Is the Republic of South Africa on the watchdog’s grey-list chopping block?
By Jemma Muller and Tyla Lee Coertzen
The risk of South Africa being placed on the Financial Action Task Force’s (“FATF”) so-called “grey list” has been the subject of much debate and speculation, as well as a focal point for South African law enforcement authorities.
The FATF is an international body that assesses countries and provides guidance on measures that are lacking and can be improved on in order to combat illicit financial flows. The grey list is a global list of countries identified by the FATF as being at a high risk for money-laundering and terrorism financing. It is essentially an external reference used to describe jurisdictions that have been subject to increased monitoring and who are actively working with the FATF to tackle inadequacies in their respective regimes to combat money laundering and terrorism financing.
If placed under increased monitoring (i.e., if the country is added to the grey list), that country commits itself to expeditiously resolving the identified inadequacies within specific time frames. Their progress in this regard is closely monitored by the FATF.
South Africa has been a member of the FATF since 2003, which means that the FATF continuously monitors whether South Africa is compliant with its standards. In this regard, according to the ‘Anti-money laundering and counter-terrorist financing measures South Africa Mutual Evaluation Report’ published in 2021 (“the Report”), South Africa was found to be lacking in a substantial number of FATF recommendations. Some of the key findings of the Report include the following:
- While South African law enforcement authorities have a good understanding of money laundering, we have a limited understanding of the scale of money laundering crime threats, the weaknesses of our money-laundering legal framework, and the risks from a foreign perspective. In addition, South Africa has a limited understanding of the risks of terrorist financing.
- The effects of state capture still persist. Additionally, successful prosecutions and recovery of assets in relation to these cases are lacking.
- While South Africa arguably has a strong legal framework in which to tackle money laundering and terrorist financing, our law enforcement agencies do not have sufficient skills nor adequate resources to effectively investigate and prosecute such cases.
- An area of particular concern is South Africa’s ability to detect and confiscate illegal cross-border cash flows.
- Various high-risk sectors (including, inter alia, company service providers) rarely adhere to suspicious reporting obligations.
- South Africa needs to improve market entry screening to increase the detection of potential criminality.
- Improvements are needed in the mutual legal assistance provided by South Africa as well as the frequency within which South Africa utilizes the opportunity to request mutual legal assistance from foreign jurisdictions.
The FATF is set to make a final decision in early 2023 as to whether South Africa should be placed on the grey list. Importantly, if South Africa is placed on the grey list, there are various wide-ranging consequences both for the public and private sector. From the private sector’s point of view, the cost of doing business for South African companies with foreign entities will likely be increased. We say so as it will likely result in more stringent due diligence requirements and could possibly deter foreign entities’ from doing business in South Africa. With regards to the public sector, aside from the reputational harm of being placed on the grey list, South Africa could face increased scrutiny from international bodies (such as, inter alia, the International Monetary Fund, the World Bank and the African Development Bank) as well as economic sanctions and a reduction in trade.
While South Africa has made significant strides in improving its ability to detect, prosecute and recover proceeds of crime (as is evident by the National Prosecuting Authority’s recent efforts to prosecute high profile State Capture cases), there is significant room for improvement. As highlighted above, the consequences of being placed on the grey list are not insignificant, however, the very real possibility that South Africa will be placed on the list may be the incentive our law enforcement authorities need to address the present inadequacies.