On 24 February 2023, the Financial Action Task Force placed South Africa on its ‘grey list’. This means that South Africa will be subject to increased monitoring by the FATF and is required to actively work to address identified deficiencies in its national legislation and regulations to counter money laundering, terrorist financing and proliferation financing
While the FATF acknowledged that South Africa had made significant progress in addressing the shortcomings identified in the FATF Mutual Evaluation Report published in October 2021, eight areas of strategic deficiency were nevertheless identified in relation to the effective implementation of the country’s AML/CTF laws. South Africa is expected to take practical steps to address these areas of deficiency by no later than end-January 2025, by:
- demonstrating a sustained increase in outbound mutual legal assistance requests that help facilitate money laundering/terrorist financing investigations and confiscations of different types of assets in line with its risk profile;
- improving risk-based supervision of designated non-financial businesses and professions (these including casinos, real estate agents, dealers in precious metals and/or precious stones, lawyers, notaries and other independent legal professionals, accountants and trust/company service providers) and demonstrating that all AML/CTF supervisors apply effective and proportionate sanctions for non-compliance;
- ensuring that competent authorities have timely access to accurate and up-to-date beneficial ownership (BO) information on legal persons and arrangements (this refers to the natural persons who ultimately own or control a customer and/or the natural persons on whose behalf a transaction is being conducted, and includes persons exercising ultimate effective control over a legal person or arrangement) and that these authorities apply sanctions for breaches by legal persons of their BO obligations;
- demonstrating a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre (FIC) for AML/CTF investigations;
- demonstrating a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorism financing activities in line with its risk profile;
- enhancing its identification, seizure and confiscation of the proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;
- updating its terrorist financing risk assessment to inform the implementation of a comprehensive national counter financing of terrorism strategy; and
- ensuring the effective implementation of targeted financial sanctions and demonstrating an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.
Importantly, the eight areas of strategic deficiency identified by the FATF do not contain an item that relates directly to preventive measures in respect of the financial sector, nor do they require enhanced due diligence measures to be applied to South Africa. The FATF also stated that ‘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’.
The FATF does, however, encourage its members and all jurisdictions to consider the strategic deficiencies identified by the FATF in their risk analyses when engaging in business relations and transactions involving South African parties.
A likely practical consequence of South Africa being placed on the grey list, then, is that domestic persons, whether natural or juristic, could face enhanced scrutiny from offshore counterparties and an increased administrative and/or contractual burden in the context of cross-border / international transactions.
The extent to which this may be the case is likely to be informed by the risk analyses, risk appetites and risk-based approaches of offshore counterparties as regards South African persons (which, in turn, will be dictated by an offshore party’s need to comply with the expectations of its own jurisdiction of domicile or those of its own foreign regulators).
In practice then, we expect that there may be an additional layer of complexity for offshore counterparties dealing with domestic persons. If not carefully managed, this has the potential to dissuade foreign parties from dealing with South Africa, whether from a general business or trade perspective, from the perspective of foreign direct investment, or as regards the ability of South African persons or the State itself to secure financing from foreign lenders or to compete on the global stage.
National Treasury has stated in a media statement (available here) that it ‘expects that the increased monitoring will have limited impact on financial stability and costs of doing business with South Africa’, and that this will be monitored closely. These matters are accordingly front of mind for Treasury, which stands South Africa in good stead.
The Financial Sector Conduct Authority (FSCA), as the market conduct regulator supervising all South African financial institutions, in its press release relating to the grey-listing (available here), has said that all accountable institutions that fall within the FSCA’s supervisory purview will be expected to review their risk management and compliance programmes, to enhance their understanding of AML/CTF risks and to implement effective controls to mitigate these risks.
The FSCA further expects institutions to increase their reporting of suspicious and/or unusual transactions to the FIC, and to fully comply with all other obligations set out the Financial Intelligence Centre Act, 2001 (FICA).
In a media statement issued by the South African Reserve Bank (SARB) almost immediately following the grey-listing decision (available here), the SARB confirmed that it expects banks and other financial institutions within the SARB’s supervisory purview to comply fully with all of their obligations, and stated that the SARB will apply a high standard of supervision to safeguard and protect the integrity of the financial system.
In a strong commitment to deal more effectively with AML/CTF, the SARB intends to enhance its supervisory activities and to dissuade non-compliance through the increased issuance of proportional administrative sanctions.
Most of the obligations in FICA apply to accountable institutions as listed in Schedule 1 to FICA (including banks, life insurers, financial services providers, collective investment scheme managers and credit providers). As a result of the grey-listing, we expect all accountable institutions to be subject to increased regulatory supervision and monitoring going forward in respect of their practical compliance with FICA. This aligns with the media statements issued by the FSCA and the SARB.
We accordingly encourage all accountable institutions to take steps to ensure their compliance with FICA, without delay.
South Africa has made a political commitment to work with the FATF and the Eastern and Southern Africa Anti-Money Laundering Group to strengthen the effectiveness of its AML/CTF regime. It is evident that the country, with the unequivocal support of National Treasury, the SARB and the FSCA, is taking its grey-listing seriously, and has already developed a plan of action to be taken off of the grey list as quickly as possible.
South Africa can take some comfort here from the past experience of Mauritius, which was able to have itself removed from the grey list within just two years of being placed onto it.
The FAFT’s statement can be accessed here.
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Read the original publication at Bowmans.