South Africa is Greylisted by FATF
The recent announcement by the Financial Action Task Force (FATF) that SA has been greylisted and will be subject to increased monitoring is likely to have serious repercussions for the country’s links to global financial systems.
Being placed on the greylist means that SA has committed to swiftly resolve the strategic deficiencies identified by the FATF when it assessed the country’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) systems in November 2019 and after its follow-up Mutual Evaluation Report in 2021. Some of these deficiencies include the state’s weakness in enforcing its legal framework and failure to prosecute serious cases relating to money laundering and terrorism financing.
Here are some key insights regarding what the greylisting means for your business and what your clients need to know in relation to their investments.
This is a topic we been keeping an eye on for a while so as to fully understand its impact on advisers and their clients. In August 2022, our Head of Product and Communications, Jennifer Anderson, caught up with STANLIB Group’s Chief Compliance Officer, Njabulo Duma, to discuss greylisting in depth. Follow the link below for a recording of the webinar and to gain a deeper understanding of the situtation.
What are the likely macroeconomic consequences of the greylisting?
- The country is already deemed to pose a much higher money laundering and terrorist financing risk by the EU, UK, and US, and will likely be on the EU and UK blacklists. When Botswana was greylisted, it was automatically put on the EU’s list of non-cooperative jurisdictions and the UK’s list of high-risk countries. As a result, institutions like the IMF and World Bank may take a dim view of SA.
- In other jurisdictions, greylisting had a negative impact on GDP. The cumbersome requirements of being a high-risk jurisdiction are expected to result in a decline in foreign direct investment in the short to medium term. Pakistan, the economy of which is similar in size to ours, lost an estimated R600 billion of economic activity in 2018 and 2019 as a result of greylisting.
- Development Finance Institutions will add a risk premium to their loan terms to SA, which will increase the cost of capital.
- Access to international trade and financial systems may be constrained, specifically in the UK, US, and Europe. The internal regulatory requirements of these jurisdictions insist on enhanced due diligence for all entities and transactions originating from countries on a greylist.
- Financial markets are likely to react negatively to this announcement. The extent of that reaction will be determined by how much it has already been priced in.
What is the expected impact on ordinary investors?
Offshore investment providers will be expected by their own regulatory authorities to be strict about accepting the risk of South African-originated transactions. This may result in:
- Delays in the execution of offshore transactions going forward.
- Requests for information and documents that you would not ordinarily have provided to offshore investment providers and/or had to provide in past engagements since additional caution (and onerous due diligence processes) will be entailed in dealing with South African investors.
- Investors may be required to ensure all the information they provide is verified/verifiable, and provide recent certification of documents. If documents were issued by South African institutions, offshore providers will have to invest in processes to verify them.
- Additional costs, both in processes and risk premiums, will be incurred by offshore investment providers and are likely to be passed onto investors.
Will my clients’ INN8 offshore investments be affected?
The INN8 Offshore Investment Platform is Jersey-domiciled, and all onboarding requirements already comply with Jersey’s AML/CFT legislation. We therefore doubt whether your clients will experience much inconvenience as a result of the greylisting. Enhanced due diligence may be triggered on certain investors, but we already do this.
What is the potential impact on my business?
- For those firms with international partners or counterparties, the additional requirements may lead to difficulty in doing business and additional costs as mentioned above.
- This may impact the profits of the business.
What will it take to get off the grey list, and how long is this expected to take?
SA will need to address the strategic deficiencies in its AML/CFT framework identified by the FATF. The FATF will also need to be confident of SA’s capacity to deliver accountability for state capture crimes and to recoup the funds looted from state institutions by guilty parties.
We are hopeful that a sustained, united, rigorous, and coordinated effort by the relevant stakeholders will remediate SA’s shortcomings and result in its swift removal from the greylist. However, this is not guaranteed and we encourage advisers to prepare for the possibility of a longer remediation period.
Key points in this article
- INN8’s greylisting webinar
- Macroeconomic consequences
- Impact on investors
- INN8 offshore investment platform
- Impact on business
- What’s next for South Africa