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Life on the GREYLIST



It’s going on four months since international money laundering and terrorist financing watchdog the Financial Action Task Force (FATF) placed South Africa on its grey list. Since that depressing news broke towards the end of February, there’s been plenty of talk in the media – and around the braai. But outside of rants and headlines, what does it really mean for the financial services industry?

What is the FATF?

If we’re going to talk greylisting, it’s worth understanding who put us on the list. The FATF is an inter-governmental body established in 1989 to act as a watchdog against money laundering and the financing of terrorism globally. It currently comprises 37 member jurisdictions – South Africa is one of them, having joined in 2003 – and two regional organisations. Most financial centres around the world are represented (incidentally, The Russian Federation had their membership suspended the same day South Africa was put on the grey list).

As of 2019, the Paris-based body has an open-ended mandate that recognises the need for it to “continue to lead decisive, coordinated and effective global action to counter the threats of the abuse of the financial system by criminals and terrorists and strengthens its capacity to respond to these threats that all countries face,” as explained on its website. It works closely with organisations such as the World Bank and the International Monetary Fund (IMF).

The FATF aims to protect the integrity of the financial system by making it harder for criminals and terrorists to raise, use and move funds. This means continuously researching how money is being laundered and terrorism funded, and reporting on these findings so that governments and the private sector can stay up to date with the latest developments in the financing of nefarious activities and take steps to mitigate these risks.

The recommendations of the FATF make it possible to have a coordinated global effort to prevent organised crime, corruption and terrorism. And more than 200 countries and jurisdictions have committed to implementing the FATF Standards.

Part of what the FATF does is monitor countries to make sure they are properly implementing the FATF Standards. These assessments – called Mutual Evaluations – take the form of peer reviews, with members from different countries assessing another country. 

Mutual evaluations are lengthy, in-depth processes that can take up to 18 months. The process is transparent and collaborative, with the country being assessed receiving training on what they will need to provide and demonstrate during the course of the evaluation, as well as predesignated periods for reviewing and commenting on the assessment team’s findings.

The country is evaluated on two points: technical compliance and effectiveness. The former looks at legislation – what laws, regulations and other legal instruments the country being assessed has in place to combat money laundering and the financing of terrorism and proliferation. 

More importantly, effectiveness is how well those technical measures are working in practice. As part of the assessment, a team of experts does a site visit during which the country being assessed has to provide evidence that their measures are achieving the desired outcomes. The expectations for each country are based on the risks that particular country is exposed to – so they differ from country to country. At the end of the assessment, an in-depth report is produced that indicates how well the country in question is doing and provides recommendations for areas where they could be better.

This is where it gets bad for South Africa.

Back in 2021 the FATF adopted a report that was compiled following a mutual evaluation of South Africa led by the IMF. While South Africa’s legislation was up to scratch, the report found us lacking in the implementation department. The FATF stated that “South Africa has a solid legal framework to fight money laundering and terrorist financing but has significant shortcomings implementing an effective system, including a failure to pursue serious cases.” Not good.

As a G20 economy and a regional financial hub for Sub-Saharan Africa, the report found South Africa to be “exposed to the laundering of domestic crime proceeds and foreign crime proceeds from the region. It is also exposed to terrorism financing risks associated with foreign terrorism, foreign terrorist fighters (FTFs), and potential domestic terrorism.”

Topping the list of South Africa’s “significant shortcomings” was the bottomless poison chalice known as state capture. Also noted was our failure to follow through when it comes to pursuing the ends of justice: “While authorities carry out some successful money laundering investigations, the proactive identification and investigation of laundering networks and professional enablers is not really occurring,” the report noted scathingly. Also, that “South African authorities have achieved some good results confiscating criminal proceeds. However, they have struggled to recover assets from ‘State Capture’ and proceeds that moved to other countries.” Other areas of concern were our widespread use of cash and poor use of financial intelligence.

“Significant shortcomings” is not a good look, but as the FATF states, “a mutual evaluation report is not the end of the process.” Instead, it suggests countries view the report as a starting point to get their act together. They have a year to do so before they get outed to the public. Fast forward to the beginning of 2023 and our government had managed to reduce the initial 67 Recommended Actions to eight strategic deficiencies, but it was not enough. South Africa was put on the grey list.

An issue of semantics

The FATF publishes documents three times a year in which it identifies countries that have weak measures to combat money laundering and terrorist financing. Colloquially, these are referred to as the Black List and the Grey List. The FATF’s official terminology refers to High-Risk Jurisdictions subject to a Call for Action (the Black List) and Jurisdictions under Increased Monitoring (the Grey List).

The Black List: High-risk countries are those that are seriously lacking in their strategies and measures to counter money laundering, terrorist financing and financing of proliferation. If a country appears on this list, the FATF recommends other countries apply enhanced due diligence and even implement counter measures in some cases. The three countries currently on the black list are the Democratic People’s Republic of Korea, Iran and Myanmar.

