In late February 2023, the Financial Action Task Force (FATF) announced the addition of South Africa to its so-called grey list, along with Nigeria, UAE, Tanzania, and Uganda.
South Africa failed to satisfactorily address shortcomings in its anti-money laundering and -terrorist financing legal framework – which were highlighted in the FATF 2021 mutual evaluation review (MER).
The country scrambled to plug the gaps within the allotted time frame of one year, but when the FATF met in February 2023 to deliberate on South Africa’s efforts, there were still eight issues outstanding and the global watchdog was not completely satisfied that all possible progress had been made. As a result, South Africa was added to the grey list, or group of jurisdictions which show weaknesses in combating money laundering and terrorist financing, according to FATF’s standards.
“As of February 2023, the FATF has reviewed 125 countries and jurisdictions and publicly identified 98 of them,” says the South African branch of independent global business advisory firm FTI Consulting. “Of these 98, 72 have since made the necessary reforms to address their anti-money laundering/combating the financing of terrorism weaknesses and have been removed from the process, i.e., taken off the list.”
South Africa is the only African FATF member and since signing up to abide by the FATF recommendations 20 years ago, has managed to avoid the grey list, until now.
FTI says the writing was on the wall long before the February 2023 announcement. After the MER publication, South Africa was allowed, as part of a standard process, to present a report to the FATF International Co-operation Review Group (ICRG) on the MER findings and the plan of action in addressing them.
“This post observation period report was apparently over 300 pages long. Our country’s hand-picked delegates took the report to Rabat, Morocco in February this year.”
FTI points out that every single country to date which has been subjected to the ICRG process, ended up on the grey list – the question therefore was not if, but for how long, we would be greylisted.
The next round of mutual evaluations – the fifth – takes place in 2027.
“Our countryʼs current timelines for deliverables as set out in the action plan, tweaked in Rabat, takes us up to January 2025. This does not mean that we can only be removed then; we can be removed from the list before the January 2025 milestone date.”
State capture sluggishness
The South African government’s noticeable failure to act on state capture played a significant role in the FATF’s decision. This includes allowing criminal justice institutions to be systematically undermined during that time, and not pursuing serious cases, especially those linked to state capture. These factors and more contributed to FATF pointing out the “significant shortcomings implementing an effective system”.
According to a report published in October 2022 by Business Leadership South Africa, it is “striking that the FATF noted frequently that the lack of progress in state capture related crimes was a particular problem. While money laundering and terrorism financing risks are a sub-category of commercial crime, the FATF was clearly influenced by the wider dysfunction of the criminal justice system in dealing with commercial crime in general.”
This is one of the FATF’s priority areas of improvement for South Africa, along with a “sustained increase” in outbound mutual legal assistance requests that will facilitate money laundering/terrorist financing investigations.
The collapse of South Africa’s bid to extradite the Rajesh and Atul Gupta from Dubai, where they had fled after their ally Jacob Zuma was removed as president, to face money laundering and other criminal charges, will not help the situation. The Gupta brothers were key players during the state capture era, working with a compliant Zuma to siphon as much money as possible from the national purse.
The brothers were detained by Dubai authorities in June 2022 but the extradition request was denied, supposedly because legal documentation standards has not been met. Pretoria was informed of the decision in April 2023, though the court had made the decision in February. South Africa plans to lodge an appeal.
Speaking to FTI, Corruption Watch executive director Karam Singh notes that the National Prosecuting Authority (NPA) enrolled several high-profile cases in 2022, relating to state capture – he does, however, question the NPA’s readiness to successfully prosecute these matters.
“There remain issues around the prosecutorial capacity to successfully drive complex corruption cases to successful convictions. Going forward, capacitating the NPA further, both in terms of skills and in terms of the requisite policy and legal frameworks to drive non trial resolution of some corporate corruption matters, such as the execution of deferred prosecution agreements, is an area to monitor.”
This will require more qualified investigative resourcing with financial investigation and forensic accounting skills, deliberate interventions in building capacity within the law enforcement authorities, as well as institutional reform, adds Singh.
Implications for South Africa
“Greylisting no doubt has somewhat of a reputational impact on the country, as its effectiveness in combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction is deemed to be below international standards,” says FTI.
“Cross-border transactions will also be impacted by enhanced due diligence standards being implemented by foreign correspondent banks on local banks, resulting in higher levels of due diligence than normal being applied.”
Although FATF does not call for the application of enhanced due diligence measures, says the organisation, in reality these are applied.
The UK and EU are also expected to add South Africa to their list of high-risk countries. All of this will add to the cost of conducting international business.
“South Africa has eight strategic areas we need to address. It is NOT just about getting ourselves off the grey list. It is about fixing our country; it is about making our country a place people want to invest in and not repeat history by allowing a hand-full of morally bankrupt individuals to take over the steering wheels and determine the direction we should be going in,” says FTI.
Despite what the organisation calls “exciting developments happening in our supervisory and regulatory space”, a concerted effort between government and the private sector is necessary to ensure that South Africa’s greylisting is as short-lived as possible.