It’s not cheap for a country to be considered lax on money laundering and terrorist financing. Ask Pakistan. Ever since its on-off greylisting by the Financial Action Task Force (FATF) in 2008, it has forgone billions of dollars in GDP — $38bn, in fact.
That, at least, is what Pakistan-based economic consultancy Tabadlab found in a research report released last year.
It’s an ominous warning for SA’s already ailing economy. The FATF has given the country until October to clean up its act and show it is serious about tackling money laundering and terrorist financing, or find itself on the greylist come February. But as is the case with so many government endeavours, everything seems to have been left to the last minute.
The situation has SA’s banking chiefs worried. The problem is not of their making, but it’s the country’s lenders — along with businesses and individuals transacting offshore — that will pay the price for tardiness in addressing pressing issues. These range from economic reforms to implementing internationally accepted money-laundering and terrorist-financing rules.
To get a sense of the problem, consider that SA’s imports and exports equalled 55% of GDP expenditure in the first quarter of this year, according to Stats SA. More than half the value of the country’s economic output is traded across borders. Any greylisting would load red tape on these trade transactions.
Pakistan shows just how much that can cost. That country — with an economy three-quarters the size of SA’s, but a population more than three times larger — was on the FATF greylist from 2008-2009, 2012-2015 and again from 2019.
In its 2021 working paper, “Bearing the Cost of Global Politics”, Tabadlab gauges the economic impact of that greylisting.
“One of the mechanisms by which FATF greylisting can adversely affect the economy is through increased scepticism surrounding the economy’s future outlook,” the consultancy notes. “This will most likely lead to a decline in local investment, exports and inward foreign direct investment (FDI).”
In Pakistan, it certainly did. By Tabadlab’s estimate, the economy had to forgo $38bn in GDP between 2008 and 2019, including $4.5bn in lost trade and $3.6bn in forgone FDI.
This is precisely what SA bank chiefs fear.
“It’s a nightmare we just cannot afford — wiping out the tentative recovery we have been experiencing after the pandemic,” says Standard Bank CEO Sim Tshabalala, who pointed the FM to the Tabadlab study. “Frankly, Standard Bank is very concerned. We think that our corporate clients, and indeed all South Africans, should be equally worried. We could even be drifting towards FATF blacklisting, joining North Korea and Iran as outcast rogue states.”
SA is still reeling from the government’s haphazard handling of the economic fallout from Covid. GDP growth, according to Stats SA, has lingered below 2% since the first quarter of 2021 — not nearly enough to absorb more than 11-million unemployed and discouraged workseekers into the economy. Or to reduce the population that’s not economically active from its current figure of 13.5-million.
That will only become harder as transaction costs, including paying for imports and repatriating funds from abroad, become laden with more red tape — as would be the case if SA joins the FATF greylist. Doing business in SA will only become more expensive — and that’s on top of the plethora of licensing, foreign-exchange clearance and other rules to which companies must already adhere.
“There are serious adverse consequences to SA being greylisted, including, but not limited to, increasing the country’s risk profile, and therefore, raising the cost of doing business,” Absa says in response to questions from the FM.
Standard Bank is very concerned. We think that our corporate clients, and indeed all South Africans, should be equally worried
— Sim Tshabalala
Foreign companies are crucial to the government’s already haphazard bid to lure more investment into the economy. These companies don’t have an obligation to put money into SA; they would consider investing in an emerging-market economy with a devaluing currency if there was the possibility of sufficient profit to offset the risk. Red tape gnaws at that margin.
Add SA’s unstable labour climate, and President Cyril Ramaphosa’s dream of trillions of rands in promised investments will remain just that: a dream.
It’s not that SA doesn’t need increased investment in physical manufacturing, mining and infrastructure. These are critical to get the economy on a higher growth trajectory. Real GDP growth needs to accelerate from its pedestrian 1.9% to at least 5% to give those without jobs a chance to live the SA dream.
