South Africa faces possible grey listing by the Financial Action Task Force (FATF). This warning was set in October last year when we were to pull up our socks and improve on shortcomings in identifying, reporting on, and prosecuting illegal cash flows and crime. We were given a year (to October 2022) to prove we are making improvements, with February 2023 as the deadline to demonstrate progress on these improvements.

If we don’t deliver, we’ll end up on the ‘grey list’ but there is nothing murky ahead – and we’re behind schedule. Not your typical grey area, if we’re grey, there’s no debate that this would bring about difficult consequences. Making the list is likely to have the biggest impact on financial services, such as on ease of business and foreign direct investment (FDI), among other far-reaching effects of failing to improve on anti-money-laundering (AML) and terrorist financing (TF) prevention.

Going grey

Countries on the grey list are believed to pose a threat to the international financial system. Other offenders already on the list include Mali, South Sudan, Burkina Faso, Yemen, Syria, and Jamaica.

Pakistan was placed on the list in June 2018. Despite enacting 17 AML and TF laws and initiating several legislative amendments during the last two years to comply with FATF criteria, Pakistan remains firmly on the grey list. This may be cause for concern for South Africa as even with progress, grey listing can remain in place for years, almost as though the FATF requires consistent proof of improvements.

Worldwide woes

Tabadlab, an independent think-tank published a research paper last year, reporting that ‘grey listing spanning from 2008 to 2019, may have resulted in global GDP losses worth $38 billion’. This is not in line with improving economic prospects – nor proving that the best is being done to prevent money-laundering or terrorist financing from slipping through the cracks.  Credit Suisse made recent history in Switzerland for becoming the first bank in the country to be fined for money-laundering, having failed to prevent transactions made with illicit funds tied to the drug trade. Switzerland is not among grey listees, but this incident does prove why strong measures need to be in place to prevent crime. Without them, how many dodgy transactions are getting through?

What is SA doing – and what comes next?

We’re all familiar with the third degree in owning a bank account. Personal details and proof of address are familiar requests, but even so the FATF is dissatisfied and wants more stringent measures for South Africa. The Financial Intelligence Centre (FIC) serves as our central hub for proactivity against suspicious financial transactions. The FIC Act (FICA) is meant to be a legal framework on par with FATF’s stance on AML and anti-TF measures.

National Treasury is expected to present ‘urgent’ amendments and additional AML legislation to Parliament to satisfy the FATF.

Among the proposed amendments are that Treasury wants Co-operative banks and businesses that deal in high-value goods to fall under Schedule 1 Accountable Institutions. Payments exceeding R100 000 will need to comply with FICA. For example, this now includes motor vehicle dealers or Krugerrand dealers – even Attorneys will become Accountable Institutions. The wording of the amendment does not put limitations on any specific type of goods or services, and any businesses who were on Schedule 3 will be moved to Schedule 1, which changes compliance requirements.

Reporting institutions must report suspicious transactions to the FIC. The amendments essentially broaden the scope for FICA and include more people and businesses who are required to comply.

There are also rumours of heavy penalties coming for offending South African financial institutions, imposed by foreign regulators.

Dr Dion George MP, DA Shadow Minister of Finance recently commented that if South Africa does become grey listed, South African banks and other financial institutions will in effect be excluded from being able to transact internationally with “dire consequences for our economy, already on its knees”.

He also believes that long-needed structural reforms would come to areas including finance, compliance, and the criminal justice system, if grey listing took place, thus enabling able policymakers to act. This could be about the only positive outcome of going grey. But the Financial Sector Conduct Authority (FSCA), for example, is already amid momentous upgrades to current financial services regulation.

Looking for light at the end of a dark tunnel

South Africa’s big banks do have the required regulation in place, but the country has generally been criticised for not following a satisfactory approach to risk-assessment and so there is concern that many money-laundering or financial terrorism risks are unknown and therefore there could be many gaps.

State capture is an ongoing thorn in our side, and money-laundering convictions to date are not in line with the level of risk present in South Africa. Using cash is mainstream in the country, which is another high-risk factor that extends to cross-border concerns. It is challenging to detect and recover criminal cash, but amendments to FICA are a start.

We will have to ensure robust financial crime controls and will have to partake in international cooperation in AML and TF investigations. After grey comes black-listing, which would even further discourage investors into South Africa and raise higher red flags. Going grey is one thing but to compete on the global stage and give our economy a chance, we need to prioritise a proper defence plan against financial crime as a matter of urgency.

 

Article by James George, Compliance Manager, Compli-Serve SA