The Financial Action Task Force (FATF) conducted a Mutual Evaluation Assessment on South Africa and found that the country has poor legal, regulatory, and operational measures for combating money laundering and terrorist financing.
These findings have placed South Africa at risk of being grey-listed by the FATF.
During Nedbank’s Annual Treasurers’ Conference held at the Houghton Hotel in Johannesburg, Anti-Money Laundering specialist Ofentse Alec Theledi outlined South Africa’s strategic deficiencies regarding FATFs findings and the implications a grey-listing would have on the country’s economy.
Theledi has held several senior management positions within the banking industry and is an expert in money laundering and financial terrorism control implementations, risk management, and investigations.
His presentation on FATF’s final report, key findings, and the potential risks South Africa faces if grey-listed are summarised below.
FATF’s final report painted South Africa in a poor light
FATF is an international body for setting standards and promoting effective implementation of legal and operational measures for combating money laundering, terrorist financing, and proliferating financing of weapons of mass destruction.
South Africa has been a member of FATF since 2003 and underwent a Mutual Evaluation Assessment by the FAFT in 2019.
The evaluation comprises 40 recommendations, which assess whether South Africa’s anti-money laundering (AML) and counter-financing terrorism (CFT) systems are effective compared to international standards.
The assessment was conducted by an onsite FATF team that visited South Africa. They interviewed stakeholders who play a role in the functioning of the AML and CFT systems, including the Financial Intelligence Centre (FIC), government departments and agencies, the SARB, major banks, casinos, and legal firms.
Of the 40 recommendations, 50% were considered non-compliant or partially compliant, and the remaining 50% were rated as largely compliant or compliant.
The main non-compliant recommendations were:
- 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.
The FATF also considered the country’s effectiveness in implementing its measures against money laundering and terrorist financing by assessing 11 Immediate Outcomes (IO).
South Africa demonstrated moderately poor to very poor levels of effectiveness.
The following table shows the ratings of these immediate outcomes:
|Risk policy and coordination||moderately poor|
|International coordination||moderately poor|
|Preventative measures||moderately poor|
|Beneficial ownership of legal persons and arrangements||very poor|
|Use of FIC investigations||moderately poor|
|Money laundering investigations and prosecution||moderately poor|
|Terrorist financing investigations and prosecution||very poor|
|Terrorist financing preventative measures and financial sanctions||very poor|
|Proliferating financing sanctions||moderately poor|
The key findings as a result of the Mutual Evaluation report
The FATF ME report of South Africa was published on 7 October 2021 and concluded the following:
- The essential authorities consistently understand the main domestic money laundering threats, but an understanding of the relative scale, money laundering vulnerabilities, and threats from foreign predicates are limited.
- South Africa suffered a sustained period of State Capture, which generated substantial corruption proceeds and disabled critical agencies tasked with combating such activity.
- Law Enforcement Agencies lack the skill and resources to proactively investigate money laundering and terrorist financing and trace criminal assets.
- Money laundering cases related to State Capture have not been sufficiently pursued.
- The ability to recover cash proceeds of crime and confiscate undeclared cross-border movement of currency needs substantial improvement.
- Targeted Financial Sanctions (TFS) are not used to fight terrorism.
Due to these findings, South Africa is currently in an observation period in which the country will need to address the deficiencies regarding FATFs conclusions and produce a progress report by the end of October 2022.
If the FATF is dissatisfied with the country’s progress in addressing all the weak spots, South Africa will be grey-listed in February 2023.
The potential risks of being Grey-listed
If a greylisting materialises, South Africa would be deemed to pose a much higher risk of money laundering, terrorist financing, and proliferation and could face the following consequences:
- High-risk classification by the US and UK
- Downgrade in investment grade ratings
- potential de-investment
- Increased monitoring by the FATF
- Adverse economic effects on trade and transactions
- Impact on correspondent banking relationships
- Possible restrictions on the US, UK, and EU banks from transacting with South African banks.
Despite these potential consequences, Fitch Ratings head of Europe, Middle East, and Africa (EMEA) Sovereign ratings Jan Friederich has said that while South Africa is at risk of being greylisted, the effects of such a listing would be minimal.
“From our perspective, it would be unlikely that such a greylisting will have an impact that is sufficient to change South Africa’s rating. This is because the government is already in the process of avoiding the greylisting by considering FATFs findings,” said Friederich.
“Even if the greylisting were to occur, it would be for a short period and not enough to have a major effect on the country’s economy,” he added.