Why greylisting matters for you, your investments and the country

The hits just keep on coming, with the South African government having kneecapped its business sector and its citizens yet again.

First, it was the government’s bungling over electricity, and complicity in the criminal deconstruction of Eskom. Now, by sitting on its hands when it comes to economic crime, its huge gamble with the country’s financial system has backfired.

The decision by the Paris-based Financial Action Task Force (FATF) to place South Africa under “enhanced monitoring” due to its shoddy implementation of anti-money-laundering and counterterrorism controls is the inevitable consequence of the era of state capture, enabled by a governing party deeply implicated in this corruption.

South Africa, despite having a sophisticated and well-regulated financial services industry, has now joined a rogues gallery of countries on the FATF greylist, including war-torn Yemen and Syria, and strife-ridden Democratic Republic of Congo and Haiti.

Since Friday’s announcement, government officials have been spinning frantically to sugarcoat this mess. 

“The situation is concerning, but less dire than some people suggest,” President Cyril Ramaphosa wrote this week. “The strategic deficiencies identified by the FATF do not relate directly to the country’s financial sector — this means that financial stability and the costs of doing business with South Africa will not be seriously impacted.”

The Treasury is singing from the same hymn sheet. And the Reserve Bank, as the grand supervisor of banks and insurers, has pointed out that the FATF doesn’t call for “enhanced due diligence measures” to be applied to South Africa at this point. 

Says the Bank: “The FATF standards do not envisage de-risking, or cutting off entire classes of customers, but call for the application of a risk-based approach.”

‘Years of inaction’

Still, no matter how you spin it, the greylisting is a consequence of entirely preventable — and years-long — government inaction. 

South Africa has been a voluntary member of the Paris-based FATF since 2003. The country’s officials have sat in on more than 20 plenary meetings discussing whether certain states’ anti-money-laundering and terrorism financing controls were strong enough. 

So, in the 16 years between joining FATF and the agency’s 2019 inspection of South Africa’s controls, surely the country should have learnt something?

Yet it was only seven months ago, in July and August, that National Treasury squeaked into action by introducing two pieces of legislation to parliament — the Protection of Constitutional Democracy against Terrorism & Related Activities Amendment Bill, and the General Laws (Anti-Money Laundering & Combating Terrorism Financing) Amendment Bill. 

Ramaphosa signed those into law in December, illustrating the speed at which the legislative process in South Africa can work. In other words, there is no reason to have dragged the economy along this path to a greylisting for years.

The timing of the FATF decision is unfortunate, though. 

“This plays into the current narrative, of the government struggling to manage its affairs, especially considering news around the electricity state of disaster, state capture and corruption,” says Adriaan Pask, chief investment officer of PSG Wealth.

It’s a needless own-goal, says Deal Leaders International CEO Andrew Bahlmann, who adds that it is due to political ideology as much as anything. “There is always an ideological debate [in the government] about complying with free market processes,” he says.

That’s no exaggeration. 

Back in 2014, the cabinet was first asked to pass the Financial Intelligence Centre Amendment Bill. But, as acting Treasury director-general Ismail Momoniat wrote in an affidavit to the state capture commission in 2020, that bill “was met with great resistance from cabinet”.

The sticking point was the clause relating to “politically exposed persons”, which threatened to close the opportunities for self-dealing in the ANC.

Mzwanele Manyi, who was close to the Guptas, wrote to then president Jacob Zuma in 2016 urging him not to sign the bill, arguing that “merely by virtue of being a CEO or CFO that has dealings with government, one becomes a suspect”.

Zuma did his best to avoid signing the legislation, first arguing it was “unconstitutional”, then trying to ensure the oversight body, the Financial Intelligence Centre (FIC), was shifted from the Treasury to the justice department. 

Momoniat told Zondo that Zuma’s delays in signing the bill were “deliberate and that the Gupta family intervened, after their bank accounts were closed, to delay and stop the bill from being enacted into law”.

In the end, Zuma had no choice, but the FATF had got the message that South Africa’s government — during that era at least — had little political will to truly close the gaps. By the time Ramaphosa took over and injected urgency into the process, the damage had been done.

“This move was expected but is deeply unfortunate and was ultimately avoidable with earlier action and a more whole-of-government approach,” says Intellidex’s Peter Attard Montalto.

