Looking at how Mauritius managed their grey time may offer us some insight into what will need to be done to improve our own FATF outlook, writes Michael de la Hunt.
Just over a year ago, the Paris-based Financial Action Task Force (FATF) released its Mutual Evaluation Report on South Africa’s anti-money laundering and counter-terrorist financing measures. South Africa scored poorly with low compliance levels in the 40 areas of technical compliance, indicating several deficiencies which would require us to make some serious changes to meet FATF recommendations by April 2023 or risk being added to the FATF grey list.
Several business and industry leaders within the private sector have voiced their deep concern around this threat over the last six months, with sentiments that have been echoed by members of Parliament over the past year. When the Financial Intelligence Centre (FIC) and National Treasury presented the FATF Report to Parliament’s Standing Committee on Finance in February, FIC Director Xolisile Khanyile offered a stern warning that no investor would risk bringing money into a grey-listed country. National Treasury’s Deputy Director General (on Tax and Financial Sector Policy) Ismail Momoniat added that being greylisted would greatly impact our local economy more than a junk investment grade status.
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However, greylisting threatens our reputational risk, whereas a downgrade simply shifts perceptions of our credit risk.
There has been much talk and terror around the looming deadline next year. In his Medium Term Budget Policy Statement (MTBPS), Minister of Finance Enoch Godongwana shared that government had tabled two Bills in Parliament, aimed at addressing these weaknesses in our legislative framework. According to the FATF report, this includes weaknesses in the reporting of suspicious transactions – which any South African would tell you is far more on-brand for us than we would care for it to be.
From Steinhoff to state capture, it is clear that South Africa needs to address the culture of impunity that national government has nurtured for decades. Our capacity to uproot such deeply entrenched levels of corruption will only be possible if we keep holding public representatives to account against an empowered legislative framework that will protect our fiscal policy in the long term.
Pakistan and Mauritius offer recent case studies regarding the impact the FATF greylist might have on a country’s local economy. Pakistan paid dearly for it, being on the FATF greylist from 2008-2009, 2012-2015 and again from 2019. In its 2021 working paper, “Bearing the Cost of Global Politics”, a Pakistan-based economic consultancy Tabadlab, gauged the economic impact of that greylisting. The paper found that it adversely affected Pakistan’s economy through increased scepticism surrounding the economy’s future outlook, which led to a decline in local investment, exports and inward foreign direct investment (FDI). By Tabadlab’s estimate, the economy had to forgo $38 billion in GDP between 2008 and 2019, including $4.5 billion in lost trade and $3.6 billion in forgone FDI.
What did Mauritius do to get off the grey list?
Looking at how Mauritius managed their grey time may offer us some insight into what will need to be done to improve our own FATF outlook. Mauritius got off the list quickly and is now largely or fully compliant with 39 of the 40 FATF recommendations. They have strengthened their Anti-Money Laundering / Counter Financing Terrorism (AML/CFT) Legal and Regulatory Framework to meet international standards, towards being effective in mitigating risks. This approach has been complemented by a comprehensive risk-based supervision framework which now monitors financial institutions and designated non-financial businesses, such as real estate brokers and jewellery stores. The country has deeply improved the process of detecting fraud threats, prosecuting criminals, and confiscating illegal proceeds.
They have enhanced the transparency of legal persons and enlisted national coordination, as well as regional and international cooperation, which means authorities are working closely together to combat money laundering and financial crime. These tangible steps have made a difference to Mauritius – South African politicians would be well advised to take note of this if we are to avoid the repercussions.
Speaking of such, the implications of the greylist will undoubtedly be dire. If we are unable to clean up our act before April 2023, South Africa will more than likely be placed on the European Union’s list of high-risk countries that have strategic deficiencies in their AML/CFT regimes. Under the EU’s Fourth Anti-Money Laundering Directive, banks and other entities, such as credit institutions, banks, insurance companies, investment firms, trust and company service providers in the EU are required to apply enhanced customer due diligence on transactions and business relationships involving those countries listed as high-risk third countries.
READ | OPINION: Financial greylisting could be worse for SA than junk status – here’s why
That means that transactions from or to South Africa would be subject to enhanced scrutiny and more frequent risk assessment reviews. Any entities deploying EU funding would be barred from entering into new or renewed operations with those incorporated or established in our country, except when an action is physically implemented in SA. Essentially, EU development finance institutions would be prevented from investing in any new South African fund structures (or through South African entities) until the AML/CFT compliance issues are resolved.
Another important aspect worth noting is the length of period this may affect us for. Once a country is placed on the FATF grey list, the removal process can be administratively slow. It took Mauritius 18 months for removal following extreme remediation. What’s more, if the EU blacklists us, the EU Commission would only consider delisting South Africa following an assessment of the FATF’s delisting, to ascertain whether or not to reinstitute their confidence in our AML/CFT regime.
Loss of confidence will be a great threat
Ben Bernanke’s memoir about the 2008 global financial crisis and how its aftermath affected consumer and investor confidence offers an apt description of the calamity that approaches in that “Financial panics are a collective loss of the confidence essential for keeping the system functioning”.
South Africa’s economic activity depends on the effective functioning of this financial system. We depend on being able to sell goods and services to the rest of the world while importing goods from other countries as well. We depend on our financial system’s integrity when it comes to foreign investors buying local assets such as government bonds and shares on local stock exchanges.
A collective loss of confidence will certainly be the greatest threat that faces our local economy and its growth if we are to be greylisted by the FATF. There should be no greater priority than safeguarding the integrity of our financial system – our economic activity and future, depends on it. We simply cannot continue to raise the risk premium for investing in South African financial assets.
– Michael de la Hunt is Co-Founder and Fund Manager at Ion Capital Partners.
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