cross-border trade and other financial transactions will be subject to higher levels of customer due diligence by financial institutions outside of that country.
In practice, this means being more thorough in processing and vetting clients and understanding the sources of their funds, which tends to raise costs that are passed on to customers and also makes outside investors more risk averse so funds flowing to South Africa attract a higher risk premium.
Treasury in the MTBPS documentation did say that South Africa’s debt dynamics were unfavourable over the medium-term horizon.
“The gap between the yield on South Africa’s long-term debt and the yield on the US 10-year Treasury bond has widened consistently since 2015. This reflects an increase in South Africa’s risk premium – the additional amount that government pays investors to compensate for uncertainty,” it said.
The know your client (KYC) legislation as stated in the Financial Intelligence Centre Act (Fica) of 2001 requires that financial institutions make their customer due diligence practices as robust as possible to ensure that they are not on the receiving end of any misdemeanours which have to be reported to the FATF and their watchdogs on the ground such as the Financial Intelligence Centre.
That is why individuals and companies have to periodically updated their FICA status so that financial institutions can honestly say they know their clients and the sources of their wealth.
The challenge for financial institutions is to know their clients and any changes in their circumstances, including residency, political exposure or links to political persons. This means in practice that the residents of greylisted countries are considered “high-risk” individuals for money laundering and terrorist financing.
The result is that offshore institutions want to limit their exposure to high risk environments. Even when they are willing to facilitate cross- border lows, they will ask more questions than from a non-greylisted jurisdiction and the process becomes more time consuming and costly.
BUSINESS REPORT