Counting the economic cost

As the implications of the greylisting became clear, bank shares took a beating, with the JSE tumbling 2.6% and the rand continued its slide during the week, falling 0.3% to R18.49. 

PSG’s Pask, however, didn’t expect a bloodletting. “We do not believe markets will continue to react over-negatively due to the greylisting, especially since a lot of this unwelcome news has already been priced in by markets,” he says.

But the muted market response belies the long-term threat of being stuck on the greylist. 

Ramaphosa’s prediction — that the costs of doing business won’t be seriously affected — may end up being as infamous as his 2015 prediction that load-shedding would be a thing of the past by 2017.

In particular, one International Monetary Fund study from 2021 concluded that greylisted countries typically suffer an average drop in capital flows of 7.6% of GDP.

“Greylisting has the effect of discouraging fixed direct investment in South Africa, which in turn may reduce capital inflows,” Bahlmann, who advises offshore enterprises eyeing South Africa, tells the FM. “This stems from the fact that potential investors in the country are ‘warned’ that conducting business with South Africa could facilitate terrorism financing and money laundering.”

Transactions with South African companies are then deemed “high risk”, which leads to greater compliance headaches and paperwork.

“This will likely disincentivise investment into and trade with South Africa — but many deals will still continue, especially by international companies that are not strangers to this country,” he says.

Momentum Investments economist Sanisha Packirisamy shares this view. “Being greylisted could further impair the economy’s links to the global financial system, raise South Africa’s cost of capital, and create an additional disincentive for offshore companies to deal with South Africa,” she says.

Sangeeth Sewnath, the deputy MD of asset manager Ninety One, says that besides the higher transaction and funding costs, this move will also damage the country’s reputation, resulting in “a less efficient economy with more frictional costs”.

At the same time, lawyers for Webber Wentzel point out that regulators in South Africa’s largest trading partners — the US, EU and the UK —  might place restrictions on their banks doing business here.

“Some international financial institutions have policies that prevent them from doing business with greylisted countries or, at least, limit the scope of business that can be conducted,” they say.

This means local companies could “find it harder to obtain financing from foreign lenders on the international capital markets, and from multilateral lenders such as the World Bank”. 

It could harm South Africa’s competitiveness and trading revenues could take a knock — local insurance companies, in particular, look vulnerable.

So, as much as Ramaphosa might argue it won’t increase finance costs, the reality is that it will just be easier for foreign investors to look at countries without the extra red tape. 

South Africa can hardly afford this right now. 

In his budget speech last week, finance minister Enoch Godongwana lowered the government’s outlook for economic growth for 2023 to 0.9%, from the 1.4% that was expected last October. 

Stanlib economist Kevin Lings says this “simply adds to the long list of challenges the South African economy has to overcome — making it even more difficult for South Africa to lift its economic performance and gain some momentum.”

Impact on investors

For investors with offshore funds the impact remains, well, grey.

“International fund managers and their administrators will review their distribution practices in South Africa, based on their own internal risk-based approaches,” Allan Gray’s Sandy McGregor and Daniel van Andel told clients. “This could result in additional due-diligence requirements.”

Sewnath tells the FM that new compliance measures are likely to be required. “This means investors will have to provide more information about the source of the funds, as well as the identity of the investor or the beneficial owner,” he says.

The good news for those South Africans who earn their salaries in euros, pounds and dollars, along with those businesses exporting products, is that they may have dodged a bullet for now. 

The Banking Association South Africa (Basa) says “there were no items on the national action plan that relate directly to preventative measures in respect to the financial sector”. 

“South African banks already follow global best practice, and they will not be shut out of international markets.” 

Nonetheless, banks are scrambling to reassure worried customers. 

“Our long-established relationships with correspondent banks and other intermediary financial institutions remain in good standing,” Simone Cooper, head of business clients at Standard Bank, wrote to customers on Monday morning.

Similarly, Old Mutual CEO Iain Williamson said in an e-mail to customers: “We want to reassure you that any savings and investments you have with us are safe and secure.”

This suggests that while the greylisting could discourage overseas investors who are on the fence about investing, the day-to-day practicalities of banking and doing business are unlikely to alter. 

But that equation changes if South Africa can’t get off the greylist any time soon.

Getting rid of the stain

Which isn’t to say the FATF process is unimpeachable — it’s just that at this point, it doesn’t help to moan that its evaluation procedure is flawed.

