What is the FATF?
The FATF is a global inter-governmental body that promotes policies and sets international standards relating to the combating of money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction. The FATF maintains two lists of countries that present cause for concern: a grey list and a black list.
What is Grey-listing?
Grey-listing happens when a country is formally under increased monitoring from the FATF in connection with deficiencies in its anti-money laundering, terrorism and proliferation financing framework.
Grey-listed countries have committed to addressing inadequacies within a given timeframe. Blacklisted countries, on the other hand, are high-risk countries that do not actively engage with the FATF, currently North Korea and Iran.
Why was SA grey-listed?
The FATF evaluates countries against 40 recommendations and 11 effective immediate outcomes. South Africa performed poorly in its 2021 FATF evaluation. Since then, action taken to address deficiencies has included the passing of the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act and the General Laws Amendment Act of 2022 (which made changes to a raft of laws including the Financial Intelligence Centre Act and the Financial Sector Regulations Act). There has also been greater scrutiny by the FSCA of beneficial ownership of financial institutions. Despite efforts by numerous stakeholders in SA, the FATF’s January 2023 assessment of the country’s progress found that eight strategic deficiencies remain.
The FATF found that while South Africa had sound laws, frameworks and oversight around anti-money laundering and combatting the financing of terrorism, prosecution and conviction of serious financial crimes was weak.
What are the potential impacts of grey-listing?
Grey-listing affects a country’s reputation. Direct effects depend on how the rest of the world responds. Because the FATF calls for countries and financial institutions to apply enhanced due diligence and counter-measures when dealing with countries on the grey list, possible impacts include weakening access to international trade and financial systems as well as added difficulty and costs of doing business. It might also result in a reduction in capital flows and a higher cost of capital. Evidence on the impact of grey-listing on other countries is mixed.
Any factors that are likely mitigate the impacts of grey listing?
South Africa already attracts a low level of foreign direct investment inflows given the impact of loadshedding, crumbling infrastructure and political uncertainty on investor confidence. Activity on our capital account consists largely of portfolio flows (foreigners purchasing and selling South African bonds and equities).
Also, South African financial institutions have deep, long-lasting relationships in the global trade and financial system with correspondent banking playing a key role in facilitating the operation of our multinational corporations and commodity exports, which the world relies on.
What will grey-listing cost me?
Locally, there should be limited direct impact on South Africans. Those South Africans who deal with offshore counterparties (banks, brokers or other financial institutions) may experience more onerous due diligence screening, less efficient transaction processing and a generally higher cost of doing business.
How long is grey-listing likely to last?
Generally, it takes one to three years for countries to address deficiencies and be taken off the grey list. A shining example close to home is Mauritius which was placed on the grey list in February 2020 and removed in October 2021 after swift, decisive action to address deficiencies and strengthen its regime on anti-money laundering and combatting the financing of terrorism. National Treasury has said South Africa is expected to address deficiencies by “no later than the end of January 2025”.
What happens if we don't get off the list?
A sustained period of grey-listing may see the steady erosion of investment flows into South Africa, a higher cost of borrowing for local institutions and the government as well as weaker long-term economic growth. The most impactful economic risk would stem from the withdrawal of banking and payments services which are critical in facilitating trade, investment, remittances and economic growth. For the man on the street, the impacts will most acutely be felt by those needing to send or receive money to from abroad, a higher cost of borrowing from higher interest rates, higher prices on imported goods and potentially a higher unemployment rate as economic growth deteriorates.
What should investors do?
As always, we encourage investors to focus on factors they can control to ensure they reach their financial goals:
- A well-diversified investment portfolio provides the best protection against global or SA-specific market risks.
- History shows that staying invested for the long-term and avoiding attempts to time the market delivers better long-term returns for investors.
- Keeping investment fees low means you can hold on to more of your investment returns.
Read an article on an interview Kelin Pottier gave to BusinessTech on the subject of grey-listing last week: It’s time to be realistic about South Africa’s grey-listing
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
