South Africa was officially “greylisted” at the end of last month. We explain what this means and contextualise what the impact might be.
What is greylisting?
The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.
Countries that are deemed to have strategic deficiencies in their anti-money laundering and counter-terrorist financing (AML/CFT) regimes are declared "jurisdictions subject to a call for action."
If these countries fail to take sufficient action to address the deficiencies, they may be placed on the FATF's "list of jurisdictions under increased monitoring," which is also commonly referred to as the "grey list."
Last month, South Africa joined the list of countries currently greylisted such as the Cayman Islands, Nigeria, Panama, and Syria, amongst others.
South Africa had been under review by the FATF since 2017 and, in 2019, the FATF identified several areas in which South Africa's AML/CFT regime needed improvement. These included improving the transparency of beneficial ownership information, enhancing the supervision of designated non-financial businesses and professions, and strengthening the country's ability to investigate and prosecute money laundering and terrorist financing offenses.
South Africa had 67 areas noted in the June 2021 evaluation report from the FATF and had implemented measures to address 52 of them. They have until January 2025 to address the remaining 15 areas.
How is a country removed from the grey list?
A country is greylisted after being notified by the FATF of areas where its AML/CFT regime needs improvement. Once these areas are addressed, a country can come off the grey list. As an example, Mauritius came off the grey list after only 18 months.
As noted above, South Africa was notified of these areas some time ago and has made several regulatory changes to improve its AML/CFT monitoring. If South Africa addresses the outstanding areas, it could be removed from the FATF grey list as early as 2024. According to Finance Minister Enoch Godongwana, South Africa is likely to be removed from the grey list mid-2024.
What impact does greylisting have on the economy?
There are a number of impacts that greylisting has on an economy, such as:
Reduction in foreign direct investment
As South Africa is seen as a high-risk investment destination, some investors may not be allowed to invest in the country anymore. This is an immediate impact as there may be capital flow out of South Africa.
Challenges for SA business wishing to access international financial services
The greylisting could also result in increased scrutiny and monitoring by financial institutions, which could make it more difficult for businesses in South Africa to access international financial services.
Reduced competitiveness in a global market
South African companies that operate in a global market will face stricter competition owing to enhanced reporting requirements when transacting.
Increased due diligence by foreign parties for investors from SA
When investors from South Africa want to participate in the global economy, they will be required to provide more detailed source of funds documentation.
Reduced confidence in SA
We may see an initial impact on confidence in SA as an investment destination.
Despite these difficulties, South Africa is large exporter of raw materials and the world will continue to need these going forward. The country also has a highly regarded financial sector that is unlikely to be materially impacted by the FATF’s decision.
Many offshore platforms will continue to operate as usual and will adjust to any practical implications that arise.
Diversification is key
South Africa being greylisted is another one of a host of reasons to diversify internationally to limit your exposure to uncertain investment environment that South Africa represents. South Africa has been riddled with challenges and represents a fraction of the global economy, it is now more important that ever to diversify internationally.
As cross-border wealth managers, we are well placed to assist you with internationalising your assets. If you would like to chat about offshore investments or cross-border financial planning advice, get in touch at firstname.lastname@example.org or give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519.
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