At the start of last year, South Africa faced a stark reality when it was grey listed by the Financial Action Task Force (FATF). This designation suggested that the country’s efforts against money laundering, terrorist financing, and other financial offenses fell short of international standards.
A grey listing is not merely a symbolic alert; it carries profound implications that can stifle economic growth, dissuade foreign investment, and tarnish the nation’s global reputation.
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To regain its standing, South Africa must take decisive measures and recognize the gravity of the situation while learning from global examples.
Examining the non-financial repercussions of grey listing
Grey listing exposes South Africa to intensified scrutiny from global financial institutions, complicating and elevating the costs of international business operations.
The impacts are tangible and significant.
Foreign investors, apprehensive about potential regulatory challenges, may reduce their investments in the nation. Already strained capital inflows are likely to further decline, exerting additional pressure on the rand and exacerbating inflation.
Moreover, businesses within South Africa are faced with increased compliance expenses as financial transactions come under closer examination. This translates into delayed payments, impeded trade, and decreased competitiveness. For a country grappling with economic stagnation, grey listing poses a substantial hurdle to its growth aspirations.
The importance of learning from previous cases
While the South African government is actively addressing the remaining six action items (as outlined in a recent update from National Treasury), it’s instructive to consider the effects prolonged grey listing has had on other emerging economies.
For instance, Pakistan was grey listed in 2018 and subsequently experienced a significant reduction in foreign direct investment. Despite efforts to remove itself from the list, the economy endured years of lowering global confidence, worsened by the Covid-19 pandemic.
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Similarly, Nigeria faced FATF scrutiny in the mid-2000s, witnessing a sharp decline in trade and capital flows. Even after addressing the underlying issues, the reputational damage persisted, delaying their economic recovery.
South Africa must avoid this trajectory by promptly and effectively resolving the core issues that led to grey listing.
Lessons from successful case studies and essential reforms
Countries like Mauritius and Botswana showcase effective strategies to navigate the challenges of grey listing. Mauritius was grey listed in 2020 due to deficiencies in its anti-money laundering (AML) and combating the financing of terrorism (CFT) frameworks. However, through decisive reforms, including stricter regulations and enforcement measures, Mauritius successfully exited the list in under two years. Botswana, which faced grey listing in 2018, made extensive reforms within its financial sector and enhanced transparency, regaining full FATF compliance by 2021.
The unifying factor behind these success stories is swift, coordinated action among government agencies, financial institutions, and law enforcement. South Africa must adopt a proactive approach, concentrating on three critical areas: institutional reform, enforcement, and collaboration.
First, the FATF identified deficiencies in South Africa’s regulatory and institutional frameworks, particularly in regards to AML and CFT practices. To address this, South Africa needs to revise its financial regulations to comply with global standards by enhancing regulatory oversight and empowering the Financial Intelligence Centre (FIC) with additional resources to enforce compliance across all financial sectors.
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Additionally, the government should enact stricter regulations on the disclosure of beneficial ownership for companies and trusts to mitigate illicit financial flows.
Read: SA approaches the opportunity to exit the grey list
Regarding law enforcement, grey listing highlights not only regulatory deficiencies but also the nation’s struggle to effectively prosecute financial crimes. South Africa’s law enforcement agencies, particularly the Hawks and the National Prosecuting Authority (NPA), must prioritize investigations into financial crimes and, when possible, establish specialized units trained to handle intricate financial cases.
Lastly, the private sector, especially the banking and financial services industries, plays an essential role in this endeavor. These institutions serve as the frontline defense against illicit activities, necessitating banks and businesses to invest in technologies that can quickly identify and report suspicious activities.
Monitoring progress
In October, Treasury provided an optimistic progress update. The encouraging news was that the FATF Plenary acknowledged nine upgrades for South Africa from its 22-item Action Plan. We are now perceived as having “largely or fully addressed 16 of the 22 action items” outlined in the plan, with six remaining to be resolved.
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As noted by Investec recently, Treasury allocated R14 billion in the Mid-Term Budget Policy Statement to empower agencies crucial in combating crime, including those focused on financial crimes. The establishment of the Fusion Centre, which unites entities such as the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency, and the FIC, has already resulted in the preservation and recovery of approximately R1.75 billion in criminal assets.
Shaping the future
Achieving compliance with FATF standards is merely the beginning. South Africa must capitalize on this opportunity to restore investor confidence and strengthen its financial system. A clear and consistent dedication to transparency and governance will be crucial, requiring government officials to adopt a unified and proactive approach in communicating progress to both domestic and international stakeholders.
The stakes for South Africa are exceptionally high, and time is of the essence.
Grey listing threatens not only South Africa’s development but also its position as a hub for regional investment. As Africa’s most industrialized economy, it carries the responsibility of leading the continent’s financial integration with the global market. A lack of decisive response from the government and Treasury could lead to lasting economic consequences.
Bryan Silke is an associate partner at Hudson Sandler Invicomm.
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