A report by the international watchdog, the Financial Action Task Force (FATF), in October 2021 identified significant weaknesses in parts of South Africa’s financial regulations. The report’s findings put the country at risk of being greylisted by the international watchdog. According to the report, South Africa has become a hub for money laundering and terrorist activity financing in recent years due to rampant corruption and weaknesses in the criminal justice system. The report further recommends that local authorities will need to improve South Africa’s legal and regulatory framework to tackle financial crimes by November 2022 to avoid being greylisted in February 2023.
South African authorities have not done enough to avoid possible greylisting
When a country is added to the gray list, it means that it is under enhanced surveillance by the FATF. A country on the gray list is a country whose financial crime systems have strategic deficiencies. South Africa will then be considered a high-risk jurisdiction to do business with, and the FATF will require additional measures for investors wishing to do business with the country. For the banking sector, the gray list means that banks will have to spend more money to manage correspondent banking relationships and relationships with global infrastructure providers in South Africa.
Over the past year, local authorities in South Africa have not done enough, or moved fast enough, to follow up on the recommendations of the FATF report and avoid possible greylisting. In response to the FATF report, the Reserve Bank of South Africa’s Prudential Authority published a study of the banking sector in July 2022 in which it found that the country’s largest banks were at high risk of being used to nefarious purposes by external and internal parties. As the clock is fast approaching the November 2022 deadline, the South African government is trying to push two pieces of legislation through Parliament before the deadline. The only piece of legislation is the General Laws (Anti-Money Laundering and Anti-Terrorist Financing) Amendment Bill, which makes changes to four key financial laws, changing wording and responsibilities to better protect South African financial systems against money laundering and terrorist financing. The second is the Constitutional Democracy Protection Against Terrorism and Related Activities Amendment Bill, which will expand policy and investigative powers and loosen the definition of terrorist activity.
The government’s hasty and knee-jerk reaction to change these legislative measures poses a risk to the country itself. In its weekly Risk Alert published on October 17, the Risk Analysis Center (CRA) warns that the hastily drafted legislation introduces secondary risks to civil liberties and potential infringements of constitutional rights. According to the vague language proposed for the Bill to Amend the Constitutional Democracy Protection Against Terrorism and Related Activities Bill, the CRA warns that it “could be used to limit the rights to freedom of expression and association, and to suppress criticism of the government”. The General Laws (Anti-Money Laundering and Anti-Terrorist Financing) Amendment Bill also includes provisions that will require non-profit organizations to register with the government and submit to the state regulatory oversight. The bills were only open to the public for 10 days and this has since been extended until October due to a “loud outcry from public society”.
Greylisting could exclude South Africa from certain financial markets
The actual result of the gray listing could see South Africa excluded from certain financial markets, which would have a negative effect on the wider economy and in particular on consumer prices. However, proposed amendments to key financial laws as efforts to avoid gray listing could also pose significant challenges for South African businesses. In particular, proposed amendments to the Financial Intelligence Center Act (FICA) to expand the scope of “responsible institutions” mean that both small and large businesses will now have to comply with new regulations that will impose administrative burdens and additional operational costs to businesses. Rising compliance costs lead to higher product costs which are ultimately passed on to the consumer.
Critics of the proposed changes argue that the FICA changes are too broad in their definitions and include activities that pose no risk of money laundering or terrorist financing. It is recommended that small businesses (SMMEs) be subject to a lower requirement and that other mechanisms such as transaction value can be used to manage risk.
However, in order for South Africa not to be gray listed, the General Laws (Anti-Money Laundering and Anti-Terrorist Financing) Amendment Bill and the Protection of Constitutional Democracy Against Terrorism and related activities are to be enacted by Parliament this month. Reports from Business Leadership SA and research firm Intelligex conclude that South Africa has an 85% chance of being greylisted by February next year. With this inevitability on the horizon, the crucial aspect now is for local authorities to minimize the impact of this on the financial sector and the South African economy.