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Greylisting: what now for accountable institutions?

Posted on 29 Mar 2023

On 24 February, South Africa was greylisted by the Financial Action Task Force (FATF), an intergovernmental financial crimes watchdog, for failing to address eight important shortcomings identified in its anti-money laundering and countering the financing of terrorism (AML/CFT) legislation.

The country has until January 2025 to address these issues, but in the meantime, what does greylisting mean for accountable institutions like financial service providers (FSPs), property and legal practitioners, high-value goods dealers and trust companies?

What is the Mutual Evaluation Report and how did it impact accountable institutions?

The FATF – which was founded with the aim to promote policies and set international standards for combatting money laundering, terror financing, and the proliferation of weapons of mass destruction financing – conducts peer reviews, or mutual evaluations, of member states. These reviews determine whether countries adhere to the FATF’s standards, which include 40 recommendations for combatting serious financial crimes, and assesses a country’s effectiveness in implementing these measures through 11 “immediate outcomes”.

South Africa’s Mutual Evaluation Report (MER) was conducted from 2019 to 2021, a time during which the country’s legal framework wasn’t at its strongest due to state capture. The report identified 67 recommended actions, and in October 2021, South Africa was put under a one-year observation period to give it time to address these issues.

In an attempt to avoid being greylisted, the government amended legislation to address the shortcoming identified in the report. Amendments that affected accountable institutions mainly involved expanding and strengthening existing controls in the Financial Intelligence Centre (FIC) Act and related AML/CFT legislation. This was to ensure the effective implementation of targeted financial sanctions and improve risk-based supervision of accountable institutions, like legal practitioners, property practitioners and trust companies.

Several new categories of accountable institutions were added to the FIC Act, and these entities now have to update their existing AML/CFT and counter-proliferation financing (CPF) processes.

At Masthead, we analysed both the proposed and final legislative changes and updated our compliance documentation and templates accordingly. This was to help our clients implement and update their own AML/CFT processes.

Why was South Africa greylisted?

Since South Africa’s 2021 MER was published, significant progress was made in strengthening the country’s AML/CFT measures. Most of the 67 recommended actions were implemented, but a January 2023 assessment of the country’s progress identified eight areas of strategic deficiencies, and South Africa was greylisted as a result.

To get off the greylist, South Africa needs to do the following, according to the FATF:

  1. Demonstrate a sustained increase in outbound mutual legal assistance (MLA) requests that help facilitate money laundering/terror financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile.
  2. Improve risk-based supervision of designated non-financial businesses and professions (DNFBPs), for example property practitioners, and demonstrate that all AML/CFT supervisors apply effective, proportionate and effective sanctions for noncompliance.
  3. Ensure that competent authorities have timely access to accurate and up-to-date beneficial ownership (BO) information on legal persons and arrangements and apply sanctions for breaches of violation by legal persons to BO obligations.
  4. Demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the FIC for its ML/TF investigations.
  5. Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of TF activities in line with its risk profile.
  6. Enhance its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile.
  7. Update its TF risk assessment to inform the implementation of a comprehensive national counter financing of terrorism strategy.
  8. 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.

The South African government is now working with the FATF to implement an action plan to fix these deficiencies.

How will greylisting impact South Africa?

It’s important to note that South Africa has been greylisted, not blacklisted. Countries on FATF’s blacklist present “high-risk jurisdictions subject to a call for action”. Also, these countries aren’t interested in cooperating with the FATF. Currently, there are three countries on the blacklist: North Korea, Iran and Myanmar.

Countries on the greylist, on the other hand, are described as “jurisdictions under increased monitoring”, and they are working with the FATF to address their legislative shortcomings. In February 2023, there were 24 countries on this list.

Greylisted countries suffer reputational damage because their ability to combat financial crimes is seen as lacking compared to international standards. And there are potential economic impacts, such as less capital flow into the country, increased cost when raising international funding and a drop in foreign direct investment.

What does greylisting mean for accountable institutions?

The likelihood of being greylisted was quite high given the number of issues raised in South Africa’s 2021 MER, which is why Masthead has been discussing the possibility (and impact) of being greylisted with our clients for the past year.

From our engagement with affected businesses, there seems to be a lot of uncertainty about how to risk rate and conduct due diligence on clients. The FATF did not call for enhanced due diligence measures in South Africa (this is a requirement for blacklisted countries), and the FATF’s standards don’t prescribe de-risking or cutting off entire classes of customers. But it does call for the application of a risk-based approach. Therefore, clients still need to be risk rated based on a business’ Risk Management and Compliance Programme (RMCP).

That said, when doing business in South Africa, some international companies, for example those in the UK and EU, are required to do enhanced due diligence. The resulting delay in the execution of transactions and increase in the cost of doing business can discourage overseas companies and investors from doing business in South Africa. Masthead also flagged this issue with our clients early on, which has enabled some, especially financial advisors, to adapt their investment philosophy and advice to better serve their clients and protect them from unsuspected market movements.

What happens next?

To address the eight deficiencies identified by the FATF, South Africa will have to implement amendments to existing laws or introduce new legislation, some of which may impact accountable institutions, requiring them to make additional changes to their AML/CTF processes. As with the FIC amendments actioned last year, Masthead will keep our clients informed of these developments and assist them with implementing any amendments or new laws.

It usually takes a country one to three years to get off the greylist. For example, after two years, Morocco was removed from the greylist earlier this year. However, some countries take longer – both Cambodia and Pakistan were on the greylist for four years before they were removed.

South Africa will only be removed from the list after a final, on-site assessment when both the FATF and the country are satisfied that the eight areas of strategic deficiencies have been sufficiently addressed. South Africa has until January 2025 to do this. However, the National Treasury hopes the government can do this by 2024.

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A national supplier of risk management services to independent financial advisors and other licensed financial service providers (FSPs). Established in 2004, we help our clients overcome their risk management challenges so they can grow and thrive in an increasingly regulated industry. Providing professional guidance and practical support, our team of specialists is passionately committed to delivering tangible solutions.

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