SA has work cut out getting off greylist

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Webber Wentzel Finance Team

SA’s greylisting by the Financial Action Task Force (FATF) hassignificant implications for itseconomic growthand global competitiveness,but moves arealready being taken to satisfy the FATF.

Themain implicationof greylisting is that members of the internationalcommunity are “warned” that conducting business withthe impugned country couldfacilitate terrorism financingand money laundering.

In April2022, theInvestigating Directorate(ID) was established within the National Prosecuting Authority toprosecute individuals and entitiesthat were involved instate capture. Besides, SAsubmitted several reports tothe FATF, prosecuted severalmoney laundering offendersand utilised extraditions toget fugitive offenders. TheNational Treasury alsomoved quicklyto enact necessary legislation.

OnDecember 222022, the GeneralLaws (Anti-Money Launderingand Combating Terrorism Financing)

Amendment Act commenced after being signedby the president. Theact amends five piecesof legislation including the:1) Companies Act, 2008; 2) Financial Intelligence Centre Act; 3) Financial

Sector RegulationAct, 2017; 4) Nonprofit Organisations Act, 1997; and 5) Trust Property Control Act, 1988.

OnDecember 232023, the Protectionof Constitutional Democracy Against Terrorist andRelated Activities AmendmentAct commenced after beingsigned by the president.This act expands the definition of terrorist activities;provides for crimes relatedto terrorist training,the joiningofterrorist organisations, and the possession anddistribution of

GREYLISTING WILL DISCOURAGE FDI IN SA AND REDUCE CAPITAL INFLOWS. IT WILL RAISE THE COST OF DOING BUSINESS IN SA publications withterrorismrelated content.

In February2023, SA made a high-level political commitment to work with the FATF and Eastern and Southern Africa AntiMoney Laundering Group to strengthen the effectiveness of its anti-money laundering and counter-terroristfinancing (AML/CFT) regime. Since theadoption oftheMutual Evaluation Report (MER) in June2021, SAhasmade progress on manyof the MER’s recommended actions to improve its system, including bydeveloping AML/CFT policies to address higher risks and amending the legalframework forTF and TFS, among others.

The implications of greylisting for SAare twofold: reputational and economic. SA now has a negative reputation inthe globaleconomy.Itmay alsobedowngraded by credit rating agencies, which wouldaffect the country’s ability to borrow on the global capital markets.

The economicconsequences of greylisting are:

● Less capital flows into SA: According to a report by the International Monetary Fund (IMF),greylisting leadstoa significant decrease in capital inflows. For vulnerable countries, this could result in a balance of payments crisis. This is because greylisting entails thatall transactionsofSouth African companies and individuals will beseen as highrisk transactions, resulting in complicated compliance and administrative duties, and likely disincentivisinginvestment into and trade with SA.

● Economic penalties might beimposed onSA: FATF member states and other bodies might impose economic penalties and similar measures against SA. International finance flows to and from SA will entail higher compliance obligationsand transaction costs.

Regulators in theUS, EU, andthe UKmightplace restrictions on their banks regarding transactingwith South African banks. Some international financial institutions have policies that prevent them fromdoing business with greylisted countries orat least,limit the scope of business that can be conducted. Suchrestrictions will further impede business and foreign investment.

● Less foreign direct investment (FDI): Greylisting will discourage FDI in SA and reduce capital inflows. It will raisethe costof doingbusinessin SA,makingforeign investors reluctant to invest in the economy. This is because globalcounterparts will have to undertake increased duediligence when dealingwith SAentities.As transactioncostsrise, there isa disincentiveto do businesswith firms. SA will beviewed asahigh-risk jurisdiction for business, so some foreign investors might take out their investments.

● Decrease in SA’s external reserves: If therearelower capital inflows and FDI into SA, this could reduce external reservesas therewill beless tax revenue.

● Difficulty obtaining financingon theinternational market: Given the implications of greylisting, SouthAfrican companieswill find it harder to obtain financingfrom foreignlenderson the international capital markets,and frommulti-laterallenders suchasthe World Bank.

● Decreased competitiveness of South African companies in theglobal economy: South Africancompanies, due toenhanced monitoring,will facemore requirements to prove sources of funding, leading to highertransaction costsand delayed execution of transactions.This willultimately harmthe competitivenessof SouthAfrican companiesand SAasa wholeintheinternational market.

Financial institutionsthat relyheavilyon globaltradein their treasury departments willbe heavilyimpacted.

COMPANIES WILL FIND IT HARDER TO OBTAIN FINANCING FROM FOREIGN LENDERS ON THE INTERNATIONAL CAPITAL MARKETS

Tradingoffshore willcome withhigher duediligence hoops to jumpthrough and morered tape.Tradingrevenue is thereforegoing to decline.The SouthAfrican insuranceindustry willbe impacted.

● Climate adaptation will be impacted: SA urgently needs to adapt to climate change,and financingfrom international partners is needed.At COP26,theUS, EU, UK, France, and Germany pledged to give $8.5bn to SA to finance its transition to alower carboneconomy. After greylisting, international financeflowsto andfromSA will beriddled withhigher compliance obligations and transaction costs. Evenif SA doesreceivethe funding,itis likelytoneed thesupportof otherforeign investorsand companies to successfully transitionto alowercarbon economy. Greylistingwill makeitharder forthecountry to achieve its ESG goals.

WHAT DOES SA NEED TO FOCUS ON?

The FATF hasidentified eight areasthatSA needstofocus on,which includeimproving SA’s risk-based supervision ofidentifiedrisks. SAisalso requiredto improvethe investigation andprosecution of serious and complex moneylaundering andterrorist financing activities. Competent authorities are alsorequired toensurethey have accurate and up to date beneficial ownership information.

Itis importantto notethat, asMauritius hasshown,SA can come offthe greylist withinaslittle astwoyearsif the government and the private sector co-operate to take decisiveactions toaddress the FATF’s concerns.The governmentis clearlycommitted to these actions. Finance ministerEnoch Godongwana,in hisbudget speechon February22,said the outstandingdeficiencies wouldbe addressedthrough regulationsand theeight actions summarised above. SAhasaplan ofaction,itis now about implementation.