Government sends warning to businesses in South Africa
South Africa’s journey to remove itself from the Financial Action Task Force’s (FATF’s) grey list requires significant corporate compliance improvements.
And the government’s Financial Intelligence Centre (FIC) says that where these businesses don’t comply, they should expect to receive harsh sanctions as enforcement bodies continue to up the ante against them.
This was emphasised at a panel discussion at the 11th Annual Tax Indaba on 9 September 2024.
In February 2023, the FATF greylisted South Africa due to inadequate measures against money laundering, terrorist financing, and proliferation financing.
Being on the grey list means the country must address strategic deficiencies within specified timeframes and is subject to intensified monitoring.
The FATF has highlighted the need for South Africa to implement a robust strategy to counter terrorism financing, enhance anti-money laundering efforts, and improve the investigation and prosecution of complex financial crimes.
Deputy Director-General of the National Treasury, Ismail Momoniat, noted that the greylisting reflects broader systemic issues beyond the financial sector.
“The bigger issue is that we were greylisted because our law enforcement agencies were seriously weakened by state capture,” he said, pointing out that this led to ineffective investigations and prosecutions.
Momoniat stressed that the problem extends to non-financial sectors such as legal practitioners and real estate agents. “We were particularly weak in the non-financial sector side of things,” he added.
Christopher Malan from the FIC described the greylisting as a significant fall from grace, contrasting South Africa’s previous role as FATF chair in 2005/06 with its current status.
The FIC, now responsible for overseeing non-financial services, issued directives in March 2023 requiring sectors like legal practitioners, estate agents, and trust service providers to submit risk and compliance returns (RCRs) by 31 May 2023.
Yet, submission rates are still low: 60% for legal practitioners, 66% for estate agents, 74% for trust service providers, and 76% for company service providers. Only casinos met the deadline.
Malan criticised the low compliance rates, especially in high-risk sectors like legal and real estate.
“There is still a reluctance to file risk and compliance returns,” he said, highlighting the tendency of some professionals to delay compliance until faced with enforcement actions.
Despite repeated appeals, submissions from sectors including dealers in precious stones and metals, credit providers, and crypto asset service providers, which were due by 31 July 2023, remain largely outstanding.
Malan emphasised that non-compliance would undoubtably lead to sanctions as it hinders South Africa’s progress in demonstrating effective risk identification.
The FIC is also focused on consolidating regulatory data into a forensic package for law enforcement, to guide investigations and prosecutions.
Momoniat stressed that accountability must extend to all involved in financial crimes, including those in support roles such as accountants and lawyers.
“They need to also pay the consequences for what they’ve done by pretending to look the other way and enabling the crimes,” he said.
Dr. Roy Havemann from Stellenbosch University’s Bureau for Economic Research highlighted the economic urgency of resolving the greylisting.
Citing Pakistan’s repeated greylisting and its estimated R200 billion economic impact, Havemann stressed the importance of weighing compliance burdens against the economic costs of being greylisted.
Economics Professor Jannie Rossouw from Wits Business School echoed this view, noting that greylisting diminishes South Africa’s attractiveness as an investment destination, leading to higher interest rates and diminished foreign investment.
The FATF has identified 22 action items for South Africa to address to improve its anti-money laundering and counter-terrorism financing framework.
As of the FATF’s latest review in June 2024, South Africa had addressed or largely addressed eight of these items, with 14 still in progress.
Momoniat expressed cautious optimism following the recent FATF meeting in Brussels.
He believes that South Africa can resolve an additional eight to ten items, leaving a few outstanding items for early 2025.
“It is going to be tough. I think the last mile is going to be the toughest because they want to see the investigations and prosecutions,” said Momoniat.
If South Africa addresses all action items, it could exit the grey list by June 2025, with a possible extension into October if necessary.
The panel of experts said that path ahead is challenging, but timely and sustained efforts, particularly to do with compliance and prosecutions, can help restore South Africa’s standing in the global financial community.
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