FATF grey lists South Africa over money laundering and terrorism funding concerns

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The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, has grey listed South Africa because it deems the country’s financial controls being not strict enough to prevent financing of terrorist organisations and money laundering.

National Treasury, with Finance Minister Enoch Godongwana at the helm, “noted” Friday’s (24 February’s) FATF decision listing South Africa as “a jurisdiction under increased monitoring”. The decision was taken at a FATF plenary that finished in Paris the same day and came after South Africa failed to address all of the shortcomings on money laundering and the financing of terrorism that the task force identified in its 2019 evaluation of the country.

Since the results of the 2019 evaluation were published in 2021, South Africa has addressed some identified shortcomings. Of the 67 recommended actions emanating from the mutual evaluation, the government successfully addressed all but eight strategic deficiencies.

That South Africa means business, as it were, when it comes to ensuring illegal financial activity is curbed comes from Godongwana who, according to the National Treasury statement, “already demonstrated its commitment to implementing recommended actions, including speedy enactment of two pieces of legislation, which in turn amended six Acts of Parliament – the General Laws (AML and CFT) Amendment Act and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act”.

It continues: “Government recognises addressing the action items will be in the interest of South Africa and doing so is consistent with an existing commitment to rebuild institutions weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption”.

“Items in the action plan are part of the broader commitment of government to combat financial crime, corruption and state capture, as announced by President [Cyril] Ramaphosa in October last year in response to the Zondo Commission findings and recommendations. The need to address the action items is also consistent with the national strategy on AML/CFT adopted by Cabinet in November 2022 and will strengthen the fight against financial crimes as well as assist in preserving the integrity of the country’s financial system.”

The grey listing decision has serious implications for South Africa and its financial services sector. Philippe Burger, an economics professor and the dean of the Faculty of Economic and Management Sciences at the University of the Free State, told The Conversation that 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.

Burger pointed out that South Africa now joins a list of grey listed countries such as the Cayman Islands and Panama, which are known tax havens that potentially attract laundered money. “Others are known as war zones or countries with jihadist and Islamist terror groupings operating on their land. 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.”

To lift the grey listing, “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 grey listed, 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.”

Burger concluded that “to get out of the rut of grey listing the country will have to fight the rot of money laundering and terrorist funding. The jury, or in this case the Financial Action Task Force, is still out on whether it will succeed in doing so.”

“As a country that both values and enforces the rule of law, the grey listing is an opportunity for us to tighten our controls and improve our response to organised crime. This will ultimately place us on a stronger footing to effectively fight these damaging and dangerous crimes,” President Ramaphosa said.

“We have restored credibility to key institutions like SARS and the NPA to enable them to fulfil their respective mandates. We have bolstered the powers of the Special Investigating Unit (SIU) by establishing a Special Tribunal to recover public funds stolen through corruption and fraud, and an Investigative Directorate in the NPA to investigate serious corruption,” he said.

Last week, Finance Minister Enoch Godongwana announced in the 2023 National Budget that additional funds will be allocated to the police, National Prosecuting Authority (NPA), Special Investigation Unit (SIU) and Financial Intelligence Centre (FIC) to strengthen the fight against crime and corruption.

The President said one of the country’s most effective tools for combating money laundering and other financial crimes is the multidisciplinary Fusion Centre, established in 2020.

The Fusion Centre brings together bodies like the NPA, SIU, SARS, the Hawks, Crime Intelligence, State Security Agency and the FIC. Since its inception the work of the Fusion Centre has led to the preservation and recovery of approximately R1.75 billion in criminal assets.

“It is noteworthy that the strategic deficiencies identified by the FATF do not relate directly to the country’s financial sector. This means that financial stability and costs of doing business with South Africa will not be seriously impacted by the grey listing,” he said.

The 39-member FATF sets international standards to ensure national authorities can effectively go after illicit funds linked to drugs trafficking, the illicit arms trade, cyber fraud and other serious crimes. Over 200 countries and jurisdictions have committed to implement the FATF standards as part of a co-ordinated global response to preventing organised crime, corruption and terrorism. South Africa has been a member of the FATF for the last 20 years.