What greylisting entails and what it means for south africa’s economy
What greylisting entails and what it means for south africas economy
Financial crime is a serious concern for many countries around the world as it threatens the safety and soundness of financial systems world-wide. In the effort to combat money laundering, terrorism financing and other financial crimes, international organizations such as the Financial Action Task Force (FATF) and the European Union (EU) have established a set of standards that countries are expected to meet. Failure to meet these standards can result in a country being greylisted, which has significant implications for the economy. For a country to be declared greylisted, it is placed under valuation by the Financial Action Task Force (FATF).
Essentially, what greylisting means is that a country has been recognized as having compliance issues but has committed to address strategic inadequacies to counter money laundering and terrorist financing within a given timeframe. When a country has been put onto the grey list, the country is monitored by the FATF and strict regulations are imposed on them. When a country is greylisted, it means that its government has adopted an action plan or strategy to address its deficiencies identified during its mutual evaluation after an observation period, and to implement such an action plan within a defined time period, and with FATF monitoring such implementation. The implications of being placed onto the grey list is an indication that a country faces serious potential problems such as a subsequent shrinking economy, a downgrade of ratings, and a lack of trade opportunities.
What greylisting entails and what it means for south africas economy
What greylisting entails and what it means for south africas economy
What is greylisting ?
The Financial Action Task Force (FATF) is an inter-governmental body that supervises money laundering and terrorist financing around the globe. It also finances the proliferation of weapons of mass destruction. The purpose of the FATF is to prevent these illegal activities and the harm they cause to society from transpiring. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. A country may be greylisted for a variety of reasons:
- Lack of Adequate Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Measures. Countries are expected to have effective AML/CTF measures in place to prevent money laundering, terrorism financing and other financial crimes. If a country is found to have insufficient measures, it may be greylisted.
- Insufficient Cooperation with other countries. Countries are expected to cooperate with each other in combatting financial crimes. If a country is found to be uncooperative, it may be greylisted.
- Presence of high-risk industries. Countries with high-risk industries for financial crimes, such as casinos, may be more likely to the greylisted.
- Lack of political will. In some cases, a country may lack the political will to enact and enforce the necessary AML/CTF measures.
In 2021, the FATF conducted a mutual valuation which was concluded in October 2021. The valuation found holes in South Africa’s strategic systems to combat money laundering and terrorist financing. This was due to low levels of transparency and inadequate internal capabilities and systems, which led South Africa to be placed under review by the FATF and on the brink of being greylisted. South Africa found itself on a verge of being greylisted largely due to the collapse of commercial crime investigation and prosecution during the State capture period. South Africa is facing the consequences for its failure to implement effective prosecutions for crimes like money laundering and terrorist financing. Sadly, on February 24 2023, South Africa together with Nigeria were officially declared greylisted. The decisions were announced by the FATF. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed time frames. The average time spent under greylisting is 3 years, but the range is very wide, from a minimum of 1 year to a maximum of 7 years.
What greylisting entails and what it means for south africas economy
What greylisting entails and what it means for south africas economy
What greylisting entails and what it means for south africas economy
What greylisting entails and what it means for south africas economy
Furthermore, the length of time a country remains on the FATF grey list depends on the speed in which it resolves the shortcomings identified in its AML/CFT framework. South Africa has committed to resolve the remaining eight strategic actions by January 2025 on the condition that regular updates be provided, which creates an opportunity on set intervals to have South Africa’s greylisting reviewed by the FATF. However, the government hopes to address them sooner, possibly in 2024.
The initial mutual evaluation report had 67 recommended actions which South Africa had to action. In February 2023, at the time the greylisting decision was made, the FATF acknowledged the significant and positive progress made, and concluded that 15 actions remain open, linked to eight strategic actions.
The threat of greylisting was first announced in 2021, and as result, President Cyril Ramaphosa’s government has worked hard to address the concerns raised by the FATF in its mutual evaluation report, and has submitted an action plan to this end, while also participating in regular follow-up evaluations to assess progress. Some of the key actions coordinated by various stakeholders since 2021 include:
- Passing several pieces of legislation aimed at improving the country’s financial crime laws, including the General Laws (Anti-Money Laundering and Counter Terrorist Financing) Amendment Bill in December 2022.
- The mandate of the Financial Intelligence Centre Act (FICA) has already been widened to include more effective monitoring and detection capabilities.
- The establishment of the Fusion Centre, which brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency and the FIC. Since its inception the work of the Fusion Centre has led to the preservation and recovery of approximately R1.75 billion in criminal assets.
- In the Mid-Term Budget Policy Statement, Treasury made R14bn available to capacitate agencies that are critical in the fight against crime, including those that fight financial crimes.
The biggest concern is the impact that greylisting has on consumers, businesses and the country as a whole.
Being greylisted can have significant implications for the economy of a country. Some key implications include the following:
- Damage to Reputaion. Being greylisted can also damage the reputation of a country. This is the main implication on a greylisted country. It makes it difficult for the country to attract tourists and foreign investors, and can also impact the country’s ability to negotiate favorable trade agreements. Furthermore, a country’s ineffectiveness in combatting financial crimes like corruption and money-laundering as well as terror financing is deemed to be below international standards.
- Reduced Foreign Investment. Being greylisted may also lead to loss of confidence by foreign investors. This can result in a reduction of foreign investment in a country, which can have a negative impact on economic growth.
- Increased Cost of Capital. If a country is greylisted, it may find that the cost of borrowing money increases. This can make it more expensive for the government and business to borrow money, which can make it more difficult for them to finance their operations.
With regards to the impact that greylisting has on the economy, President Cyril Ramaphosa stipulated that the strategic deficiencies identified by the FATF are not directly related to the financial sector which means that financial stability and costs of doing business with South Africa will not be seriously impacted by the greylisting. The President’s word gives South Africans some assurance however, the greylisting came at an unfortunate time because it represents bad news heaped onto the worsening energy crisis and other critical failings in areas such as transport and water which are essential to a functioning economy.
When looking at greylisting from a business and consumers point of view, transactions made by companies and individuals from South Africa will be seen as high-risk transactions, prompting difficult administrative and compliance obligations, and may reduce international trade with South Africa. South Africa’s biggest traders such as the UK will immediately impose a high risk category on the country, which will have a negative impact on investment flows. Investment flows are important, because it is through foreign direct investments that the country is able grow its economy and combat high levels of unemployment.
The money that South Africa has or is been using to pay for the risk premium imposed by the global Development Finance Institutions (DFIs), could have been used to address South Africa’s developmental needs such as health-care, education, infrastructure and job creation. However, it is not the end of the world for South Africa seeing that it’s on the grey list. The positive side of being greylisted is that, although the greylisting increases government’s foreign-funding costs and weigh on trade flows, it’s unlikely to “significantly” affect South Africa’s creditworthiness. It also grants the government a “wake-up” call in the need to increase its international cooperation on the law enforcement side and the use of financial intelligence. So all that useful information that financial institutions are providing by way of suspicious transaction reports and activity- that all needs to be made much better use of by law enforcement. If South Africa continues to make significant improvements in effectiveness and swiftly exits the grey list, it will have a limited impact on financial stability and costs of doing business with South Africa, particularly if South Africa moves speedily to get out of greylisting.
