ALMOST a year after the Financial Action Task Force (Fatf) identified substantial limitations to South Africa’s Anti-Money Laundering and Combating the Financing of Terrorism regimes, sceptics and studies have shown and said that the country’s grey-listing is imminent and inevitable.

A recent report published by Intellidex, commissioned by Business Leadership South Africa, has found that there is an 85% probability that South Africa will be grey-listed, while Brenthurst Wealth director and investment strategist, Magnus Heystek, believes it is as good as done.

South Africa entered into a one-year observation period late last year to end October 2022, and a final decision on whether a grey-listing will happen should be made in February.

Intellidex said despite some progress by the government and other institutions to tackle tax crimes, illicit money flows and more – certain areas of implementation of Fatf’s recommendation seem impossible within the specific timeline. However, Heystek added that authorities had fair warning from international parties and local financial institutions for more than a year and that they were well aware of how urgent it was.

The research report estimated that the economic impact of grey-listing could be limited or severe depending on how South Africa reacts to grey-listing. They estimate the impact at under 1% of gross domestic product (GDP). “If we act with alacrity to 3% of GDP if South Africa is perceived to be slow and unwilling to meet the standards set by Fatf”.

Being placed on the Fatf’s grey-list impacts capital flows, including foreign direct investment (FDI) and portfolio and banking flows, to name a few.

In terms of the International Monetary Fund’s (IMF) working paper, “Empirical results suggest that capital inflows decline on average by 7.6% of GDP when the country is grey-listed. The results also suggest that FDI inflows decline an average of 3% of GDP, portfolio inflows decline on average by 2.9% of GDP, and other investment inflows decline on average by 3.6% of GDP.

A rough Business Report calculation, taking 7.5% of local GDP at just more than R300 billion, will amount to R410bn in capital outflows.

“The estimated impacts are all statistically significant,” said Anne Clayton, the head of public policy at the JSE. “Adverse implications include a reduction in capital inflows, which can result in a loss of external reserves, but quantifying the impact on the local bourse and foreign investors might be much more difficult to quantify.”

An internal JSE memorandum on the matter adds that for countries already in a vulnerable position (like South Africa), this would translate to a balance of payments crisis and a need for an IMF programme.

“Further, if a country is subject to the IMF programme, this would mean a deferment of implementation of agreed reforms and or a review of policy targets and their time lines for implementation. Consequently, there would be a sudden loss of capital inflows or external reserves, which would indicate a risk on the country’s ability to repay the IMF and inevitably end in a call for close monitoring by the IMF. It is also common cause that grey-listing affects aid disbursements towards the listed country.”

A Tabadlab working paper on, The Impact of FATF Grey-Listing on Pakistan’s Economy, which has an economy roughly the same size as South Africa, posits that Pakistan’s grey-listing events from 2008 to 2019 may have resulted in cumulative GDP losses worth $38bn (R658bn) occasioned by scepticism in its future economic outlook, eventually leading to a decline in local investment, exports and inward FDI.

Steven Powell, the head of ENSafrica’s Forensics practice, told Newzroom Africa this week that South Africa was compliant, or partially compliant, with less than half the Fatf recommendations.

But Powell said while the legislation to give effect to this was in progress, the additional budgets and resourcing also still needed to be developed. Despite South Africa’s profile dictating that there should be more enforcement and prosecution in this area, the Zuma years had deeply decapitated the authorities to do so, he said.

Concern has also grown over the limited amount of time allocated for public consultation and the possibility that it is being rushed, leading to even more legislative gaps. The JSE said that if the bill was to be passed into law as it stands now, there would be unintended consequences.

Powell highlighted the issues still surrounding non-dedicated financial services, like estate agents and law firms, which the Fatf have identified as potential vehicles for money laundering and the fact that the Financial Intelligence Centre’s (FIC) plans to play a supervisory role in respect of statutory professional bodies like the Legal Practice Council and the Property Practitioners Regulatory Authority, it can be a process that takes between two to three years to implement.

He also mentioned the amendments that have to be made to the Companies Act regarding beneficial ownership would take time, as the consulting portion in the local legislative process is time consuming.

Heystek said authorities had done little to prove their efforts. “The Fatf doesn’t care about intention. They look at how many people have been arrested, convicted and how many assets have been recovered,” he said.

“In the past 10 years, South Africa has only had one conviction for a money-laundering crime, and here we sit with the President’s Phala Phala scandal, Sasfin’s tobacco transgressions and the Gupta leaks. Yet not one person has been arrested in any of these cases,” Heystek said.

The Inteledex report stated that the Directorate for Priority Crime Investigation (the Hawks) had made minimal progress in building the capacity to investigate money laundering and terrorist financing, as well as other commercial crimes.

And despite the Companies and Intellectual Property Commission's preparation to start capturing information about the beneficial owners of companies, the masters’ offices of the high courts have not made progress on an equivalent process for trusts.

The impact on the economy and capital markets might have been lost on policymakers and enforcement agencies, but regulators across the board have raised their concerns. The South African Reserve Banks’ Financial Stability Review this year raised the matter as “an emerging risk to domestic financial stability is the impact of a potential unfavourable outcome by the Fatf”.

“Should South Africa fail to demonstrate sufficient progress in remediating the deficiencies identified in the Fatf by October 2022, it could have wide-reaching consequences for the South African financial system, particularly from a reputational risk perspective.”

– BUSINESS REPORT