SA must fix holes in terrorism financing, money laundering legislation by 2025

The main implication of being grey listed by the Financial Action Task Force (FATF) is that members of the international community are “warned” that conducting business with the “impugned” country could facilitate terrorism financing and money laundering.

This is the label that South Africa now carries after being grey listed, together with Nigeria, on Friday. Although widely expected it has significant implications for economic growth and global competitiveness, says Webber Wentzel.

According to a report by the International Monetary Fund (IMF), grey listing leads to a significant decrease in capital inflows. For vulnerable countries, this could result in a balance of payments crisis.

“This is because grey listing entails that all transactions of South African companies and individuals will be seen as high-risk transactions, resulting in complicated compliance and administrative duties, and likely disincentivizing investment into and trade with South Africa,” the Webber Wentzel team said on Friday.

They also foresee the possibility of economic penalties being imposed on South Africa by FATF member states and other international bodies. International finance flows to and from SA will entail higher compliance obligations and transaction costs.

“Some international financial institutions have policies that prevent them from doing business with grey listed countries or at least, limit the scope of business that can be conducted. Such restrictions will further impede business and foreign investment,” the Webber Wentzel team notes. They also expect trading revenue to decline. The South African insurance industry will particularly be impacted.

National Treasury seems rather unconcerned about the impact. It says in its response to the grey listing announcement that there are no items on the action plan that relate directly to the preventive measures in respect of the financial sector.

“This reflects the significant progress in the application of a risk-based approach to the supervision of banks and insurers. National Treasury therefore expects that the increased monitoring will have limited impact on financial stability and costs of doing business with South Africa.”

Global footprint

Hanneke Farrand, MD of Farrand Global, believes the practical implications for South Africans (individuals and businesses) are significant. “All businesses with a global footprint and those who are still trying to expand their businesses abroad will be impacted.”

Farrand, who is based in the Isle of Man, says it will take time to open bank accounts to allow cash payments to flow. “This is an additional burden for entrepreneurs who have the opportunity to expand their businesses abroad.”

The execution of transactions will become more complex because of enhanced due diligence requirements that are applicable to banks and advisors. This will cause inevitable delays and cost increases. “Operating abroad is not impossible, but it will certainly become more complicated,” she adds.

Michael Honiball, head of tax and exchange control at Werksmans Attorneys, says grey-listing could also lead to difficulty in obtaining additional financing from global banks and bodies like the International Monetary Fund (IMF), the World Bank and the European Bank for Construction and Development.

“It has historically led to substantial declines in capital inflows and in foreign direct investment, with subsequent economic stagnation and job losses. This will likely be the case in South Africa in an economy which is already stagnating, and where further job losses cannot be afforded,” he warns.

Iraj Abedian,  Chief Executive of Pan-African Investment and Research Services, says it is really a sad day for SA who is now the only member of the G20 countries to be grey listed.

“Tragic that Govt has known this for 5 years, yet due to inaction now the country’s brand is badly damaged. This means Minister of Finance has to go back to review all Budget 2023 projections. What a shame?,” he tweeted shortly after the announcement was made public.

Some work done

The Webber Wentzel team lists a number of measures that has already been taken to address the initial long list of FATF concerns. This includes the establishment of the Investigating Directorate (ID) within the National Prosecuting Authority to prosecute individuals and entities that were involved in state capture. This was done in April 2022. The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act is now in place after being signed by Pres Cyril Ramaphosa at the end of last year.

South Africa has also made a high-level political commitment to work with FATF and the Eastern and Southern Africa Anti-Money Laundering Group to strengthen the effectiveness of its anti-money laundering and combating terrorism financing regime.

FATF has identified eight areas that require attention. It includes improving South Africa’s risk-based supervision of identified risks. “South Africa is also required to improve their investigation and prosecution of serious and complex money laundering and terrorist financing activities,” says the Webber Wentzel team.

SA is expected to address the identified deficiencies by no later than the end of January 2025.