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South Africa has until the end of October to prove to the global economic community that it is secure and taking action to mitigate financial crime and is doing enough to avoid being greylisted by the Financial Action Task Force (FATF).
The FATF, an international watchdog, reported earlier this year that there were significant weaknesses in parts of South Africa’s financial regulation. Shortcomings within the legislation resulted in the group finding a high number of money laundering and terrorist financing cases.
National Treasury noted that South Africa’s period of observation by the group will come to a close at the end of October.
Before this deadline, the government must provide a second follow-up report to the FATF, showing that it has done or is doing enough to address its points of concern, or face a possible grey listing in February 2023.
However, no matter what the government says or does, the FATF ultimately has to be convinced that its recommendations have been taken into account and necessary changes made.
Writing in her weekly letter, the CEO of Business Leadership South Africa (BLSA), Busi Mavuso, said that a greylisting has potentially serious implications for the economy – increasing the cost of financial transactions with the rest of the world.
“It will make it harder to do business for anyone operating financial accounts abroad or dependent on foreign financial services providers. The implications for our integration into the international economy are clear.”
“Some have compared greylisting to the loss of investment grade credit rating. There are similarities, as counterparts all adjust their views of the risk of doing business with South Africa – this time it will be a reputational risk, whereas a downgrade shifts perceptions of credit risk,” said Mavuso.
Rebecca Thomson, a senior associate at Allen & Overy, said that a greylisting could also lead to an overall decline in GDP – as seen in Mauritius when they were greylisted, and GDP dropped by 1% in the first year of its listing. She added that South Africa could see the export and import of goods becoming more difficult.
South African trade is already under pressure, with the country recording a drop in its trade surplus in August to R7.2 billion due to lower exports and higher imports during the month.
According to Daily Investor, the FATF outlined a handful of areas that needed a significant overhaul – the current non-compliant recommendations include:
- R6: Targeted Financial sanctions related to terrorism and terrorist financing.
- R8: Non-profit organisations – systems to prevent NPOs from being abused for financing terrorism in several ways that FATF R8 sets out, such as by being a conduit for funds, obscuring diversion of funds, and being a front for terror organisations.
- R12: Politically exposed persons (PEPs) – measures to prevent PEPs from abusing their positions to commit money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing.
- R15: New Technologies – conducting money laundering and terrorist financing risk assessments before launching new products and business practices or using new or developing technologies.
- R17: Reliance on third parties – financial institutions should be required to implement programmes against money laundering and terrorist financing.
What government has been doing
The National Prosecuting Authority has worked hard to rack up the number of cases related to state capture, and institutions ranging from SARS to the Financial Intelligence Centre have been working to implement new measures to combat money laundering, Mavuso said.
KPMG noted that South Africa is unlikely to avoid the listing unless various actions are taken. According to the company, supervisory authorities have, since December 2021, submitted notifications asking accountable institutions to proceed with remedial actions according to the FATF.
James George, compliance manager at professional services group Compli-Serve SA, said that if the country was to be greylisted, it could be a much-needed ‘wake-up call’. Falling foul of the group could kick-start and accelerate much-needed reforms to counter fraud, corruption and terrorism financing in South Africa, he said.
Government has, however, been attempting to pass legislation in a flurry to avoid the listing. Finance minister Enoch Godongwana has tabled the Anti-Money Laundering and Combating Terrorism Financing Amendment Bill in Parliament.
Godongwana said that the bill seeks to strengthen the country’s Anti-Money Laundering and combat the Financing of Terrorism (AML/CFT) laws and makes significant changes to many relevant laws related to fighting against financial crimes.
“The proposed amendment of five pieces of legislation which are administered by different Ministers seeks to fully satisfy the technical compliance deficiencies (deficiencies relating to the adequacy of laws and legal frameworks related to the 40 FATF Recommendations) that were identified in the Mutual Evaluation Report.”
The South African Revenue Service (SARS) is also trialling a new method of seizing unexplained wealth and looking into the financial history of transactions between politically exposed people.
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