ISS: Shades of grey – FATF lists South Africa and Nigeria

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The greylisting of South Africa last month by the Financial Action Task Force (FATF) has made waves in the country, occupying substantial media attention. South Africa became only the second G20 country to have been greylisted other than Turkey – an embarrassing fall from grace. Nigeria’s addition to the list seems to have gone relatively unnoticed, no doubt due to the past weekend’s national elections.

FATF is an intergovernmental organisation founded in 1989 on the G7’s initiative to develop global policy against money laundering. Since 2001, its mandate has expanded to include financing terrorism and nuclear weapons proliferation. Its 38 member states and jurisdictions – South Africa is the only African member – set standards that more than 200 countries have committed to implementing.

Greylisting means that South Africa and Nigeria have been placed under enhanced monitoring of their measures to counter the financing of serious crimes. Greylisting is obviously better than blacklisting because it indicates that a country is attempting to comply. The three countries on FATF’s blacklist – Myanmar, North Korea and Iran – are effectively declared to be incorrigible.

Nonetheless, most analysts believe greylisting has considerable negative effects on a country’s economy, including discouraging investment. Some, for example, require fund managers to apply greater diligence before investing in greylisted countries. An International Monetary Fund study estimates that countries have on average experienced capital outflows equal to 7.6% of GDP after greylisting.

Even though the danger of being greylisted had been on South Africa’s radar for many months, and the government has tried to forestall it, it was no surprise that the FATF executive board ultimately greylisted the country on 24 February.

The problem was not so much a lack of legislation but implementation. FATF’s statement made it clear – and Finance Minister Enoch Godongwana confirmed – that South Africa was greylisted because of a failure to adequately investigate and prosecute money laundering and terrorist financing.

Last year the United States (US) government imposed financial and other sanctions on four South Africans thought to be channelling funds to Islamic State in Mozambique and elsewhere in Africa. It was widely believed that the US had tried to jolt the South African authorities into action – but with little effect.

South Africa has now agreed to implement FATF’s eight-point corrective action plan that includes ‘demonstrating a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of (terrorist financing) activities in line with its risk profile.’

The action plan also required South Africa to implement an updated and comprehensive national strategy to counter financing of terrorism, and to issue targeted financial sanctions against terrorist financiers.

The FATF action plan includes some big challenges for South Africa to tackle money laundering, including a demand for better supervision of non-financial institutions. These include estate agencies, accountants, auditors, real estate developers and precious metals dealers who often facilitate money laundering.

It is not South Africa’s financial sector that is at fault, but law enforcement and prosecution
These organisations have to observe due diligence of inflowing capital, including identifying the beneficial (real) owners of assets. This prevents criminals from hiding their ill-gotten gains behind anonymous trusts and the like.

This underscores Godongwana’s point that it is not South Africa’s financial sector that is at fault but law enforcement and prosecution. The country’s intelligence, policing and prosecutorial functions have still not fully recovered from their deliberate sabotage during the state capture of Jacob Zuma’s administration.

The grindingly slow efforts to bring the perpetrators of state capture to book reflect how difficult it could be for South Africa to tick all eight boxes in the FATF action plan.

Which is why James George, Compliance Manager at Compli-Serve SA, believes Godongwana and Police Minister Bheki Cele are being optimistic when they predict South Africa will get off the list by mid-2024. George says unless the government and private sector really work hard together, it could take as long as five years.

If one looks at Nigeria, the challenge seems even more daunting. Many of the points in its nine-point FATF action plan are similar to those in South Africa’s. But the scale of the challenge looks much greater because of the size of its population and the severe problem of violent extremism.

South Africa will take some lessons from Mauritius in complying with FATF’s demands
Godongwana and other government officials have said that South Africa will take some lessons from Mauritius in complying with FATF’s demands. The Indian Ocean island state was greylisted in February 2020 but managed to get off the list only 20 months later. Several other African countries have also been removed from the grey list.

George agrees South Africa should learn from Mauritius, which he says got off the list by strengthening anti-money laundering and counter-terrorism financing laws and implementing regulations. It also put in place a risk-based supervision framework to monitor financial institutions and non-financial businesses, and improved its detection of fraud, prosecuting criminals and confiscating illegal proceeds. South Africa could do the same, though he doubts its capacity for speedy implementation.

Nigeria faces similar implementation challenges, although Oluwole Ojewale, the Institute for Security Studies’ organised crime observatory coordinator for Central Africa, thinks that could change. He believes the new government of Bola Tinubu elected this week wouldn’t take the greylisting lightly, and would start working promptly to get Nigeria removed.

‘This greylisting comes at a time when the Tinubu government wants to set a new economic agenda, to liberalise the economy and to open it up more for foreign investment. The greylisting could become an albatross around the neck of these economic reforms, so I expect quite prompt action by the new government.’

The bright side of greylisting is that it provides a strong incentive for countries to do what they have needed to do for some time anyway.

Written by Peter Fabricius, Consultant, ISS Pretoria.

Republished with permission from ISS Africa. The original article can be found here.