After dropping the baton in the home stretch, SA is in a relay race to escape greylisting

Avoiding greylisting was like a relay race where South Africa dropped the baton at the last switch over writes Michael Avery. The country needs to pick up the baton and surge forward if it hopes to escape.

For those who have been following the story, it came as little surprise that South Africa was declared among the jurisdictions under increased monitoring by the Financial Action Task Force (FATF) at its most recent review on February 24th, with significant implications for the country's economic growth and global competitiveness. 

In conversation with Nedbank CEO Mike Brown on Classic Business last year, he likened it to a relay race, with rules around who's allowed to run in the race, what stadium, ages and so on – the framework of rules, regulations, and so on.

The financial services sector is the first runner; it is their responsibility to know their clients and report transactions they believe to be suspicious as well as certain cash threshold levels to the Financial Intelligence Centre, the second runner (FIC). The FIC's role is to examine each transaction, connect the dots, and, if something needs to be looked into, pass it along to the next runner, which is the investigating authorities, who look into the matter further if there is a case. The prosecuting authorities are the last runners.

And if you look across that entire chain, you'll find that one of the FATF's 11 identified deficiencies maps to banks. The other ten map to various entities in that relay race at the back end. Consider how many prosecutions have emerged from the Zondo commission, for example.

South Africa has already taken measures to address the concerns raised by the FATF. The Investigating Directorate was established within the National Prosecuting Authority to prosecute individuals and entities involved in state capture. South Africa has also submitted several reports to the FATF, prosecuted several money laundering offenders, and utilised extraditions to get fugitive offenders. The National Treasury has enacted necessary legislation to amend five pieces of legislation, including the Companies Act, 2008, and the Financial Intelligence Centre Act.

The implications of grey-listing for South Africa are primarily two-fold: reputational and economic. The blow to the country's reputation comes at a terrible time with the outgoing CEO of embattled power utility Eskom Andre de Ruyter blowing the lid on widespread corruption still plaguing the utility and alleging that South Africa's police service and NPA are dragging their heels in bringing the perpetrators to book.

The economic consequences of greylisting include less capital flowing into South Africa, economic penalties being imposed, and regulators in the US, EU, and UK placing restrictions on their banks regarding transacting with South African banks. This will discourage foreign direct investment and reduce capital inflows, raising the cost of doing business in South Africa, and making foreign investors reluctant to invest in the economy.

South African companies will face more requirements to prove sources of funding, leading to higher transaction costs and delayed execution of transactions. This will ultimately harm the competitiveness of South African companies and South Africa as a whole in the global market. 

Climate adaptation will also be impacted, as South Africa urgently needs to adapt to climate change, and financing from international partners is needed. Even if South Africa does receive financing, it will be riddled with higher compliance obligations and transaction costs.

In conclusion, the FATF greylisting of South Africa has significant implications for the country's economic growth and global competitiveness. However, South Africa has taken measures to address the concerns raised by the FATF, and it remains to be seen how effective these measures will be in mitigating the impact of the grey-listing. Ultimately, South Africa needs to demonstrate that it is serious about addressing AML/CFT issues and restoring its reputation in the global economy.