Professor Louis de Koker of Le Trobe Law School in Melbourne, Australia, Analyses the decision by The Financial Action Task Force to place South African on its Grey List. Despite, or perhaps because of, balanced analysis, the FATF doesn't come out of it covered in glory. Nor does South Africa.
The Financial Action Task Force (FATF) greylisted South Africa at its February 2023 plenary meeting in Paris. This means that FATF, the influential intergovernmental global standard-setting body for anti-money laundering and combating of financing of terrorism and proliferation, listed South Africa as a 'jurisdiction under increased monitoring'.
Several articles and statements reported in the South African media raised concerns about the negative economic impact resulting from enhanced due diligence measures that international counterparts will impose on South African business to guard against the risks emanating from South Africa. The picture is however more complex. Much depends on how international counterparts understand what the FATF requires them to do, the information that will inform their risk assessment, and the steps taken by the South African government and industries.
FATF standards are not basic standards. They are ambitious. The greylisting of significant economies such as Turkey, Nigeria, the UAE, the Philippines, and South Africa as well as a range of smaller economies, show that aspects of the current standards are perhaps overly ambitious for truly global standards.
The key standards date back more than three decades. Yet no country is fully compliant with the FATF technical and effectiveness standards. Some are closer to the mark than others, but all countries are still on a journey to full compliance. Comparatively speaking, some countries may, however, fall further behind while others may not be interested in meeting the standards.
In the late 1990s, the FATF began blacklisting non-compliant countries and territories. Blacklisting impacted countries negatively, in part because criminal funds fled those jurisdictions to avoid the FATF scrutiny. The last countries were listed in 2001 and delisted in 2007. By then it proved to be a powerful tool that resulted in listed countries improving their compliance levels.
Shades of grey
A more sophisticated grey- and blacklisting process was launched by the FATF in 2009.
Blacklisting is reserved for high-risk jurisdictions with significant strategic deficiencies. This is for extreme compliance cases, such as Iran, North Korea where the FATF requires specified countermeasures.
The FATF also commenced publishing a dark grey and light grey list of countries with strategic compliance deficiencies. Countries that failed to commit to an action plan to address their deficiencies, or failed to act on their commitment, were listed on the dark grey list. After an absence of some years, the dark grey listing (now part of the blacklist) returned in October 2022 when Myanmar was listed due its failure to implement its action plan.
The light grey list, on the other hand, was reserved for those countries who adopted action plans to address the deficiencies and that are being monitored for implementation of those plans.
How does the FATF describe these light grey jurisdictions in its listing statements? The February 2023 text of the grey list states that:
"Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring."
In contrast to recent press articles highlighting the deficiencies that trigger a listing, the FATF’s own declaration not only highlights the country’s commitment to meaningful remedial action but assures the international community that the FATF will monitor the implementation of the action plan, i.e. that it will not simply be an empty promise.
The FATF message is therefore far more positive than typically portrayed in the media. It is surprising that this message about the remedial action plan would trigger negative business risk responses which were absent or muted when the initial mutual evaluation report identified the deficiencies.
Expected and actual responses to grey-listed countries
How does the FATF expect international businesses to respond? The second paragraph of the listing statement is clear:
"The FATF does not call for the application of enhanced due diligence measures to be applied to these jurisdictions. The FATF Standards do not envisage de-risking, or cutting-off entire classes of customers, but call for the application of a risk-based approach. Therefore, the FATF encourages its members and all jurisdictions to take into account the information presented below in their risk analysis."
The FATF is explicitly not calling for enhanced due diligence measures. This statement was added to the standard listings text in 2019. Enhanced due diligence measures are reserved for countries on the dark grey and black list. Why then would South Africa face negative economic impact as a result of its greylisting? Working with John Howell and Nicholas Morris we considered this in a recent study of the economic impact of FATF greylisting. The reasons are complex and not necessarily convincing.
