South Africa is at risk of being greylisted by the Financial Action Task Force (FATF), which can have severe economic consequences for the country.
The FATF is the global money laundering and terrorist financing watchdog which sets standards to prevent illegal activities that harm society.
More than 200 countries and jurisdictions are committed to implementing the standards proposed by the inter-governmental FATF.
The FATF maintains two lists of countries based on their risk profiles:
- High-Risk Jurisdictions subject to a Call for Action (Blacklist) – Countries that are deficient in their anti-money laundering and counter-financing of terrorism regulatory regimes.
- Jurisdictions Under Increased Monitoring (Greylist) – Countries with a higher risk of money laundering and terrorism financing but have committed to work with the FATF to develop action plans to address their deficiencies.
Iran and North Korea are on the FATF blacklist, while the greylist contains 24 countries, including Cambodia, Haiti, Pakistan, Panama, Uganda, and Zimbabwe.
South Africa is at risk of being included in the FATF greylist unless they implement measures to address its deficiencies.
The FATF found that South Africa is exposed to the laundering of domestic crime proceeds and foreign crime proceeds from the region.
It is also exposed to terrorism financing risks associated with foreign terrorism, foreign terrorist fighters, and potential domestic terrorism.
“South Africa needs to pursue money laundering and terrorist financing in line with its risk profile, including “State Capture”, the corruption practices involving businesses and politicians conspiring to influence South Africa’s decision-making process to advance their own interests,” the FATF said.
“It helped generate substantial corruption proceeds and undermined key agencies with roles to combat such activity.”
South Africa has started to address the situation, but much more must be done to avoid greylisting.
The FATF said law enforcement agencies lack the skills and resources to proactively investigate money laundering or terrorist financing.
“Proactive identification and investigation of laundering networks and professional enablers is not really occurring,” it said.
South African authorities have also struggled to recover assets from ‘State Capture’ and proceeds that moved to other countries.
Other problems include detecting and recovering cash proceeds of crime and preventing false or undeclared cross-border currency movements.
What happens when a country is greylisted
When the FATF places a country on its grey list, it is subject to increased monitoring which either assesses them directly or uses regional bodies to report on their progress to address deficiencies.
Greylisted countries face economic sanctions from institutions like the International Monetary Fund (IMF) and the World Bank and experience adverse effects on trade.
Unless South Africa demonstrates sufficient progress to address its deficiencies by October 2022, it faces being placed on the FATF greylist in February 2023.
David Noon, commercial director at Capital International, warned that being greylisted will significantly impact our international risk profile.
It will negatively affect trade between South African financial institutions and their overseas counterparts.
Other potential impacts include a decline in foreign investment and possible de-risking, where banks end relationships with clients based in high-risk jurisdictions.
Standard Bank CEO Sim Tshabalala said if South Africa is greylisted, the rand will weaken, and inflation and interest rates will spike.
Tshabalala said being greylisted is worse than a downgrade by ratings agencies, which South Africa cannot afford.
“I am deeply concerned about the negative impact of a FATF greylisting. Unless we act, South Africa will become a financial pariah,” he said.
Stuart Theobald, Intellidex co-founder and chairman, shares Tshabalala’s concerns around a FATF greylisting.
“It would completely eliminate South Africa’s medium-term economic growth, and almost no one seems to be worrying about it,” he said.
Theobald warned that the consequences of being greylisting would be dramatic.
“Every counterpart across the world will have to apply a higher level of due diligence to South African businesses,” he said.
International banks, for example, will add another layer of bureaucracy to engage with South Africans.
International funders like the World Bank and the European Union will apply additional restrictions to support South Africa, and the IMF often requires FATF compliance for access to funding.
The economic impact of a FATF greylisting
Pakistan, which has appeared on the FATF greylist numerous times since 2008, provides a good case study on the impact of being greylisted.
Texas A&M University-San Antonio senior research associate, Dr Naafey Sardar, assessed the impact of the FATF greylisting on Pakistan’s economy.
Sardar found that the FATF greylisting from 2008 to 2019 may have resulted in cumulative GDP losses of $38 billion to Pakistan.
Pakistan had a GDP of approximately $264 billion in 2020, similar to South Africa’s GDP of $302 billion in the same year.
The decline in Pakistan’s GDP was driven by a reduction in consumption expenditures, exports, and foreign direct investment.
The economy saw strong GDP growth when the FATF took Pakistan off its grey list in 2015. It confirms the impact of being greylisted.
When the country was placed back on the greylist in June 2018, the impact was severe. It wiped out most of its GDP gains from the first half of 2018, followed by a staggering $10 billion loss in 2019.
The chart below shows the impact on Pakistan’s GDP growth after being placed on the FATF grey list in June 2018.
Pakistan’s foreign direct investment (FDI) – offshore investments in the country – took a particularly big knock after the announcement of a greylisting.
Pakistan’s FDI plummeted to its lowest level as investors looked for safer countries to put their money.
Another interesting consideration is the accelerated deterioration of the Pakistani Rupee (PKR) to the USD from the beginning of 2018.
It could be a result of an outflow of capital, a lack of FDI, and investors avoiding holding the Pakistani Rupee.
Pakistan started facing significant inflationary pressures in 2018, mainly due to high import costs relative to exports.
It was followed by an aggressive interest rate hiking cycle interrupted by the Covid-19 pandemic.
In 2018, Moody’s and Fitch gave Pakistan B3 and B ratings, respectively, unchanged from before. However, they both gave a negative outlook, downgraded from a stable outlook.
It is not possible to prove that all these indicators were caused by the FATF greylisting of Pakistan.
However, it is highly likely that the greylisting significantly impacted the country’s economy and stalled GDP growth.
This data shows that South Africa should not risk being placed on the FATF’s Jurisdictions Under Increased Monitoring (grey list), as the economic consequences could be devastating.