South African authorities not done enough to avoid the possible greylisting

When a country is added to the grey list, it means that it is under increased monitoring by the FATF. A greylisted country is one with strategic deficiencies in its systems to counter financial crimes. South Africa will then be deemed as a high-risk jurisdiction to transact with, and the FATF will require additional steps for investors who want to conduct business with the country. For the banking industry the greylisting implies that banks will need to spend more money on managing correspondent banking relationships and on relationships with global infrastructure providers in South Africa.

In the past year the South African local authorities have not done enough, nor acted fast enough, to address the recommendations from the FATF report and to avoid the possible greylisting. In response to the report from the FATF, the South African Reserve Bank's Prudential Authority published a banking sector review in July 2022 in which it found that the country's biggest banks were at high risk of being used for nefarious purposes by external and internal parties. As the clock is fast approaching the November 2022 deadline the South African government is attempting to steamroll two pieces of legislation before Parliament before the deadline. The one piece of legislation is the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill, which makes amendments to four key financial acts, changing wording and responsibilities to better secure South Africa's financial systems from money laundering and terrorism financing. The second is the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill which will expand policy and investigatory powers and loosen the definition of terrorist activity.

The government's hasty and kneejerk reaction of amending these pieces of legislation poses a risk to the country in itself. In its weekly Risk Alert published on 17 October, the Centre for Risk Analysis (CRA) warns that the hastily drafted legislation introduces secondary risks to civil liberties and potential infringements on constitutional rights. According to the vague language proposed for the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill the CRA warns that it "could be used to limit the rights to free expression and association, and to suppress criticism of the government". The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill also makes provisions that will make it compulsory for non-profit organisations to register with the government and to subject themselves to the regulatory oversight of the state. The Bills were open to the public for a mere 10 days and this has since been extended to October due to a "vociferous outcry from public society".

Greylisting could shut South Africa out of certain financial markets

The actual outcome of the greylisting could see South Africa shut out of certain financial markets, which would have a negative effect on the wider economy and particularly on consumer prices. However, the proposed amendments to the key financial acts as efforts to avoid the greylisting, may also pose significant challenges for South African businesses. In particular, the proposed amendments to the Financial Intelligence Centre Act (FICA) regarding broadening the scope of "accountable institutions" implies that both small and large businesses will now need to comply with the new regulations placing extra administrative burdens and operational costs on businesses. Increased compliance costs result in the increase in product costs which is then ultimately passed onto the consumer.

Critics of the proposed amendments argue that the amendments to FICA are too broad in their definitions and include activities that pose no risk of money laundering or terrorist funding. It is recommended that smaller businesses (SMMEs) be subject to a lesser requirement and that other mechanisms such as transaction value could be used to manage risk.
Nevertheless, in order for South Africa to avoid being greylisted the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill need to be signed into law by Parliament this month.. Reports from both Business Leadership SA and research firm, Intelligex, conclude that South Africa has an 85% chance of being placed on the greylist in February next year. With this inevitability on the horizon the crucial aspect now is for local authorities to minimise the impact of this on the financial sector and the South African economy.