The ‘grey list’, what is it all about?

Who had even heard of the ‘grey list’ a year ago? Before South Africa was added, it seemed only a handful were aware of what it meant to belong on the grey list. As a financial services provider we must ensure that we are compliant and belong to the FSCA (Financial Sector Conduct Authority). This Financial body provides rules, regulations, and guidelines relating to how a country conducts its financial affairs. South Africa, like every country, must ensure compliance and abide by the rules as set out by universal governing bodies.

So, what are the implications when one’s country is greylisted?

How it affects us?

The Financial Action Task Force (FATF) released in its statement on 24th February 2023 that South Africa had been greylisted. The biggest economic risk of being greylisted relates to the restrictions placed on banking services necessary for trade. Many South Africans are not aware of what this entails and how it affects them and their investments. Especially investing offshore, which has become increasingly popular due to the semi-emigration and emigration of many South Africans, added with the desire to diversify across much deeper financial markets and more stable currencies.

Why has South Africa been greylisted?

South Africa is like a teenager who has not finished his or her homework and who has now been sent to detention for not adhering to the rules of the ‘school’. South Africa did not complete all its ‘tests’ which were conducted in 2019 when many of our institutions (especially law-enforcement agencies) were most vulnerable following state capture. In 2021, when the school reports were given out, South Africa did not fare well.

Whilst no country is fully compliant with all forty FATF recommendations and all eleven effective immediate outcomes, South Africa was deemed to have too many weaknesses in its legal framework in all eleven effectiveness immediate outcomes. Because of this, the ‘teacher’ put South Africa under a one-year observation period starting October 2021, giving South Africa time to address the sixty-seven recommended actions.

South Africa pulled up its socks, and significant progress was made during the observation period. We passed two major Amendment Acts in 2022 and strengthened our institutions. In January 2023, an assessment of our progress found that South Africa had made significant and positive progress, reducing the sixty-seven recommendations to eight. As a result, South Africa was greylisted while the remaining issues are addressed; despite recognition from the FATF that significant and positive progress had been made since 2019.

What is meant by the FATF grey list?

This means we are now in detention unless we address the concerns of the governing body. Greylisting of South Africa refers to the FATF identifying countries with strategic Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) deficiencies.

In summary, the greylisting of a country means that its government has adopted an action plan to address deficiencies identified during an observation period, and will implement the plan within a defined period, under scrutiny of the FATF.

What are the implications for a country that is greylisted by the FATF?

The most important implication is reputational damage to the country, as its effectiveness in combatting financial crimes like corruption, money-laundering and terror financing are deemed to be below international standards. The second implication relates to subsequent action taken regarding cross-border transactions, by foreign banks that provide correspondent banking services and financial institutions.

How long can it take for countries to be removed from the grey list (‘detention’)?

Generally, it takes between one and three years for countries to address the concerns and take relevant action. Once the FATF is satisfied, after a final on-site assessment, the country in question may be eligible for release. South Africa is expected to address the eight areas of strategic deficiencies identified by the FATF, by no later than the end of January 2025. However, the South African government hopes to address them sooner, possibly in 2024.

South Africa’s greylisting by the FATF highlights the need for the country to enhance its Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) system. Even though the country has a good reputation for its banking system, there is always room for improvement to fight financial crimes, including money laundering and terrorist financing.

The government’s objective to regulate the financial sector and ensure its integrity aligns with FATF’s requirements to combat financial crimes. Therefore, the country needs to work towards improving its AML/CFT system, not only to meet FATF standards but also to strengthen its ability to tackle financial crimes. This includes implementing better regulations and enforcement, enhancing financial intelligence, and improving inter-agency cooperation. Continuously improving the integrity of the financial system is crucial for South Africa’s reputation as a financially stable and secure country. It will also help attract foreign investment, which is crucial for economic growth and development.

What this means for Harbour Wealth’s clients going forwards:

In accordance with our Risk based approach, the Harbour Wealth compliance process will be slightly stricter for all offshore investment business, this includes new and existing clients.

Most clients have become accustomed to the question of, “Are you a Politically Exposed Person (PEP)?”, when conducting business with Financial Institutions. We have now been introduced to the question of “Are you a Commercially Exposed Person (CEP)?” What is a CEP? This will be senior executives of well-known commercial enterprises both nationally and internationally.

If you are a CEP or PEP, you will be regarded as higher risk applicants and enhanced due diligence will be required on a client-by-client basis. Harbour Wealth takes AML/CFT very seriously and we endeavour to assist in removing South Africa from the grey list. This is mainly for the benefit of our country, our economy, and for the security of our clients.

How can we assist you?

We understand that this is frustrating for all, and we hope that this visit to detention will be short lived. However, in the meantime we will all have to complete the extra documents as thoroughly as possible. We understand that this will entail further administration, however we have been aware of the grey list for some time and are therefore well placed to make this experience a little more bearable.

If you would like to discuss this further or have any queries, please don’t hesitate to get in touch with any of the experienced and accredited wealth managers at Harbour Wealth.