South Africa faces a high probability of being “greylisted” by the Financial Action Task Force (FATF) early next year if does not strengthen required mechanisms against money laundering and terrorist financing.
If this comes to pass, financial firms around the world, including banks, will be required to apply enhanced due diligence to any South African client, a process more invasive and extensive, to assess the source of funds and probity of clients.
As a result, international companies may elect not to do business with any South African company or individual to reduce costs and compliance risks, which would drive the required foreign direct investment away.
These are the findings of a report released yesterday following research done by consulting firm Intellidex, which was commissioned by the Business Leadership South Africa (BLSA).
According to the report, titled “Sword of Damocles”, Intellidex estimated an 85% probability that FATF will greylist South Africa in February 2023 when it holds a plenary to consider the country’s implemented progress.
This follows a year-long observation period, which ends this month, after the FATF identified serious weaknesses in South Africa’s anti-money laundering (AML) and Combatting the Financing of Terrorism (CFT) framework.
If greylisted, South Africa would join 23 other countries on the FATF’s greylist, including Burkina Faso, Mali, Morocco, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates and Yemen, while Iran and North Korea are the only two countries on the blacklist.
Reacting to the report, BLSA CEO Busi Mavuso said business was committed to improving the environment in which it operated, which was why the FATF issue had concerned the industry.
“This report provides clear guidance on what we as a country must do to ensure that greylisting does not cause long-term damage to the economy,” Mavuso said.
“We all need to work together to ensure our commercial crime investigation and prosecution, as well as anti-money laundering and terrorist financing supervision is world class. That is in the best interests of South Africa anyway.”
At the end of August, Cabinet approved the much-anticipated General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill tabled before Parliament by the minister of finance.
The primary objective of the bill is to address deficiencies in the customer due diligence measures contained in the Financial Intelligence Centre Act 38 of 2001.
The FATF, which polices global compliance with AML and CFT measures, conducted a peer review assessment of South Africa’s system in 2019 and flagged a number of issues.
During the evaluation, South Africa scored a very poor ratings assessment on technical compliance after failing 20 of the 40 FATF recommendations, and scored poorly in the effectiveness assessment as it failed on all 11 effectiveness measures.
According to the report, South Africa has a relatively high volume and intensity of crime and more than half of reported crimes fall into categories that generate proceeds.
The main domestic proceeds-generating predicate crimes are tax crimes, corruption and bribery, fraud then trafficking in illicit drugs, and environmental type crimes.
The report said that the weaknesses identified were primarily as a result of the undermining of institutions in the criminal justice system during the state capture era.
The country has faced significant challenges in the investigation and prosecution of commercial crime, particularly during and following the state capture era when it experienced systematic undermining of key institutions of the criminal justice system.
The researchers estimated that the economic impact of greylisting could be limited or severe depending on how South Africa reacted to being greylisted.
They estimated the impact at under 1% of gross domstic product (GDP) if South Africa acts with alacrity, and at 3% of GDP if South Africa is perceived to be slow and unwilling to meet the standards set by the FATF.
Given that South Africa was unlikely to avoid greylisting, the report recommended that the focus must be on minimising its impact.
It recommended that the Presidency set up an internal task team to lead the government response to greylisting, working with the inter-departmental committee assembled by the National Treasury.
It also said that private sector companies and individuals must prepare for the enhanced due diligence that will accompany greylisting.
BUSINESS REPORT