The Grey List: This comprises countries that are under increased monitoring, like South Africa. A country on this list has shortcomings and deficiencies that have been noted by the FATF, but the country has committed to resolving the issues within an agreed-upon timeframe. The FATF does not openly recommend enhanced due diligence or counter measures for greylisted countries, but there is a chance that other countries may choose to self-govern and implement these of their own accord.

Worth noting is that greylisting is not a life sentence – when a country meets its objectives and sufficiently addresses the deficiencies that got it onto the list, it will be removed, as was the case for Cambodia and Morocco recently. There are currently 23 countries on the grey list, including South Africa. 

Taking stock

As noted by the National Treasury, “The most significant implication to a country that is greylisted is the reputational damage to the country, as its effectiveness in combating financial crimes like corruption and money-laundering as well as terror financing are deemed to be below international standards.”

Furthermore, there’s the chance of other countries implementing countermeasures that make it more arduous for international companies to do business with South Africa. The National Treasury noted, in particular, foreign banks providing corresponding banking services. Practically, it means stricter vetting of clients and the sources of their funds. 

Case in point: When a country is put on the FATF grey list, the European Union typically adds that country to its list of high-risk third countries as well. And unlike the FATF, the EU does require enhanced due diligence for countries on that list. Sure enough, in May the EU updated its list of high-risk third-country jurisdictions and South Africa was on it.

However, while South Africa’s greylisting is certainly doing the country no good, the fallout may not be as bad as some of the headlines initially made it out to be. In his article In The Grey (read it on p10), Robert Rhodes, MD at Momentum Wealth International, notes that the Momentum Wealth International team believes that South Africa being on the grey list does not automatically result in a more challenging due diligence process – mainly because their due diligence is very strict already. He says there may be additional documentation required, such as evidence of the source of the funds, but in many cases, they already have the necessary information and, in some cases, the information may even be available in the public domain.

Meanwhile, South Africa has to address eight areas of strategic deficiencies by January 2025 if we are to be removed from the grey list. We also need to provide regular updates on our progress, which means there may be opportunities to have our grey-list status reviewed sooner. According to the National Treasury, the government is hoping for 2024. The eight strategic areas in question, as summed up by the National Treasury are:

  1. Demonstrate a sustained increase in outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile 
  2. Improve risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrate that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for non-compliance
  3. Ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violations by legal persons to BO obligations
  4. Demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for its ML/TFML/TF investigations
  5. Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile
  6. Enhance its identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile
  7. Update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy
  8. Ensure the effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.

Leaving the grey list

Countries can remain on the FATF grey list indefinitely if they don’t demonstrate significant progress in addressing their shortcomings. In an article on their website, Investec noted Yemen, Syria and the Democratic Republic of Congo as examples of countries that have been on the grey list for 10 years or more. However, most countries do not languish there. 

“Since 2007 the ICRG has reviewed 125 countries, and publicly identified (i.e. ‘listed’) 98 countries. Of these 98, 72 have since made the necessary reforms to address their AML/CFT weaknesses and have been removed from the process,” notes the FATF.

And it’s not inconceivable that South Africa will address these areas of concern by or before the deadline. We had already made good progress during our one-year observation period – just not enough. As the Reserve Bank noted in a press release: “The SARB and the South African government more broadly, maintain a close and open relationship with the FATF. Since the FATF Mutual Evaluation of South Africa in October 2021, our coordinated government stakeholders have undertaken substantial and far-reaching efforts, led by the National Treasury, to enhance our anti-money laundering, counter financing of terrorism and counter proliferation financing (AML/CFT/CPF) regime and its implementation. South Africa’s hard work resulted in most of the identified deficiencies being addressed within the 12-month observation period afforded to South Africa.”

The Financial Sector Conduct Authority (FSCA) echoes the sentiment. In a press release, it noted that coordinated and substantial efforts led by the National Treasury following the FATF Mutual Evaluation had led to many of South Africa’s key deficiencies being addressed in a relatively short period of time.

“The things that pertain to our mandate as the FSCA have largely been attended to,” said FSCA Commissioner Unathi Kamlana in the press release. “So as an authority in charge of supervising the conduct of financial players in SA, we are satisfied that our systems and processes are rigorous enough to monitor local players as required by FATF. Of course, our work can only be effective and yield meaningful outcomes if all our partner institutions in the system work together. I’m encouraged to say that much progress has been made in this regard, and we will continue to pull together to address whatever gaps may still exist in our value chain.” 

As the National Treasury notes, addressing the areas of concern that were identified in South Africa’s mutual evaluation is not just about satisfying the FATF so we can get off the grey list. “This is principally for the benefit of the country, its economy, its financial system, and also for the safety and security of the country’s citizens,” it noted.

From that perspective, South Africa’s greylisting appears to have been a much-needed call-to-action for the government to address some pretty serious threats. Hopefully we will leave the grey list sooner than later, with better measures in place.