Escaping the Grey List束 by reclaiming our freedom

At the start of last year, South Africa faced a challenging reality when it was placed on the grey list by the Financial Action Task Force (FATF). This designation signified that the country’s efforts against money laundering, terrorist financing, and other financial crimes fell short of international standards.

Essentially, being grey listed is not merely a symbolic alert; it carries substantial consequences that can impede economic progress, discourage foreign investment, and tarnish the nation’s global reputation.

Read: South Africa requires a consolidated agency to tackle corruption, OECD advises

To restore its standing, South Africa must undertake decisive measures and recognize the gravity of the situation alongside global precedents.

Recognizing the non-financial consequences of grey listing

Grey listing subjects South Africa to increased scrutiny from international financial institutions, making it more expensive and complex to engage in global business.

The effects are tangible and profound.

Foreign investors, concerned about possible regulatory pitfalls, may reduce their investments in the nation. Already strained capital inflows could shrink further, increasing pressure on the rand and heightening inflation.

Moreover, businesses within South Africa are likely to encounter rising compliance costs as financial transactions face stricter examination. This can lead to delayed payments, obstructed trade, and diminished competitiveness. For a country grappling with economic stagnation, grey listing may persist as a formidable barrier to achieving growth targets.

The importance of learning from historical cases

While the South African government actively addresses the six outstanding action items (as highlighted in National Treasury’s latest update), it can be beneficial to reflect on the impacts prolonged grey listing has inflicted on other emerging economies.

For instance, Pakistan was put on the grey list in 2018, resulting in a marked decline in foreign direct investment. Despite efforts to remedy this, the economy suffered from years of reduced global confidence, worsened by the Covid-19 pandemic.

Read: South Africa’s property laundromat leveraged for laundering illicit African funds

Likewise, Nigeria underwent FATF scrutiny in the mid-2000s and experienced a significant drop in trade and capital flows. Even after resolving the underlying issues, the reputational damage persisted, delaying their economic resurgence.

South Africa must avoid this trajectory by swiftly and effectively addressing the root problems that resulted in its grey listing.

Insights from successful case studies and required reforms

Countries like Mauritius and Botswana illustrate effective approaches to overcome challenges associated with grey listing. Mauritius was grey listed in 2020 due to deficiencies in its anti-money laundering (AML) and combating the financing of terrorism (CFT) frameworks. However, through decisive reforms including stricter regulations and enforcement mechanisms, Mauritius successfully exited the list in less than two years. Botswana faced grey listing in 2018 as well but implemented comprehensive financial sector reforms and enhanced transparency, achieving full FATF compliance by 2021.

The unifying element among these success stories is the prompt, coordinated effort among government agencies, financial institutions, and law enforcement. South Africa must similarly adopt a proactive approach, concentrating on three key areas: institutional reform, enforcement, and collaboration.

First and foremost, the FATF pinpointed deficiencies in South Africa’s regulatory and institutional frameworks, particularly concerning AML and CFT methodologies. To correct this, South Africa must revise its financial regulations to align with international standards, enhancing regulatory supervision, and equipping the Financial Intelligence Centre (FIC) with additional resources to enforce compliance across all financial sectors.

Furthermore, the government should enforce stricter requirements for disclosing beneficial ownership of companies and trusts to counteract illicit financial flows.

Read: South Africa nearing the chance to exit the grey list

Concerning law enforcement, grey listing reflects not only regulatory failings but also the nation’s difficulties in effectively prosecuting financial offenses. South Africa’s policing agencies, particularly the Hawks and the National Prosecuting Authority (NPA), must prioritize financial crime investigations and, where appropriate, create specialized units trained to address complex financial cases.

Lastly, the private sector in South Africa, particularly the banking and financial services sectors, plays an integral role. These institutions serve as the first line of defense against illicit activities, making it essential for banks and businesses to invest in technology capable of quickly identifying and reporting suspicious activities.

Monitoring progress

In October, Treasury provided an optimistic progress update, revealing that the FATF Plenary acknowledged nine upgrades for South Africa from its 22-item Action Plan. The nation is currently viewed as having “largely or fully addressed 16 of the 22 action items” listed in the plan, with six remaining to be addressed.

Read: Dawie Roodt discusses the grey list, mini-budget, and fiscal anchor concept

According to Investec, Treasury allocated R14 billion in the Mid-Term Budget Policy Statement to bolster agencies critical to combating crime, including those tackling financial offenses. The establishment of the Fusion Centre, which integrates bodies such as the NPA, SIU, Sars, the Hawks, Crime Intelligence, State Security Agency, and the FIC, has already led to the preservation and recovery of approximately R1.75 billion in criminal assets.

Shaping the future

Achieving compliance with FATF standards is merely the beginning. South Africa must capitalize on this opportunity to restore investor confidence and strengthen its financial infrastructure. A clear and ongoing commitment to transparency and governance will be crucial, necessitating government officials to adopt a cohesive, proactive approach in communicating progress to both local and global stakeholders.

The stakes for South Africa are extraordinarily high, and time is of the essence.

Grey listing jeopardizes not just South Africa’s growth but also its position as a regional investment hub. As the continent’s most industrialized economy, it bears the responsibility of leading Africa’s financial integration with the global market. A failure by the government and Treasury to act decisively could lead to long-lasting economic consequences.

Bryan Silke is an associate partner at Hudson Sandler Invicomm.

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