Behind-the-scenes of SA’s grey listing

The media coverage of South Africa’s looming grey listing by the international Financial Action Task Force (FATF) has mainly focussed on the impact of such action on local financial institutions and investors, with little written about how the country ended up in this predicament to begin with. It turns out, South Africa did what thousands of its high school learners (sic) do each year; by failing an important exam, the AML-CTF assessment. AML-CTF is an acronym for anti-money laundering and the combating of the financing of terrorism; and the assessment, also called a mutual evaluation, was carried out in November 2019 by the FATF alongside members of the Southern African Anti-Money Laundering Group and the International Monetary Fund (IMF).

Two angles to the FATF evaluation

FAnews was privileged to attend the 12^th Annual Fiduciary Institute of Southern Africa (FISA) Conference, at which Philip Langenhoven of the Financial Intelligence Centre (FIC) spilled the beans on the country’s mutual evaluation performance. His presentation titled ‘The looming grey-listing threat: why change the legislation?’ reflected on the country’s last gasp legislative attempts to side-step the grey listing, before offering comment on the potential harm grey listing may cause. “The mutual evaluation considers compliance standards from two angles,” said Langenhoven. “First, technical compliance, meaning whether South Africa has the necessary infrastructure and legislation in place to be comply with the FATF standards; and second, it tests the effectiveness of the legislation”. 

According to Langenhoven, South Africa performed rather poorly under both the technical and effectiveness pillars. The FATF final report, published in October 2021, showed full compliance in only three of 40 technical areas. “We received largely compliant on 17 factors; partially compliant on 15; and non-compliant on five,” he explained. As for effectiveness, South Africa only received eight ‘moderate’ and three ‘low’ ratings across the 11 ‘immediate outcomes’ that were considered. Being fully or largely compliant on half of the 40 technical assessments was considered inadequate, as was the rather mediocre ratings on the effectiveness measures. As an aside, the FATF mutual evaluation comprises a comprehensive review of a country’s legislative framework, and in-country meetings with various government departments, law enforcement agencies and supervisory bodies. 

A mad scramble to fix the AML-CFT legislation

The FATF report identified significant strategic deficiencies in South Africa’s legal framework. “If these are not fixed, then South Africa is at risk of being eligible for the FATF enhanced follow up procedures [including] the FATF considering us as a jurisdiction with a high risk for AML-CFT activities, which has a number of consequences,” said Langenhoven, who spent some time discussing the myriad committees and sub-committees, including an Interdepartmental Working Group on Mutual Evaluation, that had been set up to address the ‘gaps’ flagged by the FATF report. Among these committees were those tasked with pushing through legislative changes. 

“There are a number of legislative changes in process to address the technical deficiencies that were identified in the FATF report; by changing these acts, South Africa hopes to demonstrate to the FATF that we are on the right track as far as technical compliance is concerned,” said Langenhoven. The balance of his presentation focused on the General Laws (AML & CTF) Amendment Bill, also referred to as the Omnibus Bill, and proposed changes to the Trust Property Control Act (TPCA), on which FISA submitted comment to the Parliamentary Standing Committee on Finance recently. The Omnibus Bill seeks to address deficiencies in at least 14 of the 20 recommendations that were identified as being non- or partially compliant, including the appropriate enlargement of powers and procedures for regulatory authorities. The outstanding deficient recommendations will be dealt with via policy processes and mechanisms still to be developed. 

Omnibus Bill still a ‘work in progress’

There is a long list of Acts that will be impacted by the Omnibus Bill, including the TPCA; the Non-Profit Organisations Act; the Financial Intelligence Centre (FIC) Act, the Companies Act; and the Financial Sector Regulations (FSR) Act. “Changes to the TPCA will place far more obligations on trustees,” Langenhoven said, though he preferred not to debate whether the recent FISA submissions on the amendments were right or wrong. The audience was reminded that the Bill was still a ‘work in progress’. That said, there are some big changes that FISA members need to look out for, including: 

• Clause 1 of the Omnibus Bill inserts definitions of ‘accountable institution’ and ‘beneficial owner’ into Section 1 of the TPCA.
• Clause 3 of the Omnibus Bill amends Section 10 of the TPCA to require a trustee to disclose their position as trustee to any accountable institution with which the trustee engages in that capacity, and to make it known to that accountable institution.
• Section six of the TPCA is amended to specify matters that would disqualify a person from acting as a trustee, for example failing the ‘fit and proper’ test. 

Langenhoven also offered detail on section 11 of the TPCA, saying that disclosure details in Section 11(1) of the Act will be prescribed by way of regulation. A new section, Section 11(a) specifies information that must be kept by trustees in relation to beneficial ownership. After discussing how the Omnibus Bill would affect the FIC Act, Langenhoven took a moment or two to reflect on what it means to be on the grey list. He suggested that a decline in direct foreign investment was inevitable and that “everybody involved in cross border business would find it a bit more difficult to conduct business”. The bottom line is that international businesses in the European Union and United States would increase the compliance and due diligence burden of any of their financial institutions when conducting business with South Africa. 

February showdown with FATF plenary looms

South Africa has already given some feedback to the FATF, having reported on progress towards the technical compliance issues; and our comment on the effectiveness ‘fixes’ is due by 28 November 2022. Following this feedback, a final face-to-face meeting between the FATF assessors and various South African stakeholders is scheduled for January 2023. The decision on whether or not to grey list South Africa will be taken at the FATF Plenary meeting in February 2023. 

“There is still hope that South Africa can avoid grey listing,” concluded Langenhoven. “But if we cannot, then our next focus should be to get off the list as soon as possible, which we can only achieve by working with the international community and the FATF to reach their targets; the sooner we address those deficiencies and reach those targets, the sooner we will be removed from the grey list”. 

Writer’s thoughts:
Whether or not South Africa is added to the grey list is still up in the air for now… But we can state as fact that the country’s administrators and regulators are their own worst enemy when it comes to measuring up against important international benchmarks. First the ratings agencies, now FATF! Is South Africa going to be grey listed? Yes, or no? We would love to hear your thoughts. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.