EU institutions respond to the European Commission listing of high-risk jurisdictions. When the FATF greylists a country, the European Commission adds that country to its own list of high-risk third countries. Unlike the FATF the EU requires its institutions to employ enhanced due diligence measures in relation to those countries. Whether this is warranted in relation to greylisted countries is debatable but such measures add risk-related overlays, and potentially costs, to business with EU institutions.
Non-EU institutions implementing enhanced due diligence measures often point to the sentence in the statement that encourages countries to take into account a handful of general country-related observations summarised in the statement. That sentence does not provide a strong basis for such measures. Furthermore the summary information in the statement is too high level to inform appropriate institutional risk decisions.
Some argue that the FATF’s closer monitoring of the country causes the negative economic impact. It is not clear how FATF’s oversight of the implementation of the remedial plan can hold those consequences. Increased monitoring should actually assure markets that the remedial steps are likely to be implemented, thereby limiting the risk.
In practice, many institutions, and the risk-rating tools that they use, have not fully adapted to the changes in the FATF listing processes and the revised messaging in the more recent statements. Nor did their regulators (and, arguably, the European Commission). Some confuse this list with the black list and dark grey list and believe that FATF calls for enhanced due diligence measures of greylisted countries. That is clearly not the case.
Some institutions use greylisting as an opportunity to closely read the country’s mutual evaluation report (MER) identifying the deficiencies, and then respond to those. But those reports provide dated information. In South Africa’s case the report was published in October 2021, reflecting the position as in November 2019. It does not reflect extensive legislative amendments adopted in 2022 which significantly improved South Africa's technical compliance with FATF standards. FATF’s statement itself acknowledges the progress made:
"Since the adoption of its MER in June 2021, South Africa has made significant progress on many of the MER’s recommended actions to improve its system including by developing national AML/CFT policies to address higher risks and newly amending the legal framework for TF and TFS, among others."
Reliance on old MER data results in over-designed and unnecessarily costly risk mitigation measures.
Authors who warn about significant negative impact that South Africa may suffer as a result of the listings draw on statistics that mainly relate to smaller jurisdictions or countries like Pakistan, with unique non-FATF risk profiles of their own. Close on a 100 jurisdictions have been listed in the FATF’s listing process and the general pattern is that they make the required improvements and are then delisted. FATF’s softer messaging around greylisting and market familiarity with the listing/delisting pattern may limit negative economic impact, even within the EU. Listing may however trigger a review by some institutions of their investments in, and relationships with, South Africa. Impact may flow from decisions to terminate those. While triggered by the listing those decisions would normally be based on broader economic and political stability factors.
Limiting unnecessarily harmful impact
What can be done to limit negative responses to grey-listing? Action and communication are key.
South Africa had a world-class anti-money laundering system with institutions that worked hard to ensure national integrity. The quality of its anti-money laundering systems triggered the invitation to join the exclusive membership of the FATF in 2004. State capture has left law enforcement and government-related parts of the framework in tatters. They should be restored and improved to support national interest.
Grey-listing means the government has adopted an action plan to address the problems. The government needs to convince stakeholders that the plan is sound; that it will result in a better framework for South Africa, that it is being implemented, that milestones are being met; and that the deadline of January 2025 is feasible.
South African regulated institutions and their supervisors also have a role to play. They must implement sound crime combating measures and ensure that counterparts have relevant and accurate information to correctly assess any risks relating to their business relationships. Where enhanced measures are imposed it would be important to understand why they are imposed. Good engagement will be key to prevent and address unnecessarily harsh action.
In short, South Africa needs an effective public private partnership to move off the grey list as fast as reasonably possible, while preventing unnecessary economic harm. South Africa, as one of the few co-designers of FATF standards, should not have placed itself in its current position but, with decisive government action and good industry collaboration, this unfortunate chapter can be closed without undue economic harm.
Professor de Koker can be found on Linked in here: https://www.linkedin.com/in/louis-de-koker-4175672/
The EU list of high-risk jurisdictions: https://finance.ec.europa.eu/financial-crime/high-risk-third-countries-…
The FATF's Mutual Evaluation Report re South Africa: https://www.fatf-gafi.org/content/dam/fatf/documents/reports/mer4/Mutua…
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