Latest in the SA Economy | Investec Focus (2024)

The anticipation of greylisting has been building for some time, and following FATF's announcement today the currency reached R18.49/USD from its open of R18.24/USD, with the event largely factored in.The news will also not necessarily result in any adverse moves by the rating agencies, which have worked this into their calculations, noting in prior reports that SA was likely to be greylisted, and that, on a standalone basis, the greylisting does not add to the likelihood of a downgrade.

Apart from the greylisting being priced in, the negative impact on markets and the currency was also likely somewhat offset by a well-received national budget announcement earlier in the week. In his annual statement, South Africa's finance minister outlined plans for relieving Eskom's debt, with very sensible conditions designed to ensure that the utility cleans up the rampant corruption and mismanagement that has hobbled it for the past decade or more -- a prerequisite to the sustainable resolution of the electricity crisis. More broadly, the budget demonstrated that fiscal consolidation remains on track and is even running ahead of schedule on some ratios.Eskom’s debt, along with other SOE debt government guarantees, was already included under the state debt and so the bail-out is credit neutral.

But if the greylisting is not expected to dent SA's growth directly, it will have some indirect consequences, possibly including reduced portfolio flows, as well as deterring foreign direct investment (FDI). SA’s FDI is already exceptionally low, with foreigners selling SA portfolio assets in anticipation of today's news over the course of the past twelve months.

The key question now is whether and how quickly SA is able to get off the FATF grey list. This is where the credit rating agencies and others have expressed concern.

It should be noted that the purpose of greylisting is not to punish or damage a country. Inclusion on the list of "Jurisdictions under increased monitoring", as the list is officially termed, is not intended to make the economic environment more difficult, prevent flows of monies in and out of borders, or bring impediments to legal businesses.It is rather intended to raise the standard of compliance in a country. It's worth noting that, in South Africa's case, both the banking sector and the relevant legislation by and large already meet the FATF requirements.Many South African banks are indeed well placed to help clients with what will amount to likely extra paperwork and some delays due to additional due diligence requirements.

More persistent problems include SA's poor track record of successful prosecutions for crimes including money laundering and terrorist financing, along with a systemic failure to provide assistance to international investigations into financial crimes.

National Treasury notes that “following engagements with FATF, it assessed that the country needed to make further and sustained progress in addressing the eight areas of strategic deficiencies related to the effective implementation of South Africa’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws as set out in the FATF’s statement.”

The action items in question are as follows:

(1) demonstrate a sustained increase in outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile;

(2) improve risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrate that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for noncompliance;

(3) ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violation by legal persons to BO obligations;

(4) demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for its ML/TF investigations;

(5) demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of TF activities in line with its risk profile;

(6) enhance its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;

(7) update its TF Risk Assessment to inform the implementation of a comprehensive national counter financing of terrorism strategy; and

(8) ensure the effective implementation of targeted financial sanctions and demonstrating an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.

According to the statement by National Treasury, "Minister of Finance, Mr Enoch Godongwana informed the FATF President, Mr Raja Kumar, that the South African Cabinet has considered the Action Plan and committed to actively work with the FATF and The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) to swiftly and effectively address all outstanding deficiencies and strengthen the effectiveness of its AML/CFT regime.”

Treasury's statement goes on to point out some of the steps that have already been taken to address FATF's concerns, including the speedy enactment of two major pieces of legislation, which in turn amended six Acts of Parliament: theGeneral Laws (Anti-Money Laundering and the Combating the Financing of Terrorism) Amendment Act and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act. These two key p[ieces of legislation should go a long way toward solving the technical deficiencies identified in FATF's Mutual Evaluation Report (MER).

The government seemingly recognises that addressing the action items will be in the interest of South Africa and that doing so is consistent with our existing commitment to rebuild the institutions that were weakened during the period of state capture -- institutions that are essential to addressing crime and corruption.

The action items as formulated in the Action Plan, therefore, form part of the broader commitment of the Government to combat financial crime and corruption, as announced by President Ramaphosa in October last year in response to the findings and recommendations of the Zondo Commission on state capture.

The need to address the action items is also consistent with the national strategy on AML/CFT which was adopted by Cabinet in November 2022, which stressed the urgent need to strengthen the fight against financial crimes in the country and assist in preserving the integrity of the country’s financial system.

National Treasury also notes that the increased monitoring will have a limited impact on financial stability and costs of doing business with South Africa. There are no items on the action plan that relate directly to the preventive measures in respect of the financial sector, whichreflects the significant progress in the application of a risk-based approach to the supervision of banks and insurers.

The statement concludes with an assurance that "the costs of increased monitoring will be substantially lower than the long-term costs of allowing South Africa’s economy to be contaminated by the flows of proceeds of crime and corruption.”

South Africa’s Reserve Bank (SARB) has also reaffirmed its commitment to the fight against money laundering, the financing of terrorism, and proliferation financing. "The SARB and the South African government more broadly, maintain a close and open relationship with the FATF," said SARB in its official response to the greylisting announcement. "Since the FATF Mutual Evaluation of South Africa in October 2021, our coordinated government stakeholders have undertaken substantial and far-reaching efforts, led by the National Treasury, to enhance our anti-money laundering, counter financing of terrorism, and counter proliferation financing (AML/CFT/CPF) regime and its implementation.

"South Africa’s hard work resulted in most of the identified deficiencies being addressed within the 12-month observation period afforded to South Africa. South Africa’s 2021 MER highlighted several recommended actions linked to supervision and preventive measures applicable to financial institutions and designated non-financial businesses and professions.

"As a result of strategic efforts and numerous initiatives undertaken by the SARB, all pertinent action items received extensive attention. The Prudential Authority as well as the Financial Surveillance and National Payment System departments of the SARB are responsible for overall AML/CFT/CPF supervision across all banks, life insurers, mutual banks, cooperative banks, authorised dealers with limited authority, and clearing system participants.

"The FATF has acknowledged that the Prudential Authority has made the most progress in terms of the application of a risk-based approach to supervision.Some of the work undertaken included the issuance of sector-specific guidance, conducting a second round of sectoral risk assessments, instituting a new risk rating tool, enhancing the frequency of inspections, holding regular outreach and awareness sessions with banks and life insurers, as well as seeking to engage foreign supervisors in host jurisdictions concerning cross-border subsidiaries and their respective money laundering and terrorist financing (ML/TF) risks.Going forward, the SARB will further strengthen its supervision and further enhance the dissuasiveness and proportionality of administrative sanctions issued.

"The SARB has a zero-tolerance approach when addressing the abuse of the financial system by money launderers or terrorist financiers.The SARB, just as the South African government, commits to further intensify its efforts to combat all manners of financial crime and ensure the full compliance with global AML/CFT/CPF standards.The SARB echoes the sentiment of the FATF, which has stated unequivocally that it “does not call for the application of enhanced due diligence measures to be applied to these jurisdictions. The FATF Standards do not envisage de-risking or cutting off entire classes of customers, but call for the application of a risk-based approach.”

For South Africa, the greylisting is not the end of the world. But it comes at an unfortunate time, against the backdrop of a risk-averse global financial market environment, which has added to jitters on the back of the resignation of Andre de Ruyter from Eskom this week, and his public allegations of endemic fraud and corruption in the energy sector. It also represents more bad news heaped onto the worsening energy crisis and other critical failings in areas such as transport and water which are essential to a functioning economy. But the hope is that a concerted effort to cooperate with FATF in addressing failings in monitoring and controls, and getting off the grey list as quickly as possible, will be a positive step towards resolving the systemic problems that have for too long beset South Africa's economy and its people.