South Africa running out of time

South Africa is nearing its deadline for being removed from the Financial Action Task Force’s (FATF) greylist, and missing the deadline could have disastrous consequences for the country.

The South African Reserve Bank (SARB) recently included remaining on the FATF greylist over the medium term on its Risks and Vulnerabilities Matrix (RVM).

The RVM provides a forward-looking assessment of the key risks to financial stability in South Africa over the short, medium and longer term. 

In its latest RVM, the SARB included risks like escalating global conflicts, critical infrastructure failure, and deteriorating public sector debt ratios.

Among these serious risks, remaining on the grey list may seem less threatening to the country’s outlook.

However, Momentum Investments chief economist Sanisha Packirisamy said remaining on the greylist would escalate the adverse impacts that come with being on the list.

For background, the FATF is an international body that sets standards for combating money laundering and terrorist financing.

In February 2023, the FATF officially ‘greylisted’ South Africa, meaning the country was identified as a jurisdiction under increased monitoring due to deficiencies in its measures to combat financial crimes.

This came after a 2021 FATF mutual evaluation report highlighted significant gaps in South Africa’s ability to investigate and prosecute money laundering, corruption, and terrorism financing cases.

The regulatory body pointed to weak enforcement of existing laws and limited convictions in high-profile corruption cases, particularly those linked to state capture, as key concerns for South Africa.

In addition, the FATF said shortcomings in regulatory oversight of non-financial businesses, trusts, and beneficial ownership transparency also contributed.

The FATF has a list of 40 recommendations, where members are expected to achieve satisfactory levels of compliance. 

As per the 2021 report, South Africa had five areas out of this 40 of non-compliance, 15 areas of partial compliance, 17 areas of being largely compliant and three areas of being fully compliant. 

South Africa was then given time to address these concerns. However, it couldn’t do so adequately in the time given and was subsequently added to the greylist on 24 February 2023. 

When it was first announced that the country was greylisted, the FATF gave South Africa until January 2025 to comply with all of the requirements.  

Upon this announcement, the government committed to addressing the FATF’s recommendations and getting off the greylist as soon as possible.

Finance Minister Enoch Godongwana spearheaded efforts to introduce legislative reforms, including amendments to anti-money laundering and anti-terrorist financing laws.

Godongwana said in March 2023 that South Africa could be removed from the greylist by the middle of 2024.

That would have made South Africa the second fastest country ever to be removed from the greylist.

For the most part, Godongwana and the rest of the government’s efforts paid off. In October 2023, FATF conducted an exercise to determine the country’s progress since being added to the greylist. 

It found that South Africa has made significant progress in addressing most of the concerns.

Most notably, no areas of non-compliance were identified, and the areas of partial compliance decreased from 15 in the previous report to only five in the latest progress report. 

However, despite this solid progress, the government’s self-imposed deadline of mid-2024 came and went, with South Africa remaining on the greylist.

Therefore, South Africa now has until February 2025 – the FATF’s deadline – to address key concerns and get off the greylist. 

Packirisamy said South Africa has progressed with addressing the outstanding action items, with only six of the 22 items left to address. 

Of the six items, three relate to prosecutions, and the other three relate to access to beneficial ownership information for companies and trusts. 

However, despite the significant progress South Africa has made, it may not be enough to ensure the country is removed from the list come February next year.

Recently, Deputy Finance Minister David Masondo said that South Africa will likely not get off the list soon, and October 2025 is the most realistic timeline for achieving this.

“We are just being realistic given what we know and what we still need to do,” Masondo told Business Day.

Packirisamy said this could present significant problems for the country. 

She warned that if South Africa is not successful in being removed from the greylist in June 2025, the adverse impacts will escalate.

This could include –

• Increased compliance costs
• Restrictions to the global financial system
• Higher funding costs
• Fewer and more expensive hedging opportunities
• Loss of regulatory equivalence status.

These negative consequences would hold South Africa back significantly and make doing business in the country much more difficult.

“To be globally competitive, the cost of doing business must come down, but greylisting leads to higher transactions because of the enhanced due diligence that’s required,” Masondo told Business Day.