FATF to Decide Gray Listing of South Africa

FATF will announce its decision regarding the graylisting of South Africa on 24th February 2023. If listed, the country will face potentially damaging consequences for the financial and business sectors.  

South Africa is widely regarded as the African financial hub. This is why the state and its private institutions must adhere to the global standards of governance and oversight in financial matters, particularly the implementation of AML (Anti-Money Laundering) and CFT (Counter Terrorism Financing) measures. 

According to the FATF’s comprehensive audit concluded in 2019 and subsequent MER (Mutual Evaluation Report) issued in October 2021, South Africa falls short of the global compliance due diligence standards. 

The MER details failures in due diligence operations and implementation of AML/CFT laws, holes in legislative and executive structures, pervasive corruption, and lack of staffing and training in key areas (including law enforcement).

The South African government as well as its private sector underestimated the scope even after understanding the risks posed by money laundering. 

The MER also highlights the understanding of terrorist financing threats is largely absent or at best, inadequate. A major factor is a sustained period of “State Capture” that South Africa has endured, compounded by a notable failure to identify perpetrators or initiate prosecutions. 

The inadequate risk profiling across various high-risk financial sectors with a high volume intensity of crime, especially financial crime is highlighted in the mutual evaluation report. The situation was worsened by a large informal economy and large quantities of undeclared cash and goods regularly crossing borders outside of regulated frameworks. 

The S&P Global Ratings, an American credit rating agency, also states that SA’s shortcomings to address the issue of State Capture and government efforts to conceal illicit border transactions are key factors in the FATF’s appraisal of the country’s deficiencies to counter financing of terrorism and money laundering across the region. 

If graylisted, South Africa will face severe consequences in terms of financial status and as a regional leader. IMF states that nations graylisted by FATF typically suffer a 7.68% average net loss of capital. Foreign investment also deteriorated after graylisting and South Africa stands to face direct investment shrinkage as a consequence. 

Other African countries already on the FATF graylist include Uganda, Tanzania, Mozambique, DRC, Senegal, Mali, South Sudan, Burkina Faso and Morocco. 

Following the FATF MER, South Africa had an 18-month period of grace within which the shortcomings needed to be addressed to prevent graylisting. The president signed two key pieces of legislation in December 2022, including the General laws (AML/CFT) Amendment Act No 22 of 2022, and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act No 23 of 2022.

On 13th January 2023, a high-profile delegation led by Director General, National Treasury, Ismail Momoniat, met FATF’s joint group in Rabat, Morocco to present a summary of progress made by SA in addressing the deficiencies identified in the MER. 

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