Clawing back from #FATF is no cakewalk

The cup-half-full crowd who believe that South Africa will somehow follow in Mauritius’ footsteps and get an almost immediate grey list ‘pardon’ from the global Financial Action Task Force (FATF) are in for a shock. Yes, it is early days; but this writer gets the sense that the Financial Intelligence Centre (FIC), Financial Sector Conduct Authority (FSCA) and National Treasury (NT) will have a hard time convincing the FATF of progress in the context of a government that welcomes Russia with open arms, while making continued, veiled threats to terminate the country’s International Criminal Court (ICC) membership, among many other governance fumbles.

The ‘What the FATF’ follow-up

FAnews readers should already have the background on the February 2023 FATF decision to place South Africa on its grey list; if not, just take a look at one of our most popular recent reads: ‘What the FATF?’ In the weeks since there have been countless articles, thought leadership pieces and webinars seeking to unpack the consequences of the grey listing and map the country’s exit from it. One of the more informative presentations was hosted by Financial Intelligence Centre Act (FICA) compliance services and solutions provided, DocFox, who set out to answer questions that local accountable institutions might have. What does the grey listing mean? Are our existing compliance processes up to scratch? And what can we do to get off the list? Etc. 

“South Africa has been designated as ‘grey listed’ by the FATF,” commented Hawken McEwan, Director of Risk and Compliance at DocFox. “This is a designation, not a sanction [and it does not introduce] any legal restriction around doing business with South Africa”. The country was added to the grey list for having poor controls around money laundering, terrorist financing and proliferation financing, the latter described by the International Monetary Fund (IMF) as ‘providing funds or financial services for nuclear, chemical, or biological weapons’. More specifically, South Africa did not meet the anti-money laundering and combatting of the financing of terrorism (AML-CFT) standards set out by the FATF. 

This is not like sanctions, silly

There may be no restrictions or sanctions, but grey listing is a serious matter. “The grey listing designation does and will have an impact as the rest of the world starts to be mindful that there might be higher elements of risk when dealing with South African entities and individuals; and so, they will look to take a risk-based approach [to ensure] a level of comfort around their engagements with the country, its businesses and its residents,” McEwan said. He mentioned a reduction in foreign investment as one potential consequence of a country being added to the grey list, drawing the audience’s attention to the pace at which foreign investors were disposing of local bonds and equities of late. Reduced investment goes hand-in-hand with constrained economic growth and lower job creation. Another consequence is that compliance costs will rise, especially for accountable institutions, but also for a range of other businesses. 

“Businesses may have to update system, processes, documentation and staff training to ensure they remain compliant with whatever the latest round of regulatory changes and requirements are,” he said. International firms will have to take extra measures to ensure that transactions with South African firms are legitimate and transparent; something that local accountable institutions will likely experience as an increase in requests for information and supporting documentation. The key observation shared during this part of the presentation was that the FATF decision would make it more difficult, and a bit slower, to complete international transactions. As for compliance, things are going to become a lot stricter in the coming months.  “The FIC, the FSCA and the SARB have all confirmed that they are committed to checking compliance [among accountable institutions] and that they will be much more stringent on expecting standards to be met,” said McEwan. 

Some history topped with compliance advice

This newsletter does not intend broadcasting the history of the FATF. It is, however, worth reporting how South Africa’s run-in with the body started, and how things developed from there. Back in 2016, the country was given notice by the FATF that a team would ‘pop in’ to rate it on levels of compliance, control and implementation of the then 40 FATF recommendations. This evaluation eventually took place in 2019 to include extensive meetings with government, regulators and sector representatives. It eventually showed that South Africa was fully compliant with just three of the 40 recommendations, highlighting shortcomings in customer due diligence; implementation of AML-CFT measures; reporting of suspicious transactions; and supervision of designated non-financial businesses among eight strategic deficiencies. 

Compliance specialists in the financial services sector are acutely focused on customer due diligence matters. “The report identified weaknesses [such as] a lack of clarity regarding the types of information that should be collected and verified [which] links back to the risk-based approach and the new way of doing things,” McEwan said. The 2019 assessment findings were published in October 2021 under the title: ‘Anti-money laundering and counter-terrorist financing measures, South Africa Mutual Evaluation Report’. PS, this was a 240-page PDF monster that this writer has no intention of poring over. The South African government and various prosecutorial and regulatory entities were requested to address the report findings by no later than February 2023, though the FATF follow-up assessment was carried out late 2022. 

Kudos to the financial sector regulators, but…

The stakeholders in the South African AML-CFT environment deserve praise for the hard work done to avert the country’s grey listing, but ultimately failed. The FIC, FSCA, Prudential Authority (PA) and SARB were all singled out for the work done between 2019 and late-2022. “There has been a very public acknowledgement of their roles and responsibilities and a commitment to doing what is right, not just what is easy,” McEwan said. But the next step is going to require government to up its game. Contraventions of FIC and other AML-CFT legislation need to be identified, and the perpetrators dealt with through asset forfeitures and successful prosecutions. The FIC must improve its sharing of information, both in response to requests from other law enforcement agencies, but also proactively, domestically and internationally. More importantly, South Africa must up its game in screening against international financial sanctions lists. 

At the risk of putting out too many words, we wrap today’s newsletter with a quick look at how accountable institutions can steer South Africa off the grey list. “You just need to be compliant; be part of evidencing that what the country has in place in the legal and regulatory environs is working,” said McEwan, before offering seven key minimum requirements for FICA compliance. You must register with FIC; appoint an AML-CFT compliance officer; develop a risk management and compliance programme; perform customer due diligence; submit reports to FIC; record keeping; and ongoing training. Do not skive off; none of the seven are optional. The presentation concluded that getting removed from the grey list will require going beyond legislative compliance to “a mindset and culture change, a complete paradigm shift across the country from top to bottom”. 

How financial advisers can become ‘grey list’ superheroes

“The true financial compliance superheroes are the people on the front line, those involved with the client, the assets and the transactions [who] use their skill, experience and knowledge to pick up on subtle cues that something untoward might be going on,” McEwan concluded. And this writer challenges South Africa’s financial and risk advisers to up their AML-CFT compliance games and join the superhero war against the country’s grey listing. To win this war requires South Africa being struck from the grey list no later than 2025. 

Writer’s thoughts:

The more requirements the FATF lumps on countries to counter money laundering etc, the more creative the criminals get with ‘masking’ their questionable gains. Just think about the widely publicised shenanigans that accompany high value auctions and property transactions these days. Is your advice practice up to speed with all the AML-CFT compliance requirements around your HNW clients? Or have you simply given up keeping track of the ever-expanding universe of compliance requirements? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.