Marla Dukharan, an independent Caribbean economist, tells the FM that “the amount of money being laundered globally each year has been increasing steadily, perhaps because the world’s worst money-laundering offenders are not the ones being identified by the FATF.”

Dukharan says the bulk of the countries currently on the FATF greylist are “nonwhite developing states, which suggests that money laundering is the domain of the global south”. 

The reality is, some of the worst offenders historically aren’t included: nonprofit group Tax Justice Network publishes an annual “tax havens index”, which includes countries such as Switzerland, the Netherlands, Luxembourg, Hong Kong, the UK, France, Ireland and China among its top 20. South Africa ranks only  45th on this index.

And it’s telling, Dukharan says, that the FATF had not flagged either the UK or Russia, “despite last year’s explosion of evidence of Russian oligarchs hiding and laundering money in the City of London.”

All of which may be true — but it’s also true that South Africa’s criminal detection and prosecution systems are woefully inadequate, especially when it comes to implementing our existing laws. If South Africa harbours any hope of getting off the greylist in the next two years, it can’t take its foot off the gas in fixing the eight outstanding issues identified by the FATF (see table).

The Banking Association warns that unless the government “strengthens the capacity for the justice system to investigate and secure convictions for financial crimes”, the greylisting won’t be reversed any time soon.

Krevania Pillay, senior associate at law firm Cliffe Dekker Hofmeyr, tells the FM that to get off the greylist, there has to be “a co-ordinated effort from law enforcement authorities, intelligence-gathering bodies and accountable and reporting institutions”.

This includes lawyers, estate agents, stock exchanges, banks, fund managers and foreign-exchange dealers.

Ultimately, it’s about whether the existing rules in South Africa are effectively enforced. There are serious doubts on this front, considering how the first of the National Prosecuting Authority (NPA) state-capture cases virtually imploded in Bloemfontein this week, because of bungling by the investigators.

Still, there are encouraging signs.

For a start, the FIC hired advocate Priya Biseswar, a former director at the NPA’s Asset Forfeiture Unit, as executive manager for its monitoring and analysis division on February 1.

The centre described her as “a skilled criminal and civil litigator with more than 20 years of experience in high court litigation”, with expertise in “the unlawful activity of individuals and organisations that benefit from the proceeds of crime”.

Godongwana has also set aside more money for law enforcement. This includes an extra R1.2bn to employ 5,000 police trainees, an extra R1.76bn for the government agencies responsible for getting South Africa off the grey list, and R265m more for the FIC.

But money hasn’t been the problem with South Africa’s law enforcement; putting delinquent politicians, or compromised individuals in charge of these agencies is the real issue. Until this mismanagement is addressed, no amount of money will fix the problem. 

As Cliffe Dekker Hofmeyr’s Pillay puts it, “the proactive identification and investigation of money-laundering networks and professional enablers was not occurring”, and there have been few “successful prosecutions of high-risk crimes such as serious corruption, narcotics and tax offences”.

If, finally, serious effort is put into weeding out inept and corrupt police and investigators, there may be hope for a good outcome.

Pillay says that if those last eight FATF categories are addressed, “it would be possible for South Africa to follow in the footsteps of countries such as Mauritius and Morocco, both of which managed to manoeuvre off the list in two to three years”.

That will take political will, and proper management of South Africa’s law-enforcement authorities. And the country is some way off that.

* Additional reporting by Claire Bisseker and Ann Crotty

In 2018, the Financial Action Task Force (FATF) completed a mutual evaluation report on Mauritius — much like its assessment of South Africa in 2019. In February 2020, it greylisted the country.

Though Mauritius tackled many of the 2019 report’s recommendations, it had failed to implement five by the February 2020 deadline. From there, however, it moved quickly on the action plan it had agreed with the FATF. It trained law enforcement officials to conduct money-laundering investigations, for example, made basic and beneficial ownership information available to relevant authorities, and had its Financial Services Commission develop risk-based supervision plans.

By June 2021, the FATF acknowledged the government’s efforts. Covid put a bit of a spanner in the works, but by October 2021 — after less than two years on the greylist — Mauritius was in the clear.

The takeaway from the Mauritius case, says Ninety One deputy MD Sangeeth Sewnath, is the importance of working together. “If we use Mauritius as an example,” he tells the FM, “South Africa can be removed from the greylist within two years if the ... private sector and government co-operate to resolve the remaining concerns raised by the FATF.”

—  Greylisting: The case of Mauritius