Real pain of greylisting will be from global community

Gabriel Rybko & Ashlin Perumall

Baker McKenzie

Dueto SA’s imminent greylisting, it’s importantto determinethe effects the country might face.

Greylisting does not impose many requirements onthe greylistedcountry. Instead,the realteeth come from the publicationof the greylistto theinternational community.The politicaland economicrisks ofdoing businesswith agreylisted country are high formany countries. The sameis true forprivate financialinstitutions,which incursignificant regulatory and reputational costs due tomoney laundering and terrorist financing.

The IMF published a working paper The Impact of Grey-ListingOn Capital Flows in 2021 which used machine learning models Although theeffect of greylisting wasfound to vary acrossthe different forms of capital flow and from state to state, the IMF paper concludedthat the averageeffectisalossof7.6% ofcapitalflow intothecountry relative to its GDP. Thus,it ispossibleSA could experiencea similar decrease inthe flowof money into the country.

There is alsoa domestic cost involvedwith being greylisted, asthe urgencyof complying withthe Financial Action TaskForce (FATF) standards incursa nonnegligibleadministrativeburden.It cantakeanywhere fromtwo tofiveyears fora countryto getoff thegreylist, and theincreased scrutiny from the FATF and the international community could prove onerousfor SAover this period.

It’sdifficulttopredictwhat the effect of greylisting would be, but it wouldcertainly be a reason to not invest in SA.

Two countrieshave recently beenremoved from the greylist, and they might provide uswith somekey lessons. Mauritiussuffered a lossof capitalinflowbut through persistentefforts by the stateand co-operation withtheFATF itescapedthe greylist earlier this year.

Similarly, Pakistan was givena27-point planbythe FATF to ameliorate its technical deficiencies in 2018, and it was removedfrom the greylist last month.

The NationalTreasury has faced thethreat ofgreylisting byurgingonabevyoflegislative changesthrough the General Laws (Anti-Money Laundering andCombating Terrorism Financing)

Amendment Bill.The Treasury is attempting to rush the bill into operationbefore the FATF presentsits follow-up report,but thismay notbe enough to deter greylisting.

The discussionaround the impending FATFinvestigation hasprimarily been around legislativereform, whichmissesthemarkofthe task force’sfindings. The FATFconcluded SAhasa “solid legalframework for combating money laundering” but needs to implement this systemmore effectively, through greaterpolicing by financial authorities, and international co-operation with other FATF-style regional bodies.The report specifically referredto the erosion offinancial criminal prosecution and corruption, which hasplagued the implementation ofSA’s antimoney-laundering and combating offinancial terrorism (AML/CFT) laws. Bytaking anewapproach towards AML/CFTlaws through morespecific regulation andrigorous policing, SA would simultaneously implement theFATF recommendations andprosecute financial crimes.Doing so would certainlyimprove the country’s investment status, and the perceptionof that status among SA citizens.