By Jemma Muller and Tyla Lee Coertzen
Despite the noteworthy progress South Africa has made in response to the deficiencies identified in the Financial Action Task Force’s (“FATF”) Mutual Evaluation Report released in June 2021, the FATF placed South Africa on the ‘grey-list’ on 24 February 2023.
In order to understand the consequences of being placed on the ‘grey-list’, it is important to differentiate between the ‘grey-list’ and the ‘black-list’. The former includes jurisdictions which will be subject to increased monitoring by the FATF and have expressly committed to resolving the deficiencies highlighted by the FATF within a specified period. The failure to remedy deficiencies identified by the FATF could result in financial or restrictive sanctions being imposed by other jurisdictions, or in certain circumstances could result in a jurisdiction being considered for placement on the black-list.
The ‘black-list’ includes high-risk jurisdictions which are flagged as having significant deficiencies in their regimes to tackle money laundering, terrorist financing and financing of proliferation. The consequences of being placed on the black-list are significant. In this regard, the FATF encourages jurisdictions to implore increased due diligence, and in certain circumstances, to utilize counter-measures, such as economic sanctions, to protect itself against the risks associated with money laundering, terrorist financing, and proliferation financing.
Along with the obvious reputational harm that results from being placed on the grey-list, the grey-listing has resulted in South Africa committing to the FATF to address the deficiencies identified by the FATF within an agreed period of time, being by the end of January 2025.
While being placed on the grey-list is not as significant as being placed on the black-list, the ease of doing business with international businesses will likely be affected. This is due to the fact that many international businesses often employ risk-based processes or measures when dealing with customers from jurisdictions placed on the grey-list.
Importantly, the FATF does not require enhanced due diligence standards to be applied to the jurisdictions placed on the grey-list, nor does it call for financial institutions to terminate relationships with certain clients to avoid the risk of doing business with them, rather than manage the risk (i.e., de-risking). Rather, it encourages jurisdictions to implore a risk-based approach, based on the information provided by the FATF in relation to the jurisdiction.
The FATF’s ‘Anti-money laundering and counter-terrorist financing measures South Africa Mutual Evaluation Report’ published in 2021 identified South Africa as being lacking in 20 of the 40 FATF Recommendations and further provided South Africa with a number Recommended Actions. As a result of the FATF’s findings, South Africa has sought to make significant strides in addressing weaknesses within its legal framework which affirms its commitment to compliance and cooperation with the FATF. Specifically, since the FATF announced South Africa’s potential grey-listing risk in late 2022, South Africa has instituted various measures aimed at improving its scorecard, including the enactment of the General Laws (Anti-Money Laundering and the Combating of Financing of Terrorism) Amendment Act as well as the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act. In addition, the South African Reserve Bank has committed itself to the fight against money laundering, terrorist financing and proliferation financing along with National Treasury.
The FATF has identified 8 broad deficiencies which have resulted in South Africa’s grey-listing. These deficiencies should provide South Africa with focus points for improvement within the time period prescribed by the FATF.
1. South Africa is lacking in making requests for mutual legal assistance requests that would assist it in facilitating money laundering and terrorist financing investigations and asset recovery.
2. South Africa must improve its risk-based supervision of ‘designated non-financial business and professionals’ (“DNFBPs”) and must demonstrate that all anti-money laundering and counter terrorist financing authorities place effective sanctions on these businesses and professionals for non-compliance. DNFBPs include among the following business and professionals: casinos, estate agents, practicing attorneys and notaries, accountants and auditors.
3. South Africa must seek to ensure that competent authorities are able to access updated beneficial ownership information on legal persons and arrangements (such as businesses and trusts) in order to effectively investigate money laundering and terrorist financing that takes place through these entities.
4. South Africa must demonstrate increases in law enforcement authorities’ information requests from the Financial Intelligence Centre in relation to money laundering and terrorist financing investigations.
5. South Africa must increase its investigations and prosecution of serious money laundering criminals.
6. South Africa must enhance its identification, seizure and confiscation of proceeds of money laundering and terrorist financing related crimes.
7. South Africa must develop and prepare for the implementation of a national counter terrorist financing strategy.
8. South Africa must develop and implement targeted financial sanctions and mechanisms to identify individuals and entities meeting the criteria for domestic designation.
Both the National Treasury and the South African Reserve Bank recognize the importance of addressing the deficiencies identified by the FATF. In a media release by the National Treasury dated 24 February 2023 (“NT media release”) it was stated that: “Government recognizes that addressing the action items will be in the interest of South Africa, and that doing so is consistent with our existing commitment to rebuild the institutions that were weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption.”
As recognized by the National Treasury, the long-term costs of allowing the South African economy to continue to be tainted by corruption and the proceeds of crime far outweigh the short-term cost of South Africa being placed under increased monitoring and scrutiny. Whilst being placed on the grey-list will have negative consequences for the South African economy in the short-term, it may very well be the incentive South African authorities need to address widely recognized short-comings in our terrorist financing and money laundering framework, the resolution of which will result in significant long-term benefits.
Michael-James Currie, Director of Primerio International notes “Following the informal, but predictable, grey-listing of South Africa by the FATF, the focus by South Africa should not be only on developing or bolstering new laws (which appears to Government’s primary response to deal with this) but primarily to strengthen enforcement efforts. Similar to the OECD Anti-Bribery Recommendations, South Africa has an advanced legislative framework but lack of meaningful enforcement. It is thus key that the following initiatives be taken on: the strengthening of the independence and capacity of dedicated anti-corruption agencies; the development of a non-trial resolution framework; and the chasing of illicitly appropriated assets (locally and internationally).”