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Restrain or React: Greylisting in South Africa

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Restrain or React: Greylisting in South Africa

Webber Wentzel

1st November 2022

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In 2019, the Financial Action Task Force ("FATF") red-flagged South Africa for high levels of corruption. That means South Africa has to address its partial compliance or non-compliance with 20 of the FATF’s “Forty Recommendations” by February 2023. These are actions that all conforming nations must follow.

South Africa has taken various steps to tackle corruption. The National Prosecuting Authority has enrolled cases, the Asset Forfeiture Unit has frozen or granted preservation orders, the Special Investigating Unit has instituted High Court cases and SARS has launched investigations. South African banking institutions have sound policies in place to combat terrorist financing. However, many loopholes remain, and this makes it urgent to enact the necessary regulations in place and ensure institutions have appropriate systems in place. 

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South Africa’s Anti-Money Laundering and Combating Terrorism Financing Amendment Bill attempts to align the country with some of the FATF’s recommendations. However, there are concerns about the limited amount of time allocated for public consultation and that it may be rushed through, which would create even more loopholes. 

Likely effects of greylisting

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To avoid greylisting, the South African government must be proactive in addressing the FATF’s concerns. If it is perceived as unresponsive to those concerns, the costs will be high. The commonly cited effects will be:

(i)            an immediate increase in the risk category for all South African clients of many international financial institutions, particularly in the EU and UK. South African clients will be subject to enhanced due diligence, which will mean more frequent (usually annual instead of every three years) and more invasive assessments (requiring senior management to directly report to offshore counterparts) of clients for Anti-Money Laundering and Countering the Financing of Terrorism ("AML and CFT") risks.

(ii)           This will increase the costs for South African businesses and individuals to trade internationally and to hold bank accounts or investments abroad. Costs will increase for South African banks in particular to manage correspondent banking relationships and relationships with global providers such as payment systems.

(iii)          If South Africa is not perceived to be acting quickly in dealing with FATF requirements, foreign counterparts may decide to reduce their compliance costs by terminating relationships with South African clients and avoiding any new relationships. Greylisting will complicate official and multilateral development assistance, including funding of South Africa’s investment needs.

(iv)          Multilateral funders may introduce conditions relating to AML/CFT compliance and conduct more detailed due diligence.

(v)           Negative publicity and reputation will affect South Africa’s international relationships in numerous ways, ultimately resulting in reduced business relationships with South Africans.

How Mauritius responded to greylisting

Mauritius suffered considerably after being placed on the FATF’s greylist in February 2020, the EU’s blacklist, and the UK’s List of High Risk Third Countries. Conducting business with the European Union became harder, with negative economic consequences. For instance, enhanced due diligence resulted in serious delays in payments by banks and in concluding transactions generally. There was a negative impact on trade, which raised cross-border transaction costs and limited the country’s ability to conduct business effectively.

The Mauritian government responded decisively. It moved swiftly to reinforce existing AML/CFT laws and worked closely with the private sector, which also showed great commitment. This was key, as neither party on its own could succeed in getting Mauritius off the grey/blacklists. While the government needed to put the framework in place, the private sector had to implement it.

In October 2021, FATF members visited Mauritius and met government, financial sector associations and bank representatives. Soon afterwards, the FATF reported that it was satisfied with the progress Mauritius had made in reinforcing its AML/CFT framework and removed the country from its greylist.

While it can take a country up to five years to move off the greylist, Mauritius was able to achieve this in only two years.

Other examples of greylisted countries and their response

Since February 2021, the Cayman Islands has made a political commitment to work with the FATF and the Caribbean Financial Action Task Force to strengthen the effectiveness of its AML/CFT regime. The country is currently required to continue working on implementing its action plan to address shortcomings by demonstrating that it is prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile and that such prosecutions are resulting in effective sanctions.

The FATF has urged the Cayman Islands to swiftly complete its action plan as all deadlines have now expired. It has to address those shortcomings by February 2023.

In contrast, Pakistan has made significant progress in improving its AML/CFT regime. Pakistan has strengthened its AML/CFT regulations and addressed shortcomings identified in June 2018 and June 2021. It addressed the June 2021 points ahead of the deadline. Pakistan is therefore no longer subject to the FATF’s increased monitoring process. It will continue to work with the Asia / Pacific Group on AML/CFT to improve its systems.

South Africa’s progress

While the legislation to give effect to AML/CFT is in progress, additional budgets and resourcing still need to be developed. There is a shortage of the types of skills needed for investigating and prosecuting complex commercial corruption cases.

The South African government should follow Mauritius’s example and set the tone by showing a political commitment to reinforce the existing AML/CFT legislative frameworks and work closely and quickly with the private sector to fulfil the FATF recommendations. There needs to be co-ordination and co-operation between different levels of government such as National Treasury, Parliament, the Financial Intelligence Centre, and various law enforcement agencies to take on additional supervision of money laundering and terrorist financing.

Webber Wentzel will be hosting a workshop and conducting sessions on the "Implications of greylisting by the FATF for South Africa" with our financial and corporate clients to address these issues.

Written by Priyesh Daya, Partner & Kiara Ghirao, Associate at Webber Wentzel

 

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