Failure to avoid FATF’s ‘grey list’ poses a risk to the stability of SA’s financial system

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The South African Reserve Bank (SARB) has identified the potential of an unfavourable outcome of the Financial Action Task Force’s Mutual Evaluation of South Africa as a threat to the stability of the country’s financial system.

Read: Clock is ticking for SA to avert something ‘worse than junk status’

The FATF is an international body that promotes policies and standards for combating money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction.

It gave South Africa until October to remedy deficiencies in how it combats money laundering and terrorism financing after identifying significant weaknesses in parts of the country’s anti-money laundering and counter terrorism financing system.

If South Africa fails to demonstrate sufficient progress in addressing the deficiencies identified in the FATF mutual evaluation report by October 2022, the FATF will recommend that South Africa is publicly identified as a jurisdiction that is subjected to increased monitoring by the FATF. The country will be placed on the FATF’s so-called grey list.

The grey list names the countries that are under increased monitoring but are working to resolve the identified deficiencies. Countries on this list include Pakistan, Myanmar, South Sudan and Syria.

If the FATF believes South Africa hasn’t made satisfactory progress by October, it could be placed on the grey list in February 2023.

The FATF’s blacklist names the countries it judges to be non-co-operative in the global fight against money laundering and terrorist financing. Countries on this list include Iran and North Korea.

In its first Financial Stability Review of 2022, the SARB said an unfavourable outcome of the FATF’s Mutual Evaluation poses the following risks:

  • Higher transactional, administrative and funding costs for domestic banks;
  • Restrictions on cross-border transactions, which will affect imports and exports, leading to a decline in GDP;
  • Reputational damage to South Africa’s financial system, which could have negative capital and currency implications; and
  • The inability of South African banks to maintain correspondent banking relationships with offshore institutions.

The SARB said the government-led interdepartmental committee on anti-money laundering, counter financing of terrorism and counter financing of proliferation has drawn up a co-ordinated response to address the deficiencies identified by the FATF. However, there was a risk that the mitigating actions may not be implemented timeously.

Implications for consumers

Commenting on the prospect of South Africa being placed on the grey list, Morné Bezuidenhout, a director and wealth manager at Netto Invest, wrote in Business Day:

“Being added to some list of yet another initialled organisation in distant Europe may not seem like that much of a big deal for the average South African but think again. Word out there is that this could have far more of an impact than the junk status applied by the ratings agencies.

“[…] In February, FIC director Xolisile Khanyile warned that no investor would risk bringing money into a country that has been grey-listed, so the implication would be a drop in foreign direct investment, leading to a knock-on effect on economic growth and, consequently, the financial well-being of South Africans.

“As consumers, we can expect:

  • Investment choice to be more limited, as some financial institutions may not want to transact with us;
  • Increased compliance costs which could be passed onto you; and
  • Increased administrative burden (paperwork) due to additional due diligence.”