Going grey: What greylisting could mean for SA

If you haven’t yet heard, South Africa is on the cusp of being greylisted by the Financial Action Task Force (FATF).

While it’s not yet a done deal and efforts are underway to prevent it, local investors must be aware of these proceedings and the potential risks that will arise. Sadly, even the fact that we are being reviewed and monitored has been priced into our markets already.

As it stands, February 2023 is South Africa’s official deadline for demonstrating progress. However, if we are greylisted, there’s little doubt of difficult consequences for everyone, with the biggest impact felt across the financial services sector.

What is the grey list?

So, what does greylisting South Africa actually mean? Well, the global ‘grey list’ ticks off countries considered to be at high risk for money laundering and financing terrorism. These select nations are believed to pose a threat to the international financial system and carry a massive question mark over their financial regulatory bodies.

When a country is officially greylisted, it is heavily monitored by the FATF, which will continue to check its progress. This inclusion also serves as a warning for the susceptibility of entering the blacklist (think North Korea and Iran).

According to the official list, which includes Syria, Morocco, and Pakistan, these are the current countries that have now moved into the grey.

What is the FATF?

The FATF stands for the Financial Action Task Force. This global body, headquartered in Paris, can best be described as a ‘global financial crimes watchdog’. It sets international standards to help prevent financial crimes, while simultaneously monitoring countries across the globe, and evaluating their effectiveness in combating money laundering and terrorism financing.

South Africa is currently under review by the FATF after a mutual evaluation completed in October 2021 in which it fared quite poorly.

What does greylisting South Africa mean for us?

Claiming a spot in the grey zone will further dent our reputation. It poses a new threat to our stability, whilst adding greater weight to South Africa being heavily associated with bribery, fraud, and corruption. It’s not good, and the longer a country stays on the list, the worse it gets.

If the process of greylisting South Africa is achieved, the broader economic impact won’t happen upon the actual announcement but rather steadily over time if not remedied. Being greylisted also carries a detrimental effect on the integrity of our banking sector, causing further damage to our credibility as an investment destination.

Since global investors take the FATF watchlist seriously, any negative stains will hamper South Africa’s access to international trade and financial systems, further dampening future investment opportunities.

What are the risks for local investors?

Whilst the greylist warning ought to serve as a wake-up call for policymakers, regulators and law enforcement agencies, it’s a massive red flag for South African investors.

If you’re currently sitting with all of your money within the county, the best course of action is to actively ensure you have sufficient offshore exposure in line with your risk profile. That said, investing offshore should not form part of a knee-jerk reaction. Any decision to move money offshore should form part of a well-thought-out financial strategy, preferably with the help of a qualified professional.

For local investors wanting to externalise their rands, it’s advisable to finalise any direct offshore accounts now. Should the grey list become a reality, it will result in more onerous due diligence requirements to transfer funds in the future.

What will happen next?

The review period ends this October, by which time South Africa is expected to have completed the actions that were initially red-flagged by the FATF. However, the plenary only sits in February 2023, which is when the final grey list decision will be made.

What is South Africa doing about it?

Right now, it looks as though we are running behind schedule for demonstrating our progress, but this could change.

The National Treasury has presented urgent new amendment bills to parliament in order to satisfy the FATF’s requirements. If that legislation is already in Parliament and being processed, then there is a chance that they might be persuaded that our intentions are serious.

However, even with these actions, there’s a good chance we could miss the October deadline. Many of the issues raised by the FATF fall outside the Treasury’s reach. Aside from political willingness to implement growth-friendly economic reforms, adequate changes rely on multiple mechanisms, including parliament, regulators, and the criminal justice system.

The positives of being greylisted?

Going ‘grey’ was a good thing for Mauritius and could also be for South Africa – enhancing defences against financial fraud in the process. However, with the country’s current challenges, the added pressure is predicted to further hamper our growth. If our goal is to become a well-respected partner in the global financial system and remain a destination of choice for cross-border investments, the best course of action is active prevention now.

If the idea of the FATF greylisting South Africa is causing concern and you’d like a second set of eyes on your investment portfolio, don’t hesitate to get in touch.

I’m Giles Maynard. I provide individual investment and wealth management services for private clients and companies. I have been trusted by clients, large and small to manage, protect, and preserve their wealth. How can I help you with yours?