SA greylisted for not stopping money laundering and terrorism funding — what it means

The Financial Action Task Force has placed South Africa on a list of countries under increased monitoring, commonly known as the grey list, after it failed to address all the shortcomings on money laundering and the financing of terrorism the task force identified in its 2019 evaluation of the country.

The decision has serious implications for the country, more specifically its financial services sector and ability to attract investment. The Conversation Africa’s political editor Thabo Leshilo talks to Philippe Burger, an economics professor and dean of the faculty of economic and management sciences at the University of the Free State, about what the greylisting means for South Africa.

What does greylisting mean?

Greylisting refers to a country being placed on a list of countries under increased monitoring by the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog. The FATF evaluates each member country’s implementation and effectiveness of measures to combat money laundering and the financing of terrorism.

South Africa has been placed on FATF’s grey list because it does not have sufficient mechanisms to monitor and combat money laundering and terrorist financing activities.

The country undertook to work with the FATF to identify strategies and time frames to improve its monitoring mechanisms. Specifically, it undertook to work with the FATF on eight topics. These include increased investigation and prosecution of money laundering and terrorist financing activities. It will also enhance its capacity to identify, seize and confiscate the proceeds of such crimes.

South Africa also needs to improve its terrorist financing risk assessment to inform its strategy to counter the financing of terrorism activities. In addition, it needs to ensure the effective implementation of targeted financial sanctions, and create effective mechanism to identify individuals and entities targeted by such sanctions.

What are the implications?

Though the FATF does not explicitly require increased due diligence, greylisting will nevertheless in effect require increased due diligence. Banks dealing with cross-border financial flows and companies wanting to invest in South Africa will have to vet their clients and the sources of client income better before they invest. This can be costly and, therefore, discourage investment. The increased risk associated with South Africa could also result in higher interest rates and cost of capital.

The higher costs domestic and international companies will incur when they trade or invest across South African borders will put upward pressure on the cost of living of ordinary South Africans. However, of probably even more significance to ordinary South Africans is the greylisting will likely deter foreign investment needed to stimulate economic growth and job creation.

Which other countries are greylisted?

South Africa joins a list of countries, none of which are known as paragons of governance.

Some, such as the Cayman Islands and Panama, are known tax havens that potentially attract laundered money.

Others are known as war zones or countries with jihadist and Islamist terror groupings operating in their territory. These include Syria, Yemen, Mali, Nigeria, and Mozambique.

The list also includes countries with very weak governments, such as Haiti and the Democratic Republic of the Congo.

What must happen for the greylisting to be lifted?

South Africa needs to work with the FATF to identify strategies and time frames to improve its monitoring mechanisms. It must then implement these improvements at the latest by January 2025. This might require improved legislation and better monitoring mechanisms to red flag potential money laundering and terrorist funding flows.

Although the country recently made a belated effort to improve its legislation to avert being greylisted, it will need to do more. Doing so will require a dedicated focus from the government to:

• pass additional relevant legislation;
• fund the investigative authorities to combat money laundering and terrorist financing activities, and;
• ensure the effective and speedy prosecution of individuals and institutions undertaking such crimes.

With the recent history of state capture for private gain by individuals, some of whom are themselves probably guilty of money laundering, the onus will be on the government to show it is serious about implementing effective legislation and mechanisms to combat money laundering and terrorist funding. Thus, to get out of the rut of greylisting, the country will have to fight the rot of money laundering and terrorist funding.

The jury, or in this case the FATF, is out on whether it will succeed in doing so.

• This article was first published by The Conversation