At the start of last year, South Africa faced a sobering truth when it was grey listed by the Financial Action Task Force (FATF). This designation signified that the country’s efforts to combat money laundering, terrorist financing, and other financial crimes fell short of international standards.

Essentially, being grey listed serves as more than just a symbolic alert; it carries substantial consequences that can impede economic progress, discourage foreign investment, and harm the nation’s reputation on the global stage.

Read: South Africa requires a consolidated agency to tackle corruption, according to OECD

To restore its credibility, South Africa must undertake proactive measures and recognize the gravity of the current situation, learning from global precedents.

Examining the broader implications of grey listing

Grey listing subjects South Africa to increased oversight from international financial institutions, making global business operations more expensive and complex.

The repercussions are tangible and significant.

Foreign investors, concerned about potential regulatory threats, may reduce their investments in the country. Already strained capital inflows could shrink further, exerting additional strain on the rand and aggravating inflation.

Moreover, firms operating in South Africa will likely face heightened compliance expenses as financial transactions endure closer scrutiny. This effectively results in delayed payments, obstructed trade, and diminished competitiveness. For a country grappling with economic stagnation, grey listing poses a formidable barrier to its growth ambitions.

The importance of learning from past experiences

While South Africa’s government is diligently working to resolve the six remaining action items (as indicated in National Treasury’s latest update), it is beneficial to analyze the long-term impacts of prolonged grey listing on other emerging economies.

For instance, Pakistan was grey listed in 2018 and subsequently faced a significant decline in foreign direct investment. Despite efforts to emerge from the list, the country’s economy endured years of declining global confidence, further exacerbated by the Covid-19 pandemic.

Read: SA’s property laundromat utilized for laundering illicit African funds

Similarly, Nigeria came under scrutiny from the FATF in the mid-2000s and experienced a sharp downturn in trade and capital flows. Even after addressing the issues, the damage to its reputation lingered, hindering its economic rebound.

South Africa must avoid this trajectory by swiftly and effectively addressing the underlying issues that prompted its grey listing.

Learning from successful cases and implementing necessary reforms

Countries such as Mauritius and Botswana provide examples of successful strategies in overcoming grey listing hurdles. Mauritius was grey listed in 2020 due to gaps in its anti-money laundering (AML) and combating the financing of terrorism (CFT) protocols. However, through decisive reforms, including more stringent regulations and enforcement mechanisms, Mauritius successfully exited the list in under two years. Botswana, which faced grey listing in 2018, also implemented comprehensive financial sector reforms and increased transparency, achieving full FATF compliance by 2021.

The key unifying factor in these success stories is prompt and coordinated efforts among government agencies, financial institutions, and law enforcement bodies. South Africa must similarly adopt a proactive approach, concentrating on three essential areas: institutional reform, enforcement, and collaboration.

Firstly, the FATF highlighted deficiencies in South Africa’s regulatory and institutional frameworks, especially concerning AML and CFT practices. To address this, South Africa must revise its financial regulations to align with global standards by enhancing regulatory oversight and equipping the Financial Intelligence Centre (FIC) with additional resources to ensure compliance across all financial sectors.

Moreover, the government should enforce stricter regulations on the disclosure of beneficial ownership of companies and trusts to curb illicit financial flows.

Read: SA approaching the prospect of exiting the grey list

In terms of law enforcement, grey listing reflects not only regulatory deficiencies but also challenges within the country regarding effectively prosecuting financial crimes. South Africa’s law enforcement agencies, particularly the Hawks and the National Prosecuting Authority (NPA), must prioritize investigations into financial crimes and, wherever possible, establish specialized units trained to handle complex financial cases.

Lastly, the private sector in South Africa, especially the banking and financial services industries, holds a pivotal role. These institutions serve as the first line of defense against illicit activities, making it crucial for banks and organizations to invest in technologies that can quickly identify and report suspicious activities.

Monitoring progress

In October, Treasury offered an optimistic progress report. The good news was that the FATF Plenary recognized nine improvements for South Africa from its 22-item Action Plan. We are now regarded as having “largely or fully addressed 16 of the 22 action items” specified in the plan, with six remaining to be addressed.

Read: Dawie Roodt discusses the grey list, mini-budget, and fiscal anchor concept

As recently noted by Investec, Treasury allocated R14 billion in the Mid-Term Budget Policy Statement to bolster agencies critical in fighting crime, including those targeting financial crimes. The formation of the Fusion Centre, which consolidates various entities including the NPA, SIU, Sars, the Hawks, Crime Intelligence, State Security Agency, and the FIC, has already led to the recovery and preservation of approximately R1.75 billion in criminal assets.

Navigating the future

Achieving compliance with FATF standards is merely the beginning. South Africa must seize this opportunity to restore investor confidence and strengthen its financial system. A transparent and consistent commitment to governance will be vital, requiring government officials to adopt a cohesive, proactive approach in communicating progress to both local and international stakeholders.

The stakes for South Africa are extremely high, and time is of the essence.

Grey listing threatens not only South Africa’s progress but also its position as a regional investment hub. As the most industrialized economy on the continent, it has a responsibility to lead Africa’s financial alignment with the global market. A failure on the part of the government and Treasury to act decisively could result in lasting economic consequences.

Bryan Silke is an associate partner at Hudson Sandler Invicomm.

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