South Africa greylisting impact: How can legal practitioners help?

March 1st, 2023
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On 24 February 2023, the Financial Action Task Force (FATF) greylisted South Africa (SA), which means that the country is not fully compliant with anti-money laundering and terrorist financing standards. The FATF is the global money laundering and terrorist financing watchdog that sets international standards that aim to prevent these illegal activities and the harm they cause to society.

South Africa’s greylisting will signal to investors, global banks and financial institutions that the country is not fully compliant with anti-money laundering and terrorist financing standards. The greylisting comes even after the FATF recently said that the country ‘has made significant progress on many of its recommended actions to improve’ its situation, however, more work needed to be done to ‘increase investigations and prosecutions of money laundering’ including the seizure of assets attained by means of crime (Jan Cronje ‘South Africa has been greylisted by anti-money laundering watchdog’ (www.news24.com, accessed 27-2-2023)). There were eight areas that were identified by the FATF for improvement, these are to –

  • ‘demonstrate a sustained increase in outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile;
  • improve risk-based supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and demonstrating that all [Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)] supervisors apply effective, proportionate, and effective sanctions for non-compliance;
  • ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violation by legal persons to BO obligations;
  • demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the Financial Intelligence Centre for its ML/TF investigations;
  • demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile;
  • enhance its identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;
  • update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy; and
  • ensure the effective implementation of targeted financial sanctions and demonstrating an effective mechanism to identify individuals and entities that meet the criteria for domestic designation’ (www.treasury.gov.za, accessed 27-2-2023).

The greylisting implications are many, one being that it will ‘hike the cost of doing business in South Africa by increasing the amount of due diligence companies have to carry out’ (Cronje (op cit)). South Africans will also find sending funds overseas with international banks more difficult. Another implication of greylisting that will affect an already ailing South African economy is that foreign direct investment and portfolio inflows will decline. Subsequently, the Reserve Bank has warned that greylisting could have wide-reaching consequences for the country’s financial system. ‘Although the bank has warned of capital and currency outflows, the more immediate problem is that it increases transactional, administrative and funding costs for the banking sector’ (Tim Cohen ‘It’s official – South Africa fails to avoid greylisting’ (www.dailymaverick.co.za, accessed 27-2-2023)).

Minister of Finance, Enoch Godongwana, has since said that ‘Cabinet has considered the action plan put forward by the FATF and had committed to actively work with the watchdog’ (Cronje (op cit)). In December 2022, President Cyril Ramaphosa signed two key pieces of legislation, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act 23 of 2022 in an effort to avoid greylisting but clearly the FAFT wants to see whether SA has the will and the ability to manage the structures it has now put in place.

In November 2022, the Law Society of South Africa hosted a hybrid (face to face/virtual) seminar on AML/CFT compliance for legal practitioners in Cape Town and Johannesburg. During the seminar, the Panel indicated that greylisting should be considered in the context of a failure to ensure a robust AML/CFT compliance environment. It was a process that would subject SA to increased monitoring and scrutiny to ensure that it took the necessary corrective actions. South Africa, as a country, would have to focus on working together to correct its deficiencies. The Mutual Evaluation Report: Anti-Money Laundering and Counter-Terrorist Financing Measures – South Africa, 2021 highlighted failures in various industries, particularly in the property practitioners and legal profession sectors. Greylisting would have an international ripple effect in that when dealing with SA, enhanced scrutiny and due diligence would be required, which may lead to a de-risking option being followed internationally rather than having to meet the enhanced due diligence requirements. SA would be seen as a high-risk client by the rest of the world.

The Panel discussion held during the LSSA seminar noted that there appeared to be insufficient expertise within the profession around AML/CFT compliance. It was suggested that the profession, rather than seeing AML/CFT compliance as a compliance burden and seeing risk as falling within the domain of governance and having regard to the pending amendment to legislation contained in the Bills and the law, legal practitioners should look for and identify opportunities in this field. By ensuring that they have Risk Management and Compliance Programmes in place, legal practitioners would signal to fraudsters and opportunists that they were likely to be reported if they attempted to take advantage of the legal profession. The risk-based approach was new and presented an opportunity for legal practitioners to enhance their expertise in this field, legal practitioners were invited to seize this new practice area as an opportunity.

This article was first published in De Rebus in 2023 (March) DR 3.

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