Celeste Campher
Cape Town - A report by the international watchdog, the Financial Action Task Force (FATF), in October 2021 identified significant weaknesses in parts of South Africa’s financial regulations.
The findings from the report have placed the country at risk of being greylisted by the international watchdog.
According to the report, South Africa has, in recent years, emerged as a hub for money laundering and financing of terrorist activities due to rampant corruption and weaknesses in the criminal justice system.
The report recommends local authorities will need to improve South Africa’s legal and regulatory framework to counter financial crimes by November 2022 in order to avoid being greylisted in February 2023.
When a country is added to the grey list, it is under increased monitoring by the FATF.
A greylisted country is one with strategic deficiencies in its systems to counter financial crimes.
South Africa will then be deemed a high-risk jurisdiction to transact with, and the FATF will require additional steps for investors who want to conduct business with the country.
Greylisting would imply banks will need to spend more money on managing correspondent banking relationships and on relationships with global infrastructure providers in South Africa.
In the past year, South African authorities have not done enough, nor acted fast enough, to address the recommendations from the FATF report.
In response to the report from the FATF, the South African Reserve Bank’s Prudential Authority published a banking sector review in July 2022 in which it found that the country’s biggest banks were at high risk of being used for nefarious purposes by external and internal parties.
As the clock is fast approaching the November 2022 deadline, the government is attempting to steam-roll two pieces of legislation through Parliament.
One is the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill, which makes amendments to four key financial acts, changing wording and responsibilities to better secure South Africa’s financial systems from money laundering and terrorism financing.
The second is the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill, which seeks to expand policy and investigatory powers and loosen the definition of terrorist activity.
The hasty reaction in amending these pieces of legislation in itself poses a risk to the country.
In its weekly Risk Alert published on October 17, the Centre for Risk Analysis (CRA) warns the hastily drafted legislation introduces secondary risks to civil liberties and potential infringements on constitutional rights.
According to the vague language proposed for the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill, the CRA warns it “could be used to limit the rights to free expression and association, and to suppress criticism of the government”.
The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill contains provisions that will make it compulsory for non-profit organisations to register with the government and subject themselves to the regulatory oversight of the state.
The bills were open to the public for a mere 10 days, and this was extended to October due to a “vociferous outcry from public society”.
Greylisting could see South Africa shut out of certain financial markets, which would have a negative effect on the wider economy, and particularly on consumer prices.
However, the proposed amendments to the key financial acts may also pose significant challenges for South African businesses. In particular, the proposed amendments to the Financial Intelligence Centre Act (Fica) regarding broadening the scope of “accountable institutions” implies that both small and large businesses will now need to comply with the new regulations placing extra administrative burdens and operational costs on businesses, ultimately passed onto the consumer.
Critics argue the amendments to Fica are too broad in their definitions and include activities that pose no risk of money laundering or terrorist funding. It is recommended smaller businesses (SMMEs) be subject to a lesser requirement and that other mechanisms, such as transaction value, could be used to manage risk.
Nevertheless, in order for South Africa to avoid being greylisted, the two bills need to be signed into law by Parliament this month.
Reports from Business Leadership SA and research firm Intelligex conclude that South Africa has an 85% chance of being placed on the grey list.
With this probability on the horizon, the crucial task now is for local authorities to minimise the impact on the financial sector and the economy.
Dr Campher is a lecturer in the Department of Economics & Finance at the University of the Free State (UFS)
Cape Times