Landing on the greylist could also curtail the Treasury’s plans to convince credit ratings agencies that the government has a hold on its debt and the ability to repay it. Ratings agencies already judge SA’s government debt as subinvestment grade (or junk).
Slower economic growth translates to a sticky debt-to-GDP ratio — and, in SA’s case, that ratio is already high for a developing market.
Nedbank CEO Mike Brown even sees further credit ratings downgrades in the offing. “The possible greylisting of SA by [the] FATF would cause material reputational damage to SA’s financial system, hamper investment and international financial transactions in the country, which it can ill-afford, and could lead to a further downgrade of the country’s credit ratings,” he tells the FM.
Banks’ ability to conduct cross-border transactions will be restricted, hampering imports and exports, which could lead to a decline in GDP and higher costs for clients as compliance and due diligence costs will increase, Brown says. However, he adds, clients in good standing and banks will not be shut out of international markets.
SA’s banking chiefs are concerned about what an FATF greylisting would mean for the country. But with the deadline looming, the government’s response seems lethargic
— What it means:
So, how is the government dealing with the problem? For the most part, keeping off the greylist simply requires that the government agencies responsible for tackling money laundering and terrorist financing do their jobs.
Or, as Sasfin CEO Michael Sassoon puts it: “SA needs to ensure that it addresses legislative shortcomings but, more importantly, [that it] converts the troves of information which banks already provide the Financial Intelligence Centre [FIC] into tangible anti-money-laundering prosecution and results.”
Since the beginning of the year, the National Prosecuting Authority (NPA) has drafted an indictment for one case involving terrorist financing, and finalised 49 cases involving money laundering, says Mthunzi Mhaga, special director in the office of the national director of public prosecutions.
“Various initiatives, improvements and programmes have contributed to enhanced performance and monitoring of money laundering as well as serious corruption cases,” Mhaga says. “Some of these include the revitalising of the anti-corruption task team’s case management committee, where partners meet monthly and progress on all priority cases is monitored collectively. These include offences related to foreign bribery, which often includes money-laundering offences.”
Mhaga says the NPA has an internal action plan to deal specifically with the FATF outcomes, with progress monitored weekly by an anti-money-laundering desk within the prosecutions authority.
In the meantime, the police’s directorate for priority crime investigation, the Hawks, is upping its investigative capabilities to deal with money laundering and terrorist financing.
“The Hawks are in a capacity-building process to address deficiencies identified relating to money laundering and terrorist financing,” Brig Nomthandazo Mbambo tells the FM. “It is not a numbers game, but more about recruiting the right people to deal with money laundering and terrorist financing ... The capability we’re building includes recruiting forensic accounting services.”
When asked how many cases of money laundering and terrorist financing the Hawks are currently investigating, Mbambo says: “[The] FATF’s concerns are not about the number of cases but certain aspects of money laundering and terrorist financing that we have to focus on and we have an action plan addressing their recommendations.”
In response to questions, the FIC — to which financial institutions and certain high-risk businesses such as attorneys, car dealerships, casinos and real estate agents must report suspicious transactions — says: “The FIC has a dedicated unit focused on terrorist financing, which provides financial intelligence support to law enforcement agencies that work in this area.”
In its latest available annual report, for the year ended March 2021, the FIC notes it received three terrorist property reports — two from banks and one from an attorney — and 5.24-million reports of suspicious transactions in the financial year.
The FATF, in its October 2021 assessment of SA’s capabilities to tackle money laundering and terrorist financing, didn’t think the government was doing enough.
“A reasonable number of [money laundering] convictions is being achieved but only partly consistent with SA’s risk profile,” it noted. Later, it added: “SA has convicted one person for [terrorist financing] since the last [mutual evaluation] and was prosecuting one case as of the on-site [visit], which is inconsistent with its significant [terrorist financing] risk.”
This seems to be the crux of the matter. Hopefully the NPA and Hawks’ action plans lead to increased indictments — and soon. October is less than three months away.
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