SA is in grave danger of being added to a grey list of countries deemed as having insufficient measures in place to combat money laundering and terrorist financing — but the National Treasury says it is confident the country can perform a “miracle” and avoid being ranked alongside Syria and Myanmar.
The Paris-headquartered Financial Action Task Force (FATF), an intergovernmental body that sets standards for combating illicit financial activity, gave SA 18 months to address specific shortcomings in its ability to prevent financial crimes, which were outlined in a mutual evaluation report published in October 2021.
The report was prepared by a team of 10 assessors drawn from FATF, the IMF and the Eastern and Southern Africa Anti-Money Laundering Group, a regional body that SA joined in 2002.
The mutual report found SA compliant with only three of FATF’s 40 benchmark recommendations to combat illicit financial activity while it was noncompliant with five, partially compliant with 15 and largely compliant with 17.
Due to SA’s poor showing the report gave SA a first deadline of October 2022 to address three of the 40 benchmark recommendations — these relate to terrorist financing, customer due diligence and reporting suspicious transactions — as well as 11 immediate outcomes covering areas such as international co-operation, supervision, beneficial ownership and money laundering prosecutions.
Should SA fail to demonstrate sufficient progress in addressing its deficiencies in combating money laundering and terrorist financing by the October 2022 deadline FATF could recommend SA be placed on a grey list of countries that are subject to increased financial scrutiny. That would see SA join a list of nations that includes Albania, Burkina Faso, Cambodia, Haiti, Pakistan, South Sudan, Syria, Turkey, the UAE and Yemen should its efforts to address its regulatory weaknesses be deemed inadequate by the final deadline of February 2023.
“We’re in grave danger of going onto the grey list and once we’re on it we’re unlikely to get off any time soon,” said James George, a compliance manager at Compli-Serve SA, a provider of advisory and compliance services to financial services firms. “The chances that we will avoid grey-listing are extremely slim and most people in the industry are too scared to say it.”
George says it typically takes countries an average of five to 10 years to get off the FATF grey list though Mauritius managed to remedy its deficiencies in under two years after being placed on the list in February 2020. However, its inclusion on the FATF grey list also resulted in it being named on a separate EU blacklist of high-risk countries with strategic deficiencies in their anti-money laundering and financial terrorism frameworks.
Should SA be grey-listed it would severely dent the country’s international standing and could also make it more difficult for local banks and financial institutions to deal with their global counterparts. While SA’s major banking groups are regarded as having better systems in place to combat money laundering, smaller financial institutions, estate agents, legal practitioners and dealers in high value goods such as Krugerrands and luxury motor vehicles are seen as having weaker compliance levels.
The Reserve Bank’s first Financial Stability Review of 2022 stated that should SA be grey-listed by FATF it could have “wide-reaching consequences” for the domestic financial system. These consequences could include higher transactional, administrative and funding costs for domestic banks; restrictions on cross-border transactions (including imports and exports); while the ability of local financial institutions to maintain relationships with offshore counterparts could be undermined.
“Some global financial institutions simply don’t want to deal with countries that are on the grey list,” said George. “That would obviously hurt the international reputation of SA institutions.”
The Banking Association SA (Basa) declined to comment on the issue saying it was being handled by the Treasury. Ismail Momoniat, the Treasury acting director-general, told Business Day the country’s grey-listing was not a fait accompli and that the country could succeed in remedying its regulatory deficiencies before the stipulated deadline.
“It is going to be an uphill battle but I am confident we can perform a miracle and avoid grey-listing,” said Momoniat, adding that there was now far more political will to address SA’s money laundering weaknesses. “We also don’t have to solve everything by February 2023 — we just need to show we’ve made sufficient progress to address each effectiveness measure and make changes to our legislation to comply with the 40 FATF recommendations.”
But while Momoniat is confident SA can make the necessary progress required to comply with FATF’s 40 recommendations he acknowledges that the 11 immediate outcomes outlined by the group might be more difficult to achieve, particularly for smaller financial firms, estate agents and legal practitioners whose services are often employed by money launderers. He said FATF could opt to place SA on what it calls enhanced follow-up, which would essentially buy the country more time to achieve higher levels of compliance.
However, the regulatory regime is just one aspect of a broader system-wide approach that also requires more robust action from the criminal justice and intelligence communities. That would help address some of the other weaknesses flagged by FATF such as investigation and prosecution of terrorist financing and monitoring of politically exposed people.
But George says SA is running out of time to avoid being grey-listed. “There just doesn’t seem to be the urgency required to adequately deal with the issue.”
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