STUART THEOBALD: SA must act fast not to fade to grey

The question of greylisting by the Financial Action Task Force (FATF) must turn to how quickly SA can get off the grey list and mitigate the impact while on it. The chances of avoiding greylisting are dwindling, and SA is set to become the most sophisticated economy yet to be greylisted when the FATF plenary meets in February 2023.

Greylisting will mean that any SA company (and individual) that transacts with international counterparts will find itself subject to enhanced due diligence. The EU is particularly stringent in its response — it designates countries on the grey list as high risk and requires member states to require entities to apply “additional mitigating measures”, including enhanced due diligence.

What this means in practice varies from state to state, but typically banks and other multinationals will increase the frequency and stringency of their due diligence review of clients. For example, an SA multinational now doing business in European markets will have to provide detailed information on its activities to banks there and its procedures to mitigate possible money laundering and terrorist financing. Before, it would have done this every three years at a fairly high level, but now it will be required to produce more detailed evidence and be subjected to review annually.

While the EU is explicit in this requirement, many other jurisdictions also use FATF greylisting as a factor for risk assessment, and many global banks incorporate it into their risk analysis too.

The effects of greylisting depend on how SA pulls together to deal with it. Mauritius managed to exit the grey list in just 20 months, but its response was swift and led from the presidency. It corralled a national effort to meet FATF’s recommendations. It provided a textbook example of an effective and detailed response.

SA has so far not been meeting that high bar. Certain parts of the system have been effective in dealing with the 20 areas highlighted by FATF as deficient in its mutual evaluation in 2021. The SA Reserve Bank, for example, has been effective in amending its bank supervision processes to comply. An omnibus bill that will amend a wide range of legislation to comply with FATF recommendations is before parliament.

Double staff

But there are far more tricky areas of the recommendations and immediate outcomes FATF expects where SA will struggle. For example, the country needs the Hawks to become an effective investigator of sophisticated money-laundering crimes, which will require teams of financial forensic investigators to be appointed. That could take years, and so far the Hawks have not shown any interest in getting going.

We also need to implement effective regulation of non-financial institutions that deal in large amounts of money, such as real estate agents, casinos and Krugerrand dealers. If we expect the Financial Intelligence Centre to do that job, it will need double the staff and budget it now has. Getting it into the right shape could take a long time.

If SA is perceived to be a long-term member of the grey list, counterparts will be less willing to put up with the trouble of conducting enhanced due diligence. Existing relationships are likely to be more resilient than new ones. An EU bank considering opening an account for a new SA-based client will be wary. If SA’s greylisting is seen as a short-term aberration, the odds will move in favour of opening such an account. But if SA is seen as a long-term miscreant, counterparts will be increasingly reluctant to deal with SA clients.

To some extent, SA will be in uncharted territory. It won’t be the biggest economy on the 23-member grey list, with Turkey, Pakistan and the Philippines all bigger, but it will be by far the most financially sophisticated, with considerable financial engagement with the rest of the world. Equity and bond markets are much bigger than any previous grey listee with considerable international participation. This level of integration will make it hard for the rest of the world to isolate SA compared with, say, Syria or Yemen, implying that the costs will be less. Yet, SA is more exposed to international financial links, so if counterparts do move to cut ties, the effect will be greater.

To mitigate these effects, companies should prepare for enhanced due diligence. They need to assemble the documents and be ready to engage with international counterparts to assure them they have extensive and appropriate mitigation for risks of money-laundering and terrorist financing. The government will also need to send the world a clear message that it is taking greylisting seriously.

SA will succeed on some of the FATF’s recommendations even if it falls short of the bar needed to avoid greylisting. The fact that SA does meet many FATF recommendations should be made clear to global counterparts who will be tempted not to look at the complexities behind the “greylisted” headline. Ultimately, SA will need to convince the world that greylisting will be short-lived and that their relationships with SA companies are worth the hassle.

 Theobald is chair of research-led consulting firm Intellidex. This article first appeared in Business Day.