27 February 2023 – 05:00
After the decision by the Financial Action Task Force (FATF) to greylist SA, many will rightly bemoan that we have added this to a long list of self-inflicted harms that have savaged investor confidence and weakened the rand.
In the end, the government’s serial failure to ensure effective law enforcement has put us on the list, though it has belatedly tried hard to avoid this outcome.
Some will bemoan too that while few countries fully comply with the FATF’s demanding standards on preventing money laundering and terror financing, it is Africa that seems, somewhat unfairly, to have borne the brunt of the Paris-based organisation’s punishment. To some extent that is right too.
But the crux of the matter is that the FATF is simply putting the pressure on SA to do what it should be doing for itself. Friday night’s greylisting will have negative consequences, making it more costly and cumbersome to do business, particularly across borders. But it has served to focus minds within the state on the need for SA to up its law enforcement game.
The pressure will be on to do a lot better between now and the next deadline in January 2025. The clear message is that unless we see more investigations, prosecutions and asset forfeitures, and unless SA can show it is ready to act decisively and effectively against financial crimes, it will face potentially severe economic consequences.
The advanced economies that are SA’s major trading partners want to be sure their own financial systems will not be infected by money laundering or terror financing, and the FATF process is designed to ensure that. In that sense, the subpar performance of our prosecution and policing services has real economic consequences. The process has hopefully driven that home to the leaders of those services, who participated, with financial regulators and government officials, in SA’s efforts to avoid the grey list.
Quite aside from the economic cost though, the greylisting is a sharp reminder that SA is behind the curve on implementing the reforms it has promised on fighting crime, corruption and money laundering. That is causing severe damage to the economy and the social fabric. We should not need the FATF to tell us that delivery on these reforms should be speeded up.
The evaluation process that led to Friday night’s decision goes back to an October 2021 FATF report that reflected the 2019 position and identified 67 items SA had to address. Led by the National Treasury, the team did an impressive amount of work to address these, even if it all felt woefully last-minute. The two key pieces of legislation that went through parliament in December will help to provide necessary tools to curb money laundering and terror financing, as well as financial crime and corruption generally. They may well not have happened without the threat of greylisting.
SA’s legislative and regulatory framework now positions it well to comply with the FATF metrics. The team has managed to whittle the original list of 67 items down to eight strategic issues that SA should resolve. That is an impressive achievement and one to be lauded even if in the end SA could not tick all 67 boxes.
Crucially, the eight remaining boxes are all about the effectiveness of our ability to investigate and successfully prosecute financial crime and catch and sanction the money launderers and terror financiers — not about the legislative or regulatory framework. That in turn reflects the dysfunctional state of SA’s police, crime intelligence and prosecuting agencies, despite promises to turn them around and repair the damage done to them in the state capture years.
The tragedy is that SA has long been highly regarded for the strength of its financial sector and the soundness of its financial regulation. But while the financial sector and its regulators spend heavily on complying with rules on dodgy dealings and reporting it, law enforcement lacks the capacity to back them up and take their reports through to effective prosecution. There are also holes in regulation and compliance outside the financial sector.
How negative the consequences of the greylisting will prove for business and investment is the subject of debate. Combined with all SA’s other woes, the damage to confidence and the country’s reputation as an investment destination and financial hub could be significant.
The priority must be to get off the greylist as fast as possible. As a member of the FATF SA has submitted itself to this process. It must make the most of it to catalyse the remedial action required to get us off the greylist — not because Paris says so, but because SA needs it.