What Financial Action Task Force greylisting would mean for SA

South African banks already comply with domestic and international anti-financial crime and terrorism funding regulation and best practice, as this is required for them to be part of the global financial system. If they do not comply, they face fines, restrictions on their business, or being shut out of the financial markets on which they depend to raise capital.

In 2021, banks reported over 394 000 suspicious transactions and over 4.85 million cash transactions to the Financial Intelligence Centre (FIC). Where banks have been in breach of regulations, they have been fined or otherwise penalised by their regulators, including the FIC.

The Financial Action Task Force (FATF) Mutual Evaluation Report calls on banks to further strengthen and improve their crime prevention and risk mitigation measures.

Listen/read: SA risks money laundering, terrorist financing grey-listing

The Banking Association South Africa (Basa) is working with the South African Reserve Bank’s Prudential Authority to fix weaknesses that they have identified in the way banks manage the risk that their businesses can be used as a conduit for illicit financial transactions.

Still, South Africa is perilously close to being subject to increased monitoring by FATF – ‘greylisted’ – mainly because of weaknesses in the country’s ability to enforce anti-money laundering and terrorism-funding regulations, and to investigate and successfully prosecute financial crimes.

The possible greylisting of South Africa will likely hamper investment and international financial transactions in the country, which it can ill-afford.

Read: SA aims to fix money laundering rules by year-end

Possible threats to the country and its financial system from a grey-listing include:

•  Higher transactional, administrative, compliance, auditing and funding costs for banks operating in South Africa, which would face increased inspections by regulatory authorities.
• South Africa may be placed on the European Union’s blacklist and the United Kingdom’s list of high-risk countries. A high-risk classification means access to commercial loans, Internal Monetary Fund (IMF) borrowing and financial aid would be limited, or more stringent access requirements imposed.
• Banks’ ability to conduct cross-border transactions would be restricted, hampering imports and exports, which can lead to a decline in gross domestic product. While banks and other financial institutions would not be immediately shut out of international markets, over the medium to long term, the impact on South Africa’s economy and financial system would become progressively worse.

Further impacts include reputational damage to South Africa, that could be negative for investment and the currency. There could be a downgrade of the country’s investment and credit ratings.

Greylisting can reduce a country’s capital flows by as much as 7.6%, according to an IMF working paper.

South Africa does not have enough savings and revenue to meet its budget deficit, which includes social grant payments, public sector wages and social and economic development programmes.

If the country does not have easy, affordable access to global financial markets through the international financial system it will become much harder for it to meet the basic needs of its people.

Where possible, Basa is supporting government and regulators’ efforts to strengthen the country’s anti-financial crime capacity and to meet the requirements of FATF. However, National Treasury is responsible for overseeing the necessary legislative and technical remediation work that must be timeously undertaken if South Africa is to avoid a greylisting.

Most of the significant remediation work falls outside of the purview of the banking industry.

While banks have a duty to report suspicious transactions, they cannot investigate and prosecute.

Once banks have reported suspicious transactions, it is the responsibility of the relevant authorities to investigate further and establish if any wrongdoing has taken place and to prosecute and convict.

Basa urges Parliament, the National Treasury, the regulators, and all other stakeholders to act with urgency to ensure that every effort is made to avoid the greylisting of South Africa – or to quickly mitigate its effects if it happens.

Government should begin to undertake an impact assessment – now – of the consequences of a greylisting and set out a roadmap back to South Africa being a credible partner in the global financial system.

If the worst happens, Basa will continue to work with its stakeholders to increase South Africa’s capacity to fight financial crime and have the country removed from the list, as has been successfully done by other nations.

Bongiwe Kunene is managing director of Basa.