On Friday 24th February the Financial Action Task Force (FATF) grey-listed South Africa, following a Mutual Evaluation Report (MER) on South Africa published in October 2021. What does this mean for you? Grey-listing by FATF means that South Africa is placed under enhanced scrutiny for the next 12 months, where eight areas have been identified needing improvement. Grey-listing indicates deficiencies found in strategic financial legislation resulting in a possible escalation in money laundering and financial terrorism, outlines Raazia Ganie, Head of Investments at NMG Benefits.
The reality for South Africans and South African institutions is that it will become harder to do business. However, we have been under scrutiny for a while, which affects the financial services sector, in particular clients with investments offshore.
JB Smith, Head of Asset at NMG Benefits, points out that on a practical level, from an investment point of view, it will be more difficult to transact offshore, as at present it takes about 3 months to open an account with an offshore investment manager, which will now likely take even longer. “From a financial market point of view, we need to be careful not to label all the movements on our financial markets (JSE, Bonds and ZAR) as due to grey-listing” JB Smith.
While markets ended in the red on Friday 24th February after the grey-listing announcement, one may be quick to blame the grey listing for this, however it is good to keep in mind that we are part of an open economy and are influenced by the flow of news from global markets.
As the only African member of FATF, which comprises 39 member countries, and holds participation and jurisdiction through regional member bodies on the African continent, South Africa falls into FATFs listing as a “jurisdiction under increased monitoring”. The eight areas identified as strategically deficient by FATF, are expected to be addressed by South Africa, no later than the end of January 2025.
Ganie notes that the effect grey-listing will have in the short term and almost immediately, is that South Africa can suffer reputational damage, deterring both foreign and domestic investment. This in turn could lead to further credit rating adjustments, as both rating agencies and financial institutions consider a listing of this nature as a risk. However, initial reactions from rating agencies have asserted that no change will take place due to the grey listing.
Further note that the cost of cross border funding and transacting with South Africa could increase due to additional checks and compliance requirements, as well as increased administrative and legal requirements. This can cause administrative bottlenecks within business due to extra processes and procedure that must be followed, outlines Ganie.
Smith asserts that grey-listing should not hold a risk in safeguarding assets or how your investments are currently managed. What grey listing does do, is add more administrative requirements in placing money offshore or withdrawing funds from offshore investment.
Now that FATF announced their findings, we expect more detail and guidance to follow from the government, regulators and external providers that will be able to outline their requirements and impacts of regulation around grey-listing in all jurisdictions. Ganie stipulates that the extra scrutiny will provide the oversite necessary to curb corruption within both public and private sectors. However, it is important to focus on long term investment, particularly as the effect of grey-listing will be on further administrative checks and balances but won’t impact investment in the long term. As South Africa is not black-listed and there are no sanctions against South Africa, there is merely additional scrutiny to the investment and removal of assets from South Africa.
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