Nedbank CEO Mike Brown says the prospect of SA being greylisted by the Financial Action Task Force (FATF) when it decides on the matter in early 2023 is “too close to call”, though he believes the effect of such an action has probably already been priced in by markets.
The Paris-based FATF, an intergovernmental body that assesses countries’ ability to combat illicit financial activity, gave SA until October 2022 to come up with a credible plan to tackle deficiencies in its ability to prevent financial crimes. Failure to do so will probably result in SA being placed on a greylist of high-risk countries when the group holds a follow-up review meeting in February 2023.
“I do think it’s still possible for us to avoid a greylisting, but it’s almost too close to call,” Brown told Business Day on Wednesday. “It is still possible, but there is a material amount that needs to be done and a lot of it is outside the Treasury’s domain.”
Shortcomings in SA’s ability to combat money laundering and terrorism financing were laid out in an evaluation report by the FATF in October 2021. The report found SA compliant with only three of the FATF’s 40 benchmark recommendations to combat illicit financial activity.
A separate report published by the Prudential Authority in July found SA’s largest banks were at “high risk” of falling foul of money laundering, terrorism and proliferation financing. A report by RMB Morgan Stanley published in early August named Standard Bank and Nedbank as the SA lenders most at risk due to their comparatively higher reliance on financial markets trading as part of the earnings of their corporate and investment banking operations.
Though the Treasury has said it was working to perform a “miracle” to keep SA off the greylist, Brown said a lot of the work falls outside the Treasury’s domain. The majority of the hurdles SA needs to clear require legislation to be passed by parliament, while Brown said there was also an investigative and prosecutorial component dependent on action from the likes of the Financial Intelligence Centre, the Hawks and the National Prosecuting Authority.
“I’m sure that FATF sits there and says ‘here’s a country that has just been through state capture and no-one is in jail — it’s obvious the system doesn’t work’,” Brown said.
Nevertheless, he does not believe the effect of SA’s potential greylisting will be quite as bad as a sovereign ratings downgrade. That differs from Standard Bank CEO Sim Tshabalala, who said in July that the consequences of greylisting would be even worse than a credit downgrade.
“If we are greylisted, my personal view is that the impact will not be as dramatic as a sovereign ratings downgrade below investment grade,” said Brown. “It will make the frictional cost of transactions cross-border materially more expensive because there will be more due diligence required by all our correspondent banks.”
Other potential consequences identified by Nedbank include the likelihood of the UK and EU adding SA to their own lists of countries with high financial risk, which could have adverse consequences on trade and financial flows. The US, EU and UK could also place restrictions on their lenders’ ability to transact with SA banks.
Nevertheless, Brown said many of these potential risks had already been priced in by financial markets.
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