More crying for the beloved country – grey-listing looms for South Africa

Rumours swirl that SA will be added to the FATF grey list for AML/CFT weaknesses, what does this actually mean and how will it impact business in SA?

In October 2021, the Financial Action Task Force (FATF) published its Mutual Evaluation Report which summarised the AML/CFT measures (i.e. measures around anti-money laundering and combating the funding of terrorism) in place in South Africa following an assessment conducted in late 2019.

This was very bad news – out of the 40 technical compliance categories considered by the FATF, South Africa was found to be non-compliant in five, partially compliant in 15, largely compliant in 17, and fully compliant in only three categories.

And now it seems that South Africa has not done enough to fix these, and the government is under extreme pressure to convince the FATF at the upcoming October meetings that the strategic deficiencies in its regimes to counter money laundering, terrorist financing, and proliferation financing have been addressed and recommendations adopted.  It now seems very likely that the FATF February 2023 plenary meeting will result in South Africa being added to the list of jurisdictions under increased monitoring, often referred to as the “grey list”.

What does inclusion in the grey list mean?

The current grey list is not a club you would want to be part of – Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Türkiye, Uganda, United Arab Emirates, and Yemen.

But what does being grey-listed actually mean in practice?  The answer is both not much (directly) and a heck of a lot (indirectly).

Being added to the grey list means that FATF will carefully monitor South Africa to complete its actions expeditiously to enable it to get off the list – that sounds ok.  But like a rating downgrade, while the grey-listing doesn’t mean much on its own, it is a significant reputational blow and it will lead to material additional compliance and complexity, and thus higher transactional costs, for anything to do with South Africa. Many banks will invoke “enhanced due diligence” procedures, which can mean anything depending on the country or institution but will definitely make it more painful, slower, and more expensive to transact with South Africa.  Because of the additional costs of such enhanced due diligence, some banks and institutions will just refuse to transact with South Africa at all.

Furthermore, economic restrictions often have a knock-on impact; international dealings will become more complex which will impede cross-border operations, resulting in a loss of financial flows and thereby restricting South African’s ability to invest offshore.  All of this will hit the GDP of a country already struggling.

See here for our previous article on how grey-listing impacted Mauritius Tax Alert: Mauritius – Regan van Rooy

So bad news at an already worrying time for South Africa, once Africa’s undisputed gateway and economic power hub, and currently struggling with power shortages and reduced investment as well as a fluctuating currency.   This makes structuring your business in South Africa even more critical, contact us to discuss how this could impact you.