How we ended up facing possible greylisting by the Financial Action Task Force

Over the last few months, the possible greylisting of South Africa by the Financial Action Task Force has been headlining the news. Ofentse Theledi who is the Head AML/CFT and Sanctions at Nedbank, unpacked what this means at Nedgroup Investment’s 11 Annual Treasurers Conference in August. 

Since 2003, South Africa has been a member of the Financial Action Task Force (FATF) which is an international body for setting standards and promoting effective implementation of legal and operational measures for combating money laundering, terrorist financing and proliferating financing of weapons of mass destruction. In 2019, South Africa underwent a mutual evaluation by the FATF to assess the effectiveness of the country’s anti-money laundering and counter financing of terrorism system. 

“The outcome of the final report which was concluded on the 7th October 2021 didn’t place South Africa in good light. A lot of findings were made in terms of how we are measuring up against the 40 FATF recommendations. How FATF measures this is through an technical compliance and effectiveness implementation”, Theledi said. 

Theledi shared the 40 recommendations from FATF. The FATF considered the 40 FATF recommendations of which 50% were rated non-compliant (NC) or partially compliant (PC) with the remaining 50% rated as Largely compliant / Compliant for South Africa. The country’s effectiveness of policies and laws was also measured by utilising the FATF identified 11 Immediate Outcomes (IOs). None of the outcomes were found to be operating effectively and most of them received a low to moderate levels of effectiveness. 

“What this means is that South Africa has been placed in a period of observation which ends in October 2022. The country will be expected to produce a progress report by end of December 2022 which needs to show how the country has stacked up against the recommendations and action items that came out of the assessment. Post that, a decision will be made in February 2023 to determine whether South Africa has made significant improvements in remediating the findings”, he added. 

The key findings of the report were that although South Africa displays an understanding of the money laundering threats from a domestic perspective, the understanding of the vulnerability scale from a foreign perspective is limited. South Africa’s law enforcement agencies were found to be wanting from a skillset and competency level in relation to investigating money laundering and terrorist financing cases. 

“It wasn’t a surprise that State Capture featured in the report, and the concern was that although the case was in the public domain for quite some time, the investigation of money laundering cases in relation to State Capture was not sufficient. This obviously raises questions on South Africa’s ability to prosecute such matters”, Theledi said. Other findings from the report included an assessment on the country’s Targeted Financial Sanctions regime which was found to be lacking. The larger banks were found to have a developed understanding of money laundering risks and to have put adequate measures to mitigate such risks. They were also found to be reporting well on suspicious transactions. However, smaller institutions and non-banking institutions were not found to be reporting risks sufficiently and as expected by FATF. 

If a grey listing materialises, South Africa would be deemed to pose a much higher money laundering, terrorist financing and proliferation risk, and could face the following consequences: 

• High risk classification by the EU and UK 
• Downgrade in investment grade ratings 
• Potential de-investment 
• Increased monitoring by FATF 
• Adverse economic consequences for trade & transactions 
• Impacts to correspondent banking relationships, and possible restrictions on banks in the US, UK & EU from transacting with South African banks. 

“The implications of this are that global correspondent banks and other intermediary financial institutions involved in transactions with South African entities are likely to demand a higher level of due diligence and may reprice businesses, or as a last report, de-risk South African exposures. Clearly this is something we need to work to avoid,” says Theledi.