Greylisting: What does it mean for South Africa?

South Africa is on the watchlist for high-risk for money laundering and terrorist financing.

Greylisting 101

Greylisting refers to the identification and monitoring of countries that are considered high-risk for money laundering and terrorist financing. The Financial Action Task Force (FATF) is the global watchdog responsible for this process. Its main objective is to establish international standards that prevent illegal activities. The FATF categorizes countries based on the level of risk they pose, with blacklisted countries being deemed high-risk and greylisted countries requiring increased monitoring.

How it happened

Greylisting is the process of identifying and monitoring countries that pose a high risk for money laundering and terrorist financing. In 2019, South Africa fell short in meeting all 11 of the FATF's effectiveness measures to combat money laundering and terrorist financing, which followed an era of endemic graft during former President Jacob Zuma's nine-year rule.

In October 2021, the FATF published a report on South Africa's anti-money laundering and counter-terrorist financing measures, flagging the possibility of greylisting and warning of significant implications for the country's financial markets. Fast forward to 24 February 2023, and South Africa has indeed been greylisted. The announcement resulted in a 1.2% slump of the rand against the dollar.

What it means for SA

South Africas central bank has previously warned that grey-listing could have wide-reaching consequences for the countrys financial system, including triggering capital and currency outflows, and increasing transactional, administrative and funding costs for banks. The implications of greylisting for South Africa are two-fold: reputational and economic.

Less capital flows and investments into South Africa 

According to a report by the International Monetary Fund (IMF), greylisting leads to a significant decrease in capital inflows. This is because greylisting entails that all transactions of South African companies and individuals will be seen as high-risk transactions, resulting in complicated compliance and administrative duties, and likely disincentivising investment into and trade with South Africa.

Decreased competitiveness of SA companies in the global economy

South African companies, due to enhanced monitoring, will face more requirements and red tape when conducting international business. This will likely lead to higher transaction costs, execution of transactions, and lower trading revenue. This will ultimately harm the competitiveness of South African companies and South Africa as a whole in the global market.

Plan of Action

When a jurisdiction is placed under increased monitoring or greylisted, it has agreed to find measures to resolve identified deficiencies swiftly under a specific timeframe. To be removed from the grey list will require efforts and active citizenship from the public and private sector to rebuild the countrys credibility and trust in the global community. To support these efforts, the South African President recently put two laws in place: 

• Anti-Money Laundering - General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2022 (General Laws Amendment Act) 
• Combating the Financing of Terrorism (AML/CFT). - Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act, 2022 (POCDATARA Amendment Act)

It is now up to South Africa to demonstrate, among other things:

• An increase in the investigation and prosecution of serious and complex money laundering and terrorism financing
• An increase in mutual legal assistance requests to other countries
• An increase in the use of financial intelligence by law enforcement agencies
• The effective implementation of targeted financial sanctions