South African companies need to take action after FATF greylisting

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However, during its plenary session in February 2023, FATF announced that it had greylisted South Africa. The global money laundering and terrorist financing watchdog placed the country on its ‘Increased Monitoring’ list - often referred to as the greylist - due to shortcomings in South Africa’s response. Being placed on the greylist means that the country is still actively working with FATF to address deficiencies in its legal systems. The country is subject to increased monitoring as it works to resolve identified deficiencies within the agreed timeframes. 

What does this mean?

For South African companies, greylisting 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 transaction execution. 

Local banks are likely to experience increased customer screening requirements during onboarding as well as heightened levels of scrutiny and transactional costs in dealing with global financial counterparties, assuming such counterparties don’t elect to ‘de-risk’ and exit South African relationships.  

Many would argue that the penalties imposed by the greylist status is the last thing that South Africa needs right now in terms of a long list of obstacles within the local business environment. The impact would also be extremely unfortunate for South Africa which has long been respected as having a sophisticated and globally integrated financial system, a more open economy and larger foreign investor participation than many of the other previously greylisted countries.

What was the impact on other countries? 

South Africa is a bit of an anomaly compared to previously greylisted countries: it has a more globally integrated financial system, with a more open economy, and greater foreign investor participation than other greylisted countries’ economies. This makes it hard to estimate the potential impact on the overall economy. 

Research by the International Monetary Fund (IMF) shows that in the 89 emerging and developing countries greylisted during 2000-2017, this action resulted in a drop in capital flows equal to 7.6% of GDP over a period of nine months. For example, foreign direct investment (FDI) inflows declined by an average of 3.0% of GDP while portfolio inflows declined by 2.9% of GDP. In the case of South Africa, the economic impact of greylisting depends substantially on the seriousness with which authorities are perceived to be acting to address the FATF’s concerns.

We have seen diverse impacts on businesses, including, among others: 

• Foreign investments suspended or deferred

• Foreign financial institutions impose tougher checks on transactions to/from the country

• Transactional, administration, compliance, and auditing costs associated with enhanced levels of monitoring

• Negative impact on the stock market

For a country’s reputation, there is the risk of a stigma effect: a blotched reputation could result in weaker export demand, lower remittance receipts, reduced access to international lending and donor funding, and weaker investment prospects. Being designated as having a heightened level of risk may not only drive investors to look elsewhere but may also attract the wrong sort of interest from those who are looking for easier conduits for their criminal activities.

What can South African companies do to mitigate this impact? 

For private companies in South Africa, responding to the greylisting will require context-specific solutions depending on the broader impact of the greylisting on their plans around aspects such as strategic expansions, capital raising, and any general increased cost of doing business. 

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. 

Where companies have been pulled into the scope of 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. 

PwC has extensive experience in assisting clients in both government (including regulatory bodies) and the private sector to respond to the impacts of FATF greylisting. This includes organisations in Malta, Switzerland, the United Arab Emirates (UAE), Mongolia, and Pakistan.