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What the FATF

28 February 2023 Gareth Stokes

It is official. On Friday, 24 February this year, the global Financial Action Task Force (FATF) added South Africa to its grey list of countries that have inadequate Anti-Money Laundering and Countering the Financing of Terrorism (AML-CFT) regimes in place. FAnews readers will not be surprised by the news, because in addition to ongoing speculation that a grey listing was inevitable, the Minister of Finance hinted at the possibility during his Budget 2023 presentation.

Making peace with our punishment

Dawie Roodt, chief economist at the Efficient Group was on the ball during his post-budget analysis, held just two days before the decision. “It seems as if the Minister has made peace with [the fact that] we are going to get grey listed; he sounded quite sure that we were going to get added to the list,” Roodt said. The SARS Commissioner was similarly resigned. In an article published on Moneyweb.co.za just hours before the FATF announcement he reportedly said: “If you have any outstanding actions then you go onto the grey list, or what they call the observation list”. 

The Commissioner’s comments were made during an online panel discussion hosted by assurance, advisory and tax services firm, PwC, during which it was noted that South Africa had whittled down a list of more than 130 “outstanding actions” to just a dozen over the past year, but still ran out of time to avoid its ‘punishment’. The effort was acknowledged by the South African Reserve Bank (SARB) in its official media release on the FATF’s decision. They wrote that the action was taken “notwithstanding the substantial efforts by all stakeholders, under the National Treasury’s leadership, to address the recommended actions contained in the FATF Mutual Evaluation Report (MER) of South Africa”. 

The number of press releases that landed in the writer’s inbox immediately following the announcement suggest that many local associations and firms considered the country’s grey listing as fait accompli. Why else go to the trouble of having a prepared press release on file? In their media comment, issued minutes after the decision, PwC said that South Africa now finds itself among a group of countries that will come under increased FATF monitoring. They also warned that the grey listing had significant implications for South African companies doing business with international counterparties. 

Costs will rise, cross-border transactions could take longer

Kerin Wood, PwC South Africa Forensic Services: Risk and Regulation Partner, said that the grey listing was confirmed despite the country making considerable progress towards resolving the deficiencies in its legal framework and implementation processes since first being warned of such issues. Unfortunately, the fact that the FATF felt these responses were insufficient means that local firms will now have to take steps to mitigate risks. According to PwC, grey listing may increase the cost of raising finance and trading with global counterparties. In addition, businesses and non-governmental organisations (NGOs) will have to meet additional requirements around sources of funding, while banks will have to comply with stricter customer screening requirements. 

The impact on firms will vary with context. “South African companies operating as financial intermediaries across jurisdictions may be asked to undertake independent risk assessments to enable their counterparties to gain assurances that their controls and / or frameworks are aligned with global standards, and to prevent such counterparties from exiting these relationships,” Wood explained. FAnews has previously reported on the possibility of grey listing and its potential impact on sectors of the intermediary market. In a newsletter titled ‘Some musings on international retirement plans’ we shared Capital International Group’s (CIG) take on the matter, as presented at the 2022 Sovereign Wealth International Retirement Seminar. 

Another Nostradamus among us…

Back in September 2022, David Noon, commercial director for South Africa at CIG, said it was “almost inevitable” that South Africa would make its way onto the grey list, despite the last-ditch efforts being made by National Treasury to ram through amendments to the Financial Intelligence Centre Act; the Non-profit Organisations Act; the Trust Property Control Act; the Companies Act; and the Financial Sector Regulations Act. The sentiment shared during this seminar was that financial advisers and wealth managers would be severely impacted by the grey listing with likely escalations in requests for clients’ audited accounts, source of funds; and payslips, to name a few. 

And in ‘Hurdles that SA-based advice practices must clear’, published November 2022, we told advisers that following grey listing, you could expect more of your offshore clients to be screened as high-risk clients and to be screened more frequently. In that newsletter, Tamryn Lamb, Head of Retail at Allan Gray encouraged independent financial advisers (IFAs) to begin preparing for grey listing by engaging with their foreign service providers to determine how risk rating requirements might change. “Make sure that you look at your own risk monitoring and compliance procedures and start preparing for the additional documentation that might be required,” she said. And that, dear reader, is how you prepare for the worst! 

Towards the end of 2022 it was felt that grey listing would contribute to a decline in foreign investment into South Africa and have a negative impact on the rand. Returning to present day, Wood said that it was difficult to estimate the impact of grey listing on the overall economy. “South Africa is a bit of an anomaly compared to previously grey listed countries [in that] it has a more globally integrated financial system with a more open economy and greater foreign investor participation,” she said. “In other jurisdictions, we have seen diverse impacts on businesses, including foreign investments [being] suspended or deferred [and] increased transactional, administration, compliance and auditing costs associated with enhanced levels of monitoring”. 

Hopes for a speedy resolution

In a media release issued last Friday, the Banking Association South Africa (BASA), said that grey listing could make it more onerous and costly to do business with South Africa and detract from the country’s reputation as an investment destination. On the plus side, they suggested that “the FATF did not automatically call for the application of enhanced due diligence measures to grey listed jurisdictions”. There are also hopes that the grey listing will be short-lived given that the significant progress made by South Africa since the FATF MER, and the high-level political commitment made by the South African government and regulatory authorities to work with the FATF to strengthen the effectiveness of AML-CFT measures. 

There were some promising statements made during Budget 2023 too, with the allocation of ZAR1.3 billion to the National Prosecuting Authority (NPA) and an additional ZAR265.3 million to the Financial Intelligence Centre (FIC) to support the implementation of the recommendations of both the State Capture Commission and FATF. The SARB said that it “stands alongside the National Treasury in its steadfast commitment to actively assist the South African financial sector supervisors to address all remaining AML-CFT deficiencies expeditiously, and to continually engage with all relevant stakeholders to enhance compliance and deter financial crime in South Africa”. BASA has also undertaken to “do whatever it can, with other public and private institutions, to successfully implement the remedial actions that have been agreed to [thus] ensuring that the country is removed from the grey list as soon as possible”. 

To each his or her own…

Until such time as South Africa satisfies the FATF of its reforms, private companies will have to implement context-specific solutions in response to grey listing. According to Wood, such steps would depend on the broader impact grey listing will have on their plans around aspects such as strategic expansions, capital raising and any general increased cost of doing business. “Where local companies have been pulled into the scope of the regulatory requirements, these entities will have to assess the specific impacts and ensure that they take steps to enhance their current control environments and frameworks to address their new regulatory expectations,” she concluded. 

Writer’s thoughts:
Year-to-date 2023 has been a shocker. Locally, we have Stage 4 or worse loadshedding, floods-by-the-minute and staggering levels of crime and corruption. On the global front we have the one-year anniversary of the Russia-Ukraine conflict, earthquakes in Syria-Turkey and natural catastrophe in New Zealand. Who knows, maybe this grey listing is the easiest news to stomach. Were you surprised by the Financial Action Task Force (FATF) decision to grey list South Africa? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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