Escaping the Grey Zone: Strategies for South Africa to Exit the FATF Grey-listing.

During their plenary meeting in France on 24 February 2023, the Financial Action Task Force, an intergovernmental organization that aims to combat money laundering, terrorist financing, and other illicit activities, placed South Africa on its grey list. South Africa’s failure to address state capture, as well as the government’s efforts to conceal the extent of illicit cross-border payments informed the financial watchdog’s decision to put the country under strict supervision.

The country’s inclusion on the grey list raises concerns about its financial reputation, international trade, and economic growth. In a nutshell, when a jurisdiction is placed on the FATF grey list, it signifies that the country has not fully implemented or effectively enforced the recommended anti-money laundering and counter-terrorist financing measures as outlined by FATF. Even though South Africa’s grey listing
announcement had no material impact on South Africa’s financial markets and economy, suggesting that the event had been broadly anticipated and priced prior to the actual announcement. However, being on the list can cause severe and long-lasting damage to South Africa’s reputation in the global financial system with a range of adverse consequences such as capital outflow, decreased economic
growth, and financial instability.

According to International Monetary Fund (IMF), countries that are grey-listed by the FATF on average experience a net loss of 7.68% of capital flow into their countries relative to GDP. They also find that foreign direct investment (FDI) inflows declined by 3.0% of GDP. In terms of South Africa, the economic impact of grey listing depends substantially on the seriousness with which South Africa is perceived to be acting to address the concerns raised by the FATF.

A concerted and comprehensive effort by the government to promptly implement all recommended actions and fulfil FATF requirements will instil confidence in international counterparts, thereby ensuring a swift exit from the list. Conversely, if South Africa is perceived as unresponsive in addressing the FATF’s concerns, the costs incurred will be substantial. Figure one reveals the impact of the FATF grey list on the South African economy.

Figure 1: The economic impact of grey listing depends substantially on perceptions of how
determined South Africa is perceived to be in addressing FATF concerns.

Thus, it is imperative that South Africa takes proactive measures to enhance its reputation and comply with international standards. In addition to the eight special recommendations highlighted by the FATF, we discuss additional key steps the country should consider to be removed from the grey list prior to the FATF assessment in 2025.  

1. Enhance Legislation and Regulatory Frameworks.

South Africa should review and amend existing legislation to align with international anti-money laundering and counter-terrorist financing standards. This includes and is not limited to updating the Prevention of Organized Crime Act, Financial Intelligence Centre Act, and the Companies Act. In addition to providing adequate legal tools for investigations and establishing penalties that deter illicit financial activities, the amendments should enhance clarity.

2. Refine Risk Assessment and Intelligence Sharing. 

Regulators such as the South African Reserve Bank (SARB), Financial Sector Conduct Authority (FSCA), and others alike, need to conduct thorough risk assessments to identify vulnerabilities and emerging threats. In order to develop effective anti-money-laundering and counter-terrorist financing strategies, it is important to understand risks in depth. Enhancing information-sharing mechanisms between government institutions, law enforcement, and the private sector is pivotal to combat money laundering and terrorist financing effectively. Strengthening these partnerships and promoting the exchange of intelligence with other countries will facilitate proactive identification and prevention of financial crimes.

3. Sweeten International Cooperation.

South Africa should improve cooperation and information-sharing with member countries. For instance, this includes deepening collaboration with regional bodies, neighbouring countries, and global Anti-money laundering and counter-terrorist financing networks. Mutual legal assistance treaties should be strengthened, and extradition processes streamlined to facilitate effective cross-border investigations and prosecutions.

4. Strengthen the Financial Intelligence Centre’s (FIC) Effectiveness.

The Financial Intelligence Centre (FIC), plays a significant role in combating money laundering and terrorist financing in South Africa. The centre should be equipped with sufficient resources, skilled personnel, and advanced technology to effectively gather, analyse, and disseminate financial intelligence. Furthermore, strengthening collaboration with domestic law enforcement agencies, other FICs, and international partners is important for proactive information sharing.

5. Raising awareness among the public and engaging with stakeholders.

Promoting public consciousness regarding the perils associated with money laundering and terrorist financing is of utmost importance. South Africa ought to undertake educational initiatives, establish connections with civil society groups, and promote the reporting of suspicious transactions. Collaborating with the private sector, comprising financial institutions and designated non-financial entities, will cultivate a climate of adherence to regulations and ethical business conduct.

In conclusion, exiting the FATF grey list is significant for South Africa’s financial reputation and economic prosperity. By taking into consideration the above-mentioned areas of improvement South Africa can effectively address the deficiencies in its anti-money laundering and counter-terrorist financing regime. By demonstrating a firm dedication to apply these recommendations, South Africa has the potential to establish itself as a dependable and secure financial centre. This would contribute to stimulating economic growth, attracting foreign investments, and strengthening its position within the international community.


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