The pending decision by the global Financial Action Task Team (FATF) on whether to greylist SA is a "sword of Damocles" hanging over the economy with an 85% probability of falling, says a new research report commissioned by Business Leadership SA.
FATF is a global body that monitors compliance with anti-money laundering and combatting terrorism financing measures. In SA's last mutual evaluation undertaken in 2019, it was found to be partially compliant or noncompliant with 20 of FATF's 40 recommendations. The body will take a final decision at its plenary in February.
Greylisting is an indication of the risk that the rest of the world attaches to South African companies and individuals as counter-parties to transactions.
While some of the weaknesses relate to legislative shortcomings, which are being processed in Parliament now with the prospect of becoming law before February, many of SA's failings are due to the weakness of the criminal justice system and the absence of prosecution for crimes of money laundering and terrorism financing.
The economic impact could range between less than 1% and 3% of GDP depending on how quickly SA can exit the greylist, says the report compiled by consultancy Intellidex. SA must be seen to be making a concerted effort to meet the requirements of FATF if this damage is to be limited to the lower end of the scale.
The immediate effect will be an increase in the risk category for all South African clients at many international financial institutions, particularly those in the European Union and UK.
Says the report:
The nonprofit sector and bilateral funding arrangements with other countries – such as SA's Just Energy Transition Partnership (JETP) transaction with international partners - will also be subjected to enhanced due diligence, complicating access to this type of funding.
Given the high probability of greylisting, the best that can be done is to minimise its impact and aim to exit the greylist as soon as possible, says the report.
Still insufficient
Intellidex recommends that government mounts a "comprehensive and credible effort" to address FATF's concerns, coordinated from the highest level of government. As the most difficult challenges are to build institutional capacity in a range of areas and departments, from the prosecuting authorities to the Hawks, the Financial Intelligence Centre, the Department of Home Affairs, police, SARS and others, Intellidex recommends that this be done by the Presidency.
Private-sector companies and individuals should also prepare for the enhanced due diligence that will accompany greylisting. They should engage foreign service providers to establish how their risk rating will be affected; what enhanced due diligence measures will be taken (if any); and how they can prepare.
While the report notes that there are some areas where SA has made good progress since the mutual evaluation – such as progress in prosecutions, arrests and asset forfeiture related to state capture – there are many other areas in which SA will not be able to make progress in time for the February meeting. Intellidex also acknowledged efforts under way to pass the necessary legislation that would, for example, put in place controls over sectors not presently monitored by the FIC such as estate agents and attorneys. Still, it was doubtful that this would have become embedded by February.
Similarly, the FATF requirement that SA improves monitoring to enable the easier discovery of beneficial owners will also take time to become effective. Thirdly, while the NPA and Hawks have taken steps to hire more forensic accountants and investigators, this is still insufficient.
Speaking at the launch of the report on Wednesday, chairman of Intellidex Stuart Theobald said: "There is still a path open to meeting the recommendations of FATF, but we think that probability is low … We believe the issues above will be very difficult to progress in time for the February FATF plenary and that South Africa will therefore be greylisted."