STUART THEOBALD: SA needs a clear plan to deal with potential greylisting

Posted in: i-Blog, Intellidex in the media, Newsletter articles on Jun 6, 2022


We are drifting with apparent indifference into being greylisted by the global money laundering and terrorist financing watchdog FATF (which stands for the somewhat Hollywoodesque “Financial Action Task Force”). This would eliminate medium-term economic growth completely, and almost no-one seems to be worrying about it.

The consequences of grey-listing will be dramatic. Every counterpart across the world will have to apply a higher level of due diligence to SA businesses. International banks will add another layer of bureaucracy to engagements with South Africans. International aid funders such as the World Bank and EU will apply additional restrictions on support to SA. The IMF often specifies FATF compliance for access to funding.

SA would join other countries such as Pakistan, Nicaragua, Cayman Islands and the United Arab Emirates that are greylisted. A study last year on Pakistan, which has an economy roughly the same size as SA, estimated its greylisting from 2012 to 2015 cost the economy $13.4bn (R208bn), and GDP took some time to recover after. All sectors of the economy were hit, with declines in local investment, exports and inward foreign direct investment. If SA were to experience similar effects as Pakistan, it would amount to one to two percentage points being wiped off GDP — effectively removing the growth currently being forecast for the measure.

In May, the Reserve Bank sounded the alarm about the risks of FATF greylisting, citing it as a new risk to financial stability. Its semi-annual Financial Stability Review said greylisting would lead to higher costs for domestic banks and reputational damage to SA’s financial system, with consequences for the currency and for capital flows. It rated the likelihood of greylisting as “high”.

The FATF put SA on notice in 2021 after a “mutual evaluation” of the country’s compliance with the FATF’s anti-money-laundering and terrorist financing rules. I wrote at the time that the peer review report contained serious criticism of how SA identifies and prosecutes money laundering and terrorist financing. While the Financial Intelligence Centre Act has established a central point that banks and other institutions must submit information to, this information is not systematically used in prosecutions.

The FATF also bemoaned the lack of focus on money laundering itself — instead, illicit financial flows are only targeted when they are the consequence of some other crime (such as corruption). The problems are much related to the destruction of commercial crime investigation and prosecution during the state capture years. The FATF, however, is running out of patience with the efforts to recover capacity.

A one-year observation period kicked off in October 2021, during which SA must demonstrate substantial progress in meeting a list of 17 “priority actions” that the FATF says must be taken. Those range from providing the Hawks with more forensic investigators, to ensuring that attorneys and estate agents are better monitored for money-laundering and terrorist financing risks. Come October 2022, the FATF will examine SA’s progress in delivering on the priority actions. If it is not satisfied, SA will be greylisted at the FATF plenary in February 2023.

When the mutual evaluation report was published, a response team was hastily assembled under the guidance of the National Treasury, reporting to the cabinet. The Treasury said at the time:  “The government is fully committed to implementing the recommendations contained in the report, and strengthening the entire system for investigating financial crimes, including the fight against corruption.” But so far there has been little evidence that the issues raised by the FATF are being rigorously dealt with.

The challenge of course is that many fall outside Treasury’s reach, particularly the criminal justice system. Quite apart from the FATF, the pressure on the National Prosecuting Authority to deal rigorously with the long list of corruption cases stemming from state capture has been immense, and it has struggled to rise to the task. Similarly, commercial crime investigations have also struggled from a lack of resources.

Should SA be greylisted, it will be important to have a clear plan to escape from it quickly. Mauritius and Botswana both exited the grey list in 2021. Mauritius had been on it for a year and Botswana for four years. Having a clear plan is a signal to international counterparts that greylisting is temporary and it is worth their effort to maintain relationships in the interim. As it stands, SA would struggle to give counterparts that sort of confidence. Indeed, so far SA seems quite indifferent.

The whole country has been crying out for improvements in the criminal justice system, and the voice of international counterparts is now loud too. The FATF was created after the September 11 terrorist attacks to ensure global monetary systems are not used to finance terrorism or launder the proceeds of crime. State capture actively undermined corruption investigation and prosecution. While the financial system did stand firm, the world is losing confidence that it cannot be abused again.

• Theobald is chairman of research-led consulting firm Intellidex. This article first appeared in Business Day. 

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