FATF D-day: Will SA be greylisted?

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SIMON BROWN: I’m chatting with Kerin Wood: she is PwC South Africa’s risk and response leader. Kerin, I appreciate the time. The FATF [Financial Action Task Force] meeting this week concludes on Friday. They’re going to talk about lots of things. Of course, for South Africa it’s all around potentially being greylisted. You make the point in a note you put out that actually our government’s done a lot. It’s a hard call whether we will or won’t, but we have done a lot as a country to try and avoid it.

KERIN WOOD: Yes, absolutely, Simon. Hard call, as you say. But I do think that it is noteworthy that we have made considerable changes to our regulatory framework around this space. And, to be quite honest, it’s regulatory reform that we haven’t seen at this scale and at this speed for a number of years. So it is definitely noteworthy.

SIMON BROWN: It has been fast-tracking legislative reforms. There could be an argument made that it should have been done an age ago, not fast-tracked. In truth we can also blame the pandemic, but we have got amendments going through in spaces of, for example, anti-money-laundering. These were some of the shortfalls that we had as a country.

KERIN WOOD: Absolutely. Maybe to touch on those shortfalls, Simon, FATF, as we know, is a global money-laundering and anti-terrorist financing intergovernmental body, and South Africa is a member of it. As a member South Africa is subjected to what we refer to as ‘mutual evaluations’, where our peers essentially come in and conduct reviews of our frameworks.

Those reviews really focus on two areas. The one is what we refer to as ‘technical compliance’, which is the extent to which we are aligned from a regulatory framework perspective to the 40 recommendations that FATF has in place. And in that regard we only really scored a 50% pass, scoring 20 out of the 40 as being either non-compliant or non- or partially compliant. So a 50/50 kind of position.

Now, if you look at that in particular, that speaks to the extent to which our framework has the necessary rules in place to govern or to manage the risk of money laundering within South Africa. That is really where we’ve seen a number of the changes come through. It’s in enhancing that particular framework.

Where we have a second portion to the mutual evaluation is around what we call the ‘effectiveness rating’. What that looks at specifically is what we call the ‘immediate outcomes’. So it ranks us against 11 different criteria, and [those are] based on the effectiveness of our framework. So not just [whether] we have a framework, but how we are actually implementing it.

I think when we talk about whether we are going to get grey listed or not, the question really does sit within that effectiveness aspect and whether we’ve done enough to demonstrate that we have actually enforced the framework we’ve put in place.

SIMON BROWN: My sense is, particularly listening to what you’re saying there, it’s not as if we were an F student. I suppose we could call it close. We had to brush up on things and, as I mentioned, change some legislation. This isn’t wholesale. This is more kind of fixing things at the edges and implementing better.

KERIN WOOD: Absolutely. I don’t think we could say that there was completely nothing in place. If you look at the technical compliance aspects, there’s what we call the big six items, which are six of the specific recommendations which they focus on. If you compare us to, for example, the UAE, which was recently grey listed, the UAE essentially got only ‘partially compliant’ or ‘non-compliant’ in five of the six of those, versus we who had three that were either ‘partially compliant’ or ‘non-compliant’. So we are not the worst of the worst.

But I do think that potentially our framework has not evolved as the environment has evolved. So by way of example we’ve seen a lot come through in the virtual asset space, and one of the areas where South Africa did not cover from a money laundering perspective was virtual asset service providers.

While FATF has over the years issued a lot of recommendations or guidance around managing those types of entities, South Africa has somewhat lagged in regulating those entities. So while the framework is in place, the extent and the nature or the scope of the framework’s application has been an area of focus to these regulatory changes.

SIMON BROWN: That’s something I hadn’t thought of. This is in essence an ongoing process. Whatever the result is from this meeting – and maybe we get a pass and we don’t get grey-listed – things are dynamic. This is something which both FATF and countries the world over need to keep evolving to manage money laundering, terrorism funding.

KERIN WOOD: Absolutely. As you put boundaries and controls in place, obviously criminals find ways to get around them. So that’s the one aspect that you have to bear in mind. And number two, we are working in an increasingly evolving technology space. So as new ideas come out there are new opportunities to abuse those ideas and those concepts in order to facilitate money laundering or terrorist financing. This is not ‘we put this in place and we don’t have to do anything going forward’. It is going to be evolving, and I think that is a particularly important aspect to reiterate.

As I say, we can’t really say whether we are going to be grey listed or not, but what I would say is that, regardless of whether we are grey listed or not, what is going to be absolutely essential going forward is not to take that foot off the pedal, to continue to demonstrate to FATF and to the globe as a whole that South Africa is committed to the enforcement of anti money-laundering and terrorist-financing legislation, and then demonstrate that by taking action through criminal sanctions, etc, going forward. In doing that you are demonstrating that your commitment is there.

SIMON BROWN: I imagine a lot of it is commitment, and we know that parts of government have been meeting last month around that.

It also then says to me that if we do get grey listed we could fairly quickly actually bounce back. For example, the credit rating agencies [have] a much longer lead time, a much slower process. We could conceivably, maybe by the end of the year even or the third quarter, be off that grey list.

KERIN WOOD: So definitely something to consider. The  impact of grey listing is going to depend on how quickly we get off the list if we do get put on it. I think there are two areas that we’ve seen through our interactions globally where people have demonstrated an ability to get off the list quickly, and those are through demonstrating that commitment as a government to anti money-laundering and counter terrorist financing, number one. And then secondly, public and private collaboration and partnerships. That’s going to be important going forward.

We’ve seen quite a good example of it through this process with our finance institutions, the prudential authority and the FSCA [Financial Sector Conduct Authority]. We have worked quite closely with each other to enhance their frameworks in those industries, but that public-private partnership is going to be essential. We’ve seen it work in countries like Mauritius, where they were grey-listed and managed to get off the list relatively quickly.

If we are put on the list, we’re probably looking at about an 18-month period to get off it. If it could be sooner that would be great, but it’s that consistent demonstration that we need to have for the next 18 months at a minimum.

SIMON BROWN: I get your point. I hadn’t realised that. A last question. We know the meeting is this week, Monday through Friday. Do we have any sense when we will hear?

KERIN WOOD: I’m hoping by the close of Friday. Probably not good news if we are grey listed [on] Friday, but we are not clear on exactly when it’s going to be publicised. There have been instances where it has been delayed, but we anticipate by the end of [this] week we’ll have a final answer.

SIMON BROWN: Okay. So we’ll find out. In the worst case we’ll know by Monday when we all get up.

We’ll leave it there. Kerin Wood, PwC SA risk and response leader, I appreciate the insights.

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