At the beginning of March, the Financial Action Task Force (FATF) put South Africa on its grey list. But for Vincent Gaudel, a financial compliance crime expert at LexisNexis Risk Solutions, it did not come as a surprise. In fact, it was reported that there was an 85% chance that the country could be greylisted. “The initial results of the 2021 mutual evaluation report by the FATF were not great for South Africa. The report pointed out lots of deficiencies and some of them had critical implications,” says Gaudel. “But it could be seen as a positive development because it means that there is an agreement between the FATF and the South African government on a range of actions that need to be taken to address the current issues.”
Simply put, being greylisted means that FATF believes South Africa is not doing enough to combat financial crime and terrorism. “Bad publicity for the country is probably the most striking consequence of being greylisted, but if you look closer, it’s not necessarily a bad thing,” continues Gaudel. “It is a wake-up call for South Africa. What the listing shows is that, as a country, there’s a big problem and now South Africa needs to rededicate resources to the issue and solve it to get off the grey list.”
Ahead of South Africa being greylisted, a wide range of legislative changes were pushed by the government to avoid the listing. “They didn’t succeed, but they did pass some laws that were designed to better address the issue,” he explains. “The consequence of the greylisting decision is that the country will now have higher political momentum when it comes to tackling financial crime, and you can expect things to change positively.”
There are currently eight actions in the FATF plan, none of which require immediate changes on private sector entities. The findings and actions are for the government to consider and act on. “Like having more resources dedicated to the competent authorities in a country that have the role of investigating, prosecuting and confiscating the financial assets of criminals,” adds Gaudel. One of the immediate consequences that come with being greylisted is that international institutions, as they update their country risk matrixes, will assess doing business with customers or counter-parties in South Africa as higher risk. “What it means is that those global financial institutions will carry out enhanced due diligence on any counter-party that has touch points with South Africa,” he says.
According to Gaudel, there are two dimensions to the FATF’s assessment. One is technical and about having the right laws in place; the other is about effectiveness and that’s what the action plan is dedicated to. “It means South Africa will have to do a lot of outreach, training and hiring for those competent authorities that have a primary role in tackling financial crime and making all those legal, investigative and prosecuting mechanisms more effective,” says Gaudel, who adds that such efforts take time to bear fruits and it typically takes anywhere from six months to several years for a country to get off the FATF grey list. “Improving effectiveness in the fight against financial crime is not just about signing a new law or changing an article here and there; we’re talking about a real cultural change in the country,” he says.
There’s no question that financial crime is a global issue and South Africa’s failure to implement FATF standards is likely to have significant impacts. A recent International Monetary Fund (IMF) study examined the effect of a country’s greylisting using more recent data and found an average decline in capital inflows of 7.6% of gross domestic product. “That’s a massive number, which they have observed from past occurrences of being greylisted, and for South Africa, it could mean a reduction of $32 billion in capital inflows,” explains Gaudel. For local financial institutions, this number is devastating (to put it mildly). “They’re committed to the highest standards and have the right tools and data, but they feel like the government is not doing its part.”
Ultimately, it’s not the bank’s job to put the bad guys behind bars. “As a bank, I’m never going to put handcuffs on the money launderers – the bank’s job stops at filing suspicions to law enforcement agencies,” says Gaudel. A bank can only file a report and it’s the government’s job to take over. “It can only work if you have both parties working effectively. There should be some reporting, some vigilance at the private sector level plus investigation, prosecution, sentencing and confiscation on the public side of things.”
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