Three years to get off terror finance greylist

• SA firms set for greater monitoring • Eight deficiencies must be fixed

SA is likely to face a three-year slog to get itself removed from a global list of 25 countries deemed to have inadequate antimoney laundering and counterterrorist financing (AML/CFT) controls.

On Friday, the Financial Action Task Force (FATF), the Paris-based body that sets standards for combating illicit financial flows, said after its February 20-24 plenary meeting SA will now face increased monitoring for issues such as suspicious cross-border transactions and proliferation financing.

That relegates SA’s global financial standing to the ranks of Albania, South Sudan and Yemen, meaning local companies and citizens are likely to face increased compliance scrutiny when transacting across borders. Nigeria was also grey-listed, and the FATF susRussia’s membership.

The National Treasury posted a fact sheet on its website on the implications. It said it typically takes one to three years for countries to deal with their AML/CFT deficiencies and be removed from the greylist.

Pakistan endured more than four years on the list, Botswana three and Mauritius two, while Iceland had the quickest turnaround after spending just one year on the list.

However, removal only comes after a final, on-site assessment when both FATF and the relevant country agree that all elements of a specific action plan have been largely or fully tackled. FATF will start with the next round of mutual evaluations in 2024, with the first mutual evaluation report from this round scheduled for its October 2025 plenary meeting. It is expected that SA will then be

assessed again in the 2027/2028 round of mutual evaluations.

“Ultimately, the length of SA’s stay on the greylist will depend on how seriously the recommendations are taken, and how effectively the deficiencies are addressed,” said Sangeeth Sewnath, deputy MD of Ninety One.

The FATF has identified eight strategic deficiencies that SA must remedy by no later than end-January 2025. However, the Treasury says SA hopes to do so sooner and possibly in 2024. “If SA continues to make significant improvements in effectiveness and swiftly exits greylisting, it will have a limited impact on financial stability and costs of doing business — particularly if SA moves speedily to get out of greylisting,” the Treasury said.

As part of the action plan identified by FATF SA must demonstrate that it has provided sustained assistance to outbound requests for assistance with money laundering and terrorist financing investigations. SA will also have to improve risk-based supervision of designated nonfinancial businesses and professions (DNFBPs) — such as estate agents, precious metal dealers and jewellers — while demonstrating effective and proportionate sanctions for noncompliance.

It needs to ensure that authorities have timely access to accurate and up-to-date beneficial ownership information on legal persons and arrangements, with sanctions imposed for violations. A sustained increase in law enforcement agencies’ requests for financial intelligence for money laundering and terrorist financing investigations must be proven.

The FATF expects to see a sustained increase in investigations and prosecutions of serious and complex money laundering and terrorist financing cases, along with the identification, seizure and confiscation of proceeds of a wider range of predicate crimes (such as bribery, blackmail, extortion, fraud, counterfeiting and illegal gambling).

The country’s terrorist financing risk assessment framework needs to be updated so that a national counterterrorist financing strategy can be implemented. Targeted financial sanctions and mechanisms to identify individuals and entities that meet the criteria for domestic designation are required.

Alan Keet, regional head of Middle East and Africa at Apex Group, said speedy implementation of these measures could “catalyse” the creation of more stringent AML/CFT checks in SA and may not necessarily result in “any significant impact on capital flows, both to and from SA”.

Investec economist Annabel Bishop said being placed on the greylist is “not the end of the world” and since it was highly anticipated, had been priced into financial markets. She said it does not represent an increased chance of a ratings downgrade.

However, not everyone is so sanguine. “Clearly, greylisting will be negative for SA in terms of reputational damage, and higher transactional, administrative and funding costs will result in a less efficient economy with more frictional costs,” said Sewnath. “In aggregate, countries which receive a greylisting status struggle to attract foreign investment.”

An IMF working paper published in May 2021 found that greylisting results in a “large and statistically significant reduction in capital inflows” equivalent to 7.6% of GDP on average. S&P Global Ratings said in September 2022 that greylisting would raise transaction and interest rate costs for local firms with state-owned enterprises (SOEs) likely to be worst affected.

“There will be some downweighting of SA exposure by

ESG [environmental, social and governance] funds that use greylisting as a proxy for governance,” Sewnath said.

In the meantime, SA can expect to be added to the EU’s list of financially high-risk countries (the so-called blacklist) as well as the UK’s list of high-risk third countries. That was the experience of Mauritius, which was placed on the FATF greylist in February 2020 before being blacklisted by the EU in October of that year, with the UK adding it to its high-risk countries list shortly thereafter.

Mauritius was removed from the greylist in October 2021.

THE FATF EXPECTS TO SEE A SUSTAINED INCREASE IN INVESTIGATIONS AND PROSECUTIONS OF SERIOUS AND COMPLEX CASES

BEING PLACED ON THE GREYLIST IS NOT THE END OF THE WORLD AND SINCE IT WAS HIGHLY ANTICIPATED, HAS BEEN PRICED IN