South Africa should brace for the possibility of being grey-listed by the Financial Action Task Force (FAFT) before the week is over, Finance Minister Enoch Godongwana warned as he delivered the 2023 budget on Wednesday.
“The FAFT plenary will decide later this week whether or not to put South Africa under increased monitoring, otherwise known as grey-listing,” he said. “We should be prepared for that possibility.”
The decision of the Paris-based international financial crimes watchdog will be known on Friday evening.
In late 2021, it found that South Africa failed in 20 of the 40 FATF standards and in all 11 of the measures to combat money laundering.
Wednesday’s budget review noted that the enactment of two laws in 2022 — the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act — addressed 15 of the 20 shortcomings flagged by the FATF.
“The remaining five will be addressed through regulations and practices that do not require legislation,” it said, adding that the government was committed to fixing flaws in the regulatory framework, strengthening enforcement and applying strong sanctions.
Speaking at a media briefing shortly before Godongwana tabled the budget, the treasury’s acting director general, Ismail Momoniat, said he believed that if Friday brought “an adverse finding”, the outcome would be mitigated by the fact that South Africa has made a sincere effort to meet standards.
“It does look to me like there has been real progress,” Momoniat said. He declined to comment on his most recent meetings with the FAFT officials, saying: “My lips are sealed.”
The government has held discussions with the FAFT on three perceived remaining areas of weakness, among them