STUART THEOBALD: Next month should see progress, but not redemption, from the FATF greylist

In October SA has an opportunity to take a big step forward in its effort to escape the FATF greylist.

FATF stands for Financial Action Task Force, an institution created under the Group of 7 (G7) to combat international money laundering and, after 2001, terrorist financing. Last week a National Treasury team, including the alphabet soup of enforcement agencies — the Financial Sector Conduct Authority (FSCA), Financial Intelligence Centre (FIC), Companies and Intellectual Property Commission (CIPC) and the SA Reserve Bank (SARB) — met the FATF to discuss the progress it has made, aiming to assure the global body it is on track.

There is much hope that the FATF plenary in October will recognise that SA has made progress, though it will not yet give SA a full reprieve. We were put on the greylist in February when the global anti-money laundering watchdog decided SA had not done enough to comply with its anti-money- laundering recommendations. We will escape only in May 2025 at the earliest.

Greylisting means that global institutions have to apply “enhanced due diligence” when doing business with SA. Several have decided it is not worth the effort and cut off SA clients, while others added charges to cover the cost. Banks and other financial institutions face difficulties in managing relationships with global counterparts. It all adds frictional costs to SA’s engagement with the global financial system.

The government has been hard at work making the changes necessary to satisfy FATF requirements, a list of eight actions it must take to get in line.

Parliament has been a site of much action with two omnibus bills pushed through in late 2022 making myriad legislative changes. Companies now have to report all of their beneficial owners to the CIPC with annual returns; trusts have to declare their founders, trustees and beneficiaries to the masters’ officers; and nonprofits must register with the nonprofit directorate if they do work in other countries. These and other issues concern the “technical compliance” requirements of the FATF — a list of 40 recommendations for the laws and regulations countries must have in place to combat money laundering and terror financing.

In August SA submitted a report to the FATF on progress with these technical requirements, arguing that it now substantially meets the requirements. This report is wending its way through the peer countries for comment before it lands up at October’s FATF plenary for assessment. The hope is that the plenary accepts that good progress has been made and provides some kind of indication of that when it publishes its update on country performance after the meeting.

However, technical compliance is the easy test. The harder test is the effectiveness of the laws and regulations. This has long been recognised as SA’s weak point. The failure to deliver effective prosecutions for corruption, embarrassingly evident in the recent failed attempts to prosecute those linked to state capture, is the clearest indicator that our criminal justice system is not effective in policing and prosecuting white collar crime.

The FATF has 11 “immediate outcomes” which it uses to test effectiveness and SA failed every one when last assessed. The truth is that no country gets full marks across all 11, so perfection is not required. But SA was deemed to be too far from the mark.

Much of the work needed is in the plumbing of the criminal justice system. While the CIPC now collects beneficial owners, are investigators able to easily obtain the information and use it in investigations? Do the investigating arms of government co-operate effectively with international law enforcement agencies, requesting assistance when useful to gather evidence?

Do our law enforcers effectively use financial intelligence gathered by the FIC? Much work has been going on behind the scenes to improve access, but more is needed. The CIPC, for instance, has only just begun to capture beneficial owners and will need a full year of annual returns to gather a database (and in all likelihood more time to chase companies for full compliance). How then will that database be accessed by law enforcement? We must wait and see.

Those elements, though, are relatively straightforward and can be achieved by getting systems in place and training people to use them. The harder effectiveness tests are whether SA is investigating and putting in jail those involved in money laundering and terror finance.

Again, much has been happening . The Hawks have been recruiting more investigators and there has been an effort by both industry and the public sector to train more investigators to deal with complex financial crime. But there is a sense that the old problems remain — these agencies were gutted under the Zuma regime, and they remain torn into factional rivalries and reticent to pursue investigations that may lead to conflict with powerful people.

There is still time to get the effectiveness measures right. The plenary that will consider progress is only in March 2025. There will be several check points between now and then at which SA will need to demonstrate progress, including a full peer review.

The FATF wording is that SA must “demonstrate a sustained increase in investigations and prosecutions” and given the low bar of the starting point, this may not be difficult in a technical sense. Whether the FATF accepts only minor progress, or rather expects prosecution levels appropriate to a country of our size and complexity is another matter.

Greylisting has been a blow to investor confidence in SA. October might just provide a glimmer of light that could contribute to shifting the trajectory.

Stuart Theobald is chair of Krutham.

This article first appeared in Business Day