In February this year, South Africa was greylisted by the Paris-based Financial Action Task Force (FATF) because of its failure to comply with its standards and measures to combat illicit financial flows, terrorist funding and potential threats to the integrity of the global financial system. This step is the consequence of the endemic corruption, generally referred to as “state capture” which has long prevailed in the country.
“While this will not immediately affect the current already low credit ratings, failure to meet the deadlines set by the FATF may induce ratings agencies to downgrade the country even further,” explains Botes.
GOVERNMENT NEEDS TO TAKE ACTION BY IMPLEMENTING POLICY
Greylisting subjects the financial services sector to increased scrutiny and stricter regulations to ensure that it addresses the deficiencies in its anti-money laundering and counter-terrorism financing (AML/CFT) systems. It serves as an early indication that the country’s financial system is at risk of misuse for illegal purposes. The logical consequence is detrimental to South Africa’s international reputation as it is seen as a high-risk jurisdiction for financial transactions, making countries hesitant to engage in financial and law enforcement cooperation.
“There are even more far-reaching repercussions than those affecting the country’s reputation. South Africa is now required to develop and implement an effective action plan to eliminate the weaknesses in the financial services sector. It must upgrade its AML/CFT laws and regulations, implement improved supervision of financial institutions, and enhance the country’s ability to investigate and prosecute AML/CFT cases. Should it fail to achieve this within the timeframe determined by the FATF, end of January 2025, there will be serious economic knock-on effects,” says Botes.
NEGATIVE IMPACT ON INVESTOR CONFIDENCE
“Foreign investors and financial institutions will be hesitant to conduct business with South Africa resulting in reduced foreign direct investment and potential capital outflows. South Africa’s access to international financial networks could be restricted, posing challenges to South African banks in conducting cross-border transactions, which in turn will negatively impact trade and economic activities,” says Botes.
General international cooperation could also be strained in certain spheres, including information sharing, law enforcement collaboration and extradition processes.
“With the requirement to implement extensive reforms and measures to rectify the deficiencies in the financial system, audit and compliance costs will skyrocket for financial, business and government institutions. All will need to invest in upgrading their AML/CFT frameworks and systems,” says Botes.
EFFECTS OF GREYLISTING ON TRUSTS
Ehlers, Director of Citadel Fiduciary, points out that the South African government recently amended legislation regulating trusts to improve compliance with FATF reporting standards. Included in this measure were the Financial Intelligence Control Act and the Trust Property Control Act (TPCA).
“Trustees of all South African trusts now need to record and report all information concerning ‘beneficial owners’, who are the founder/s of the trust, all trustees and all beneficiaries mentioned by name in the trust deed, the court order, or, if the trust is a testamentary trust, the deceased person,” explains Ehlers.
If a legal entity is one of the beneficial owners, it is required to name the people controlling and administering the entity itself. This information must be uploaded onto the Beneficial Owners Registry, an online facility at the Master of the High Court. Non-compliance can result in five years in prison or up to R10 million in fines.
“While necessary, the changes to key pieces of legislation regulating trusts add layers of complexity which only professional trustees will be able to manage. The increased burden of compliance means enhanced risk management and additional administrative costs to avoid the significant risks involved in contravention,” says Ehlers.
South Africa will be closely monitored by the FATF and its progress assessed through mutual evaluations and follow-up reports. Greylisting will be lifted only if the country successfully implements the necessary reforms and demonstrates compliance with FATF’s standards.