Getting on the naughty list is way easier than getting removed

The handful of compliance and legal experts who figured South Africa could exit the global Financial Action Task Force (FATF) naughty list by early 2025 will be sorely disappointed by the latest progress update published by National Treasury (NT). Although significant progress has been made since the country was added to the FATF grey-list in February 2023, much of the 22-item Action Plan remain unaddressed.

Six red flags remain

On 25 October 2024, the FATF Plenary announced nine upgrades to the status of these 22-items, including eight items being changed to ‘largely addressed’ and one item to partly addressed. “South Africa is now deemed to largely or fully address 16 of the 22 action items in its Action Plan, leaving the country with six outstanding action items to be addressed for the last scheduled reporting cycle, concluding in February 2025,” wrote NT in a media address to update the country. A short-and-sweet paragraph covering the country’s progress can be found on the FATF website under the heading, ‘Jurisdictions under Increased Monitoring’. 

Quoting this paragraph: “SA has taken steps towards improving its AML/CFT regime including by demonstrating a sustained increase in outbound MLA requests; strengthening its AML/CFT supervisory capacity by improving the risk-based supervision of DNFBPs; enhancing its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile; the update and implementation of its TF strategy; and increasing relevant authorities’ TF capabilities on the basis of an understanding of its TF risks, as well as ensuring the effective implementation of targeted financial sanctions.” 

On the pointlessness of plain language

This writer cannot think of a better moment for a laugh-out-loud interlude. Not only is that the longest sentence FAnews has ever published, but it is also littered with acronyms and fancy bureaucratic terms, effectively rendering the global regulatory community’s obsession with ‘plain language’ moot. To assist you in deciphering the communication, you need to know AML (Anti-Money Laundering); CFT (Combating the Financing of Terrorism); MLA (Mutual Legal Assistance); DNFBP (Designated Non-Financial Businesses and Professions); and TF (Terrorist Financing). Of course, SA, you know as South Africa. 

The reality is that the increased compliance burden introduced on financial and investment advice practices in the post grey-listing environment will remain as part of the new normal. Your writer did a quick trawl of the internet for some of the high impact administrative and compliance changes you now have to accommodate. These include enhanced customer due diligence in the form verifying client identities and tracing beneficial ownership; increased transaction monitoring of both inbound and outbound financial transactions, particularly those involving high-risk jurisdictions; and onerous Financial Intelligence Centre (FIC) reporting and record-keeping requirements. 

The cost and complexity of compliance

These and other requirements have had impacted the cost and operational footprint of most domestic financial services providers (FSPs) and product providers. Firms have had to invest in staff training, hiring additional compliance staff, and upgrading systems to meet tougher FATF standards. Incidentally, the tougher compliance focus affects each and every licenced business. When yours truly attempted to file his annual revenue report with the Companies and Intellectual Property Commission (CIPC), he was prevented from doing so before clearing a new compliance hurdle around beneficial ownership (BO). 

Returning to the grey-list discussion, NT noted that we have one further reporting cycle during which to address the remaining six action items. “Three of these relate to demonstrating a sustained increase in the investigation and prosecution of complex money laundering, terror financing and unlicensed cross-border money or value transfer services,” NT said. The remainder involve access to BO information in respect of companies and trusts, and the imposition of remedial action and / or sanctions by designated AML/CFT supervisors.” Eureka: that explains why your writer’s lowly content, communication and publishing Pty Limited had to file a BO with CIPC. 

A clear pathway to absolution

The pathway to cast aside the grey-list constraints remain clear. The FATF wants the South African authorities to address its remaining strategic deficiencies including by demonstrating that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for non-compliance; ensuring that competent authorities have timely access to accurate and up-to-date BO information; and demonstrating a sustained increase in investigations and prosecutions of serious and complex money laundering. NT has, however, reiterated its prior warning that it will be difficult to do the necessary before end-February 2025. 

On the outside chance that we make enough progress by then, the February 2025 FATF Plenary will authorise an onsite visit by the FATF Africa Joint Group around May 2025. And if that onsite assessment results in a positive outcome, the FATF Africa Joint Group can recommend to the June 2025 FATF Plenary that South Africa be delisted from the grey-list. Failing that, South Africa will be required to continue reporting on its progress every four months until such time as all outstanding issues are dealt with. More realistically, the grey-list exit will be held over to October next year, or even later. 

Does the BRICS narrative matter?

The country’s response is being spearheaded by an interdepartmental committee chaired by NT. This committee reports to Cabinet, and the Justice, Crime Prevention and Security (JCPS) cluster. “It has provided effective leadership and co-ordination to ensure the upgrading of action items related to outbound MLA requests; seizure and confiscation of proceeds of crime; implementation of terror financing strategy; and ensuring the effective implementation of targeted financial sanctions,” noted NT. Tongue in cheek, one wonders whether they saw the recent Russia-South Africa interactions on the fringes of the BRICS Summit, held in Kazan, Russia recently. 

So, while government may have its own ideas, the cluster responsible for the economy and justice appear committed to addressing the outstanding FATF technical compliance deficiencies. “South Africa now complies or largely complies with 37 of the 40 FATF recommendations, while an additional recommendation was deemed to be not applicable to South Africa; this is substantial progress since the 2021 FATF mutual evaluation when South Africa had deficiencies in 20 of 40 recommendations,” Treasury writes. 

They added that the country was now deemed to comply or largely comply with all six of the core recommendations. Serious issues remain with Recommendation 8: Non-Profit Organisations and Recommendation 32 on Cash Couriers. 

Behold, the new normal for AML/CFT

All that remains is to wrap up our discussion. NT has welcomed the progress made by all agencies in ensuring South Africa meets 16 of the 22 action items, with only six action items remaining. “While South Africa is working hard to address all outstanding action items by February 2025, this remains a difficult challenge,” NT concluded. “All relevant agencies and authorities must continue to make substantial progress, ensuring that these improvements are indeed both sustainable and effective. 

As for South Africa’s thousands of financial and risk intermediaries, you can be sure the compliance functions and new reporting requirements put in place to placate the global FATF will remain in place, becoming the foundation level for all future AML/CFT efforts. 

Writer’s thoughts:
The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025, but we still seem reluctant to tackle high-level financial crime and corruption. What do you think about the country’s AML-CFT efforts to date? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].

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