Global money laundering and terrorist financing watchdog, the Financial Action Task Force (FATF), has placed South Africa on its so-called grey list.
This adds South Africa to a group of jurisdiction under increased FATF monitoring, meaning the country has committed to swiftly resolve the identified strategic deficiencies within agreed timeframes. It has important implications for South African companies doing business with international counterparties.
Prior to this announcement, PwC commented that South Africa had made considerable progress towards resolving the deficiencies in its legal framework and implementation processes since it was informed in October 2021 of the risk that it could be greylisted.
Kerin Wood, PwC South Africa forensic services: risk and regulation partner, says that South African authorities should be commended for the efforts they made around regulatory reform that aimed to avert being grey listed . “The speed at which they facilitated this is noteworthy,” she adds.
However, FATF has decided that the response has been insufficient, and will now work with authorities to address the lingering deficiencies. This means that South African companies will need to respond quickly to mitigate the risks stemming from this development.
The impact of being grey listed
For example, grey listing could increase the cost of raising finance and trading with global counterparties. Businesses and non-governmental organisations will face additional requirements around sources of funding which are likely to increase costs and result in delayed transactional execution, and local banks are likely to be required to implement increased customer screening requirements.
For private companies in South Africa, Wood says that responding to the grey listing will require context-specific solutions depending on the broader impact it will have on their plans around aspects such as strategic expansions, capital raising and any general increased cost of doing business.
Where local companies have been pulled into the scope of the regulatory requirements, these entities will have to assess the specific impacts and ensure that they take steps to enhance their current control environments and frameworks to address their new regulatory expectations.
“South African companies operating as financial intermediaries across jurisdictions may be asked to understand independent risk assessments to enable their counterparties to gain assurance that their controls/frameworks are aligned with global standards and to prevent such counterparties from exiting these relationships,” Wood explains.
“It is challenging to estimate the potential impact of grey listing on the overall economy,” she says. “South Africa is a bit of an anomaly compared to previously grey listed countries: it has a more globally integrated financial system, with a more open economy and with greater foreign investor participation than other grey listed countries’ economies.
” In other jurisdictions, we have seen diverse impacts on businesses, including foreign investments suspended or deferred as well as increased transactional, administration, compliance and auditing costs associated with enhanced levels of monitoring.”