Following our article published on 11 April 2023 in relation to grey listing, numerous updates relating to grey listing and measures taken to combat corrupt activities have surfaced, we discuss below in detail some measures put in place by South Africa.
Being grey listed for a prolonged period of time has an impact on a country’s ability to access international financial markets and leads to increased scrutiny from financial institutions and regulators. Notwithstanding the robust anti-money laundering and counter financing of terrorism laws in South Africa, it is in the implementation as well as the policing, prosecuting and asset forfeiture where grey listing may be inevitable. The global financial crime watchdog, formally known as The Financial Action Task Force (FATF), has, identified strategic deficiencies in the ability of South Africa’s systems to counter money laundering and the financing of terrorism. This decision was announced on 24 February 2023, as a consequence of South Africa’s poor compliance with International Standards around the prevention of money laundering, terrorist financing and proliferation financing.
The verdict surfaced after South Africa had received a potential grey listing threat from the FATF in 2021, as a result of the country’s poor rating following a mutual evaluation exercise conducted in 2019 when many institutions (especially law-enforcement agencies) were at their weakest, following state capture.
Notably, the consequence for the country could have been worse, had it been ‘blacklisted’ instead. Contrary to grey listing (being placed under increased monitoring by the FATF), blacklisting is a formal sanction which indicates a country’s severe deficiencies in its Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) frameworks as it has failed to cooperate with the FATF. A blacklist calls on other countries to conduct enhanced due diligence on transactions from listed countries, and in most serious cases, apply counter measures to protect the financial system which could lead to restrictions on financial transactions and international trade (Iran and the Democratic People’s Republic of Korea are two such cases).
Whilst no country is fully compliant with all 40 FATF recommendations and all 11 effective immediate outcomes, South Africa was deemed to have too many weaknesses in its legal framework (being inadequately compliant with 20 of FATF’s recommendations) in all 11 effectiveness immediate outcomes. South Africa was placed under a one-year observation period in October 2021, giving the country time to address 67 recommended actions. In attempts to avoid being grey listed, South Africa worked vigorously, to address the concerns raised by the FATF in its mutual evaluation report, while also participating in regular follow-up evaluations to assess progress.
It is important to note that South Africa made significant progress during the observation period, passing two major pieces of amending legislation in 2022, and strengthening its institutions. According to January 2023’s assessment of South Africa’s progress, the country had made positive progress, reducing the 67 recommended actions to 8 strategic deficiencies, where more progress is required. Some of the key actions co-ordinated by various stakeholders since 2021 include:
- passing several pieces of legislation aimed at improving the country’s financial crime laws, including the General Laws (Anti-Money Laundering and Counter Terrorist Financing) Amendment Bill in December 2022.
- the establishment of the Fusion Centre, which brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency and the FIC. Since its inception the work of the Fusion Centre has led to the preservation and recovery of approximately R1.75 billion in criminal assets.
- the availability of the Mid-Term Budget Policy Statement, in which the Treasury made R14bn to capacitate agencies that are critical in the fight against crime, including those that fight financial crimes.
Despite FATFs recognition of the country’s progression strategies, South Africa was grey listed while these deficiencies are being addressed.
Although this is a major setback for South Africa, presenting a threat to the country’s financial growth and status, “grey listing is not the end of the world for South Africa, as other countries like Mauritius managed to survive grey listing.
Countries jointly grey listed with South Africa include Albania, Barbados, Burkina Faso, Cayman Islands, Democratic Republic of Congo, Gibraltar, Haiti, Jamaica, Jordan, Mali, Mozambique, Nigeria, Panama, Philippines, Senegal, South Sudan, Syria, Tanzania, Turkey, Uganda, United Arab Emirates, and Yemen.
Prior to South Africa’s placement on the grey list, the Department of Trade, Industry and Competition amended the Companies Act to include the Companies Amendment regulations 2023 resultant from the General Laws Amendment Act 2022 in order to create, among other things, a system by which key information concerning ultimate beneficial owners of shares in companies is collected, stored and updated.
As South Africa races to address the deficiencies identified by the FATF, it might be helpful to take a leaf out of the book of the likes of Mauritius, Ghana, and Cameroon. Ghana and Cameroon took expeditious measures to avoid being grey listed, on the other hand Mauritius suffered considerably after being placed on the FATF’s grey list in February 2020 and, later that year, on the European Union’s blacklist and the United Kingdom’s List of High Risk Third Countries. The repercussions of being perceived as a country with high money laundering and terrorism risk profile were for instances, far-reaching. Doing business, especially with EU members, became increasingly difficult, which adversely affected the economy. The impact was particularly severe in the global business and banking sectors, which are major pillars of the country’s economy.
Being relentless in tackling these issues, Mauritius ensured that it dealt with these issues seamlessly. The government showed very strong political commitment, moving swiftly to reinforce the existing AML/CFT legislative and regulatory frameworks and working closely with the private sector, which also showed great commitment. This was significant as neither party, on their own, could succeed in getting Mauritius off the grey/blacklist, while the government needed to put the framework in place, the private sector had to implement it.
It is hoped that South Africa will spearhead a concerted effort to cooperate with FATF in addressing failings in monitoring and controls and getting off the grey list as quickly as possible, which will be a positive step towards resolving the systemic problems that have for too long beset South Africa’s economy and its people.