South Africa’s possible greylisting by the Financial Action Task Force (FATF) in February will complicate accessing the $8.5bn (R155bn) climate change package pledged to the country.
Stuart Theobald, chair of Intellidex, said it was unlikely the money would be withdrawn, but complications could be expected around its dispersal.
At Cop26 in November 2021, the UK, US, France, Germany and the EU pledged money to South Africa to speed up the transition from coal.
The funds have “been brought together from several sources, including a few national development funds. Particularly from the EU side, we can expect complications if South Africa is greylisted,” he said.
“This will place South Africa on the EU anti-money laundering (AML) blacklist and it will therefore impose a high-risk category on South Africa with immediate effect. Funders in that jurisdiction will be required to increase due diligence significantly.”
Theobald was speaking after the release this week of a report by Intellidex, commissioned by Business Leadership South Africa (BLSA), which found there was an 85% probability the country would be greylisted by the FATF at its next plenary session.
A greylisting would also mean the money would be paid out with strict conditions. “Once greylisted, part of the loan agreement would require South Africa to commit to certain targets related to AML and countering the financing of terrorism (CFT),” he said.
This comes at a time when we are trying to strengthen the business case for investment and it can have dire consequences. The question now is whether the country is going to be caught napping or do we have a clear plan on how to get us out of this greylisting situation
— BLSA CEO Busi Mavuso
The Cop26 pledge was also a political declaration, said Theobald. “It is only an announcement of intention and not a signed agreement, meaning the greylisting can still impact. South Africa will present an investment plan at Cop27 indicating what it intends to do with the funds, and only then will the formal process of signing the agreements regarding the specific loans start.”
This process would, in all probability, coincide with the greylisting, making the funding subject to greylisting requirements.
The National Treasury did not respond to a request for comment.
Theobald said it was not only Cop26 financing that was at risk, but donor funding in general would become far more complicated in future.
“It will, for the most part, depend on each donor as different rules apply in different places. The EU, however, is by far the most strict and has a standard directive that is applied to greylisted countries. This determines how any country is treated by institutions within the EU when greylisted.”
He said the economic impact of greylisting would depend substantially on the seriousness with which SA was perceived to be acting to address the FATF’s concerns.
“For the EU, however, it will make no difference how far we are in this process. It will implement and require that very deliberate steps are followed by all institutions to minimise the risk of money laundering, corruption and terrorism financing until South Africa is officially no longer greylisted.”
Government and multilateral institutions, in particular, would be affected. “These organisations will be part of the $8.5bn deal and obligated to follow the stringent due diligence process.”
He said while the EU approach, adopted in May 2020, had been criticised for being disproportional, it remained in place and institutions were bound to follow procedures.
“While some consider it a very blunt instrument, the reality is it can be very negative for South Africa. Getting any agreements through the EU committees will be far more difficult and costly if greylisted.”
He said South Africa was also at risk of foreign counterparts terminating relationships with local clients and investors turning away from the country.
Companies and South Africa should therefore prepare themselves and be able to demonstrate sources of funding in far more detail than before. Evidence of internal processes and systems that ensured local institutions were corruption-free would be a requirement. Many organisations would have to beef up their systems to prove a zero-tolerance approach to corruption existed.
The Intellidex report found South Africa fell short of at least half of FATF recommendations for AML and CFT.
While the FATF had told South Africa of the 12 priority actions it needed to implement to avoid being greylisted, not much progress had been made and only two of the recommendations had been satisfactorily achieved. Three of the actions remained far from being achieved and only limited progress had been made on the rest.
BLSA CEO Busi Mavuso described the looming greylisting as “yet another hard blow” to a country already struggling amid difficult economic conditions.
“This comes at a time when we are trying to strengthen the business case for investment and it can have dire consequences. The question now is whether the country is going to be caught napping or do we have a clear plan on how to get us out of this greylisting situation.”
Estimates are that even with such a plan, it would take at least two years to convince the FATF to lift greylisting.
According to Theobald, politicians and government officials reacted slowly when the initial possibility of greylisting became apparent, but as the severity of the situation became clearer, there was more traction.
“Recently there has been a considerable increase in concern and an acceleration in efforts by the likes of the National Prosecuting Authority (NPA) and the Financial Intelligence Centre (FIC) to address the issue, but it is likely too little, too late,” he said.
“It is important now, even if we don’t avoid being greylisted, that we mount a concerted national effort to deal with this and get off this list as quickly as possible.”
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