85% chance of South Africa being grey listed – with potentially severe impact

Business Leadership South Africa’s (BLSA’s) independent report on the prospect of South Africa being grey listed by the Financial Action Task Force reveals a high chance of it happening.

The report, by researchers Intellidex, puts the probability of grey listing at 85% come the FATF plenary in February next year.

The economic impact of grey listing could be limited or severe depending on how South Africa reacts to it.

The researchers estimate the impact at under 1% of GDP if we act with alacrity to 3% of GDP if South Africa is perceived to be slow and unwilling to meet the standards set by FATF.

The economic impact is primarily from the increase in cross-border payment transaction costs and the general reputational impact.

Financial firms worldwide, including banks, will be required to apply enhanced due diligence to any South African client.

It would mean a more invasive and extensive process of assessing the source of funds and the integrity of clients.

While the specific requirements vary between jurisdictions, the United Kingdom and European Union require banks to apply enhanced due diligence to any grey-listed country.

As a result of this increased compliance burden, some firms may elect not to do business with any South African company or individual to reduce costs and compliance risks.

Longer term reputational effects will lead to a reduced appetite for investment exposure to South Africa. Grey listing will also complicate access to bilateral and multilateral development funding.

The economic impact will depend substantially on how seriously South Africa is perceived to be working toward FATF compliance.

If the remaining institutional fixes are being addressed with urgency, global counterparts will be more willing to maintain their relationships with South African clients.

However, if South Africa is perceived to be grey listed for an extended period, counterparts will gradually reduce exposure to existing South African clients while refusing to enter new relationships.

In the view of the authors, there are three critical areas where South Africa has struggled to reach the required levels of compliance.

• The gathering and dissemination of data regarding beneficial owners of trusts and companies. While legislation to this effect is progressing, and the Companies and Intellectual Property Commission has begun preparing to capture such information, the masters’ offices of the high courts have not made progress on an equivalent process for trusts.

• The Directorate for Priority Crime Investigation (the “Hawks”) have made minimal progress in building the capacity to investigate money laundering and terrorist financing, and other commercial crime.

• The Financial Intelligence Centre is envisaged to take on additional supervision responsibilities for the money laundering and terrorist financing oversight of non-financial institutions, including real estate agents, attorney firms, Krugerrand dealers and others. While the legislation to give effect to this is in progress, the additional budgets and resourcing still need to be developed.

Many other areas have seen significant progress, including the enrolment of 29 prosecutions related to state capture and freezing orders of over R5.5 billion.

The SA Reserve Bank and Financial Services Conduct Authority have both implemented new supervision processes to comply with FATF.

There have been impressive joint programmes to improve the investigation of corruption between the NPA, DPCI, FIC, SARS and other elements of the criminal justice system.

To limit the damage grey listing will have on the economy, the report recommends:

• The Presidency set up an internal task team to lead the government response to grey listing, working with the Inter-Departmental Committee assembled by National Treasury.

• Private sector companies and individuals must prepare for the enhanced due diligence that will accompany grey listing. They should engage foreign service providers to establish how their risk rating is affected by grey listing and what enhanced due diligence measures will be taken.