SA likely to languish on the grey-list post-2025

The lack of information about government’s grey-list action plan coupled with South Africa’s abysmal enforcement track record means there are two potential outcomes following the next global Financial Action Task Force (FATF) grey-list decision, scheduled for early 2025. Either the country finds itself ‘sentenced’ to an extended period on that list, or it finds itself in worse trouble, perhaps downgraded onto one-or-other anti-money laundering and counter financing of terrorism (AML-CFT) black-list.

Growing old on the naughty list

This rather bearish view emerged during the opening presentation to the two-day-long 2023 Anti-money Laundering, Financial Crime & Fraud Conference held in Johannesburg recently. Kevin West, a director at FTI Consulting, used his 40-minutes to review the FATF decision to place South Africa on the grey-list and to interrogate whether the country’s various enforcement and regulatory authorities were doing enough to get the punishment overturned. 

The first of four reasons why South Africa made it onto the grey-list was the country’s ineffective enforcement of AML-CFT requirements. “Many of the findings from the FATF mutual evaluation centred on our risk management and compliance programmes which were found to be compliance rather than risk driven,” West said. Other concerns included the continued decline in the country’s investigation and prosecution capabilities; its inability to deal with the state capture matter; and its growing vulnerability to financing of terrorism activities.

“Our inability to deal with state capture was [among] the reasons we were grey-listed,” West said, before reminding the audience that months had passed since the Zondo Commission published its findings, with precious little sign of successful or enduring enforcement action. Being on the grey-list places South Africa alongside the likes of the DRC; Burkina Faso; Mali; Mozambique; Senegal; South Sudan; Tanzania; and Uganda, prompting the best rhetorical question of the conference: Is that really where we want to play? 

Self-administering the cure

The FATF has been quite prescriptive about the measures that South Africa must implement to be removed from the grey-list, identifying eight strategic deficiencies that must be addressed. West took an informal meander through each of these requirements, repeatedly asking the assembled AML-CFT experts whether they had seen any notable progress towards these requirements since February 2023. PS, for your reading pleasure this newsletter will offer brief comment on each of the deficiencies, which were bulleted by National Treasury in its “we have been grey-listed” media release earlier this year. 

The first requirement is that SA “demonstrate a sustained increase in outbound Mutual Legal Assistance (MLA) requests that help facilitate money laundering and terrorism financing (ML-TF) investigations, and [result in] the confiscation of different types of assets…” These MLA requests often take years to finalise, and, as evidenced by SA versus the Guptas, our track record in this area is dismal. West raised concerns over the preponderance for going the MLA route when there was often sufficient evidence to avoid the requirement altogether. 

He then turned to the second requirement, being for improved risk-based supervision, and for AML-CFT supervisors to apply effective and proportional sanctions for non-compliance. West commented that there were signs of the South African Reserve Bank (SARB) conducting inspections at designated non-financial businesses and professions, but that more needed to be done. Point three has been in focus of late as trust administrators, trustees and trust owners wrestle with the beneficial ownership requirements being enforced by the South African Revenue Services (SARS). 

The FATF wants South Africa to ensure that all competent authorities have timely access to accurate and up-to-date beneficial ownership information on legal persons and arrangements … and [that sanctions be applied] for breaches by legal persons to these obligations. “This requirement is being addressed at a legislative level; but we have got to get the implementation level right,” West said. “It is going to take time for beneficial ownership registers to come into play ... and even then, these registers cannot be seen as a silver bullet”. 

Feeding the FIC with actionable reports

The FATF wants South Africa to demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre (FIC) for its ML-TF investigations. To achieve this outcome, the FIC needs accountable financial institutions to send through “proper and actionable” information. West was quite critical of industry’s capabilities under this heading, complaining about “absolutely pathetic” reports drawn up for no other purpose than to mark a compliance checkbox. On the enforcement side, the FIC has been tasked with establishing the necessary forensic capacity to analyse the information that it receives, and assist other state institutions with investigations. 

To address the fifth FATF deficiency, South Africa must demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of TF activities. According to West, there has been an increase in the number of investigations; but these investigations are not resulting in prosecutions. To make matters worse, following the progress around these cases is like watching paint dry! “I am working with a number of cases that are in excess of three years old … these often-complex matters end up sitting with prosecutors without being prosecuted,” West said, before offering brief comment on the sixth requirement. 

The FATF wants SA to enhance its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes. Comment on this requirement was made via some leading questions. Have we seen this happening in the state capture context? Have we seen any progress in this regard? Points seven and eight received somewhat less attention during the presentation, with the seventh being for the country to update its TF Risk Assessment to inform the implementation of a comprehensive national counter financing of terrorism strategy; and the eight to ensure the effective implementation of targeted financial sanctions. To date, South Africa has not performed well in either of these areas. 

Your reward (sic) for paying attention

It is time to reward the hardcore readers who made it this far through today’s newsletter. To emulate West’s conference experiment, you are invited, by way of a ‘yes’ or ‘no’ comment below, to indicate whether you believe South Africa has made good progress on the eight deficiencies identified by the FATF. Furthermore, do you believe we will be removed from the grey-list in January 2025. Only one person in the 200-odd real-world responded ‘yes’ to the second question. 

The presentation also raised concerns about differences in perception between government and regulators on the one side, and industry on the other, insofar as South Africa’s progress towards addressing the eight FATF deficiencies. “The majority of the progress that South Africa made towards avoiding the grey-list took place pre-February 2023,” West said. Since then, the country has passed the General Laws Amendment Act; expanded the mandate of the FIC; and established a fusion centre to allows prosecuting authorities or enforcement agencies and the FIC to work together on matters. The Prudential Authority (PA), under the SARB, has made progress too. 

Unfortunately, the lack of enforcement actions and prosecutions, coupled with the state’s handling of farmgate, state capture and the lack of transparency in recent Russia-South Africa engagements, point to the country spending more time on the grey-list than first envisaged. “I do not think we will get downgraded onto a black-list; but I also do not think we are going to get off the grey-list in January 2025,” West concluded. 

Writer’s thoughts:

One of the interesting points raised during the Anti-money Laundering; Financial Crime and Fraud conference was the disconnect between government and industry re South Africa’s progress on grey-list deficiencies. Do you think government and the various regulatory authorities are doing enough to get SA removed from the FATF grey-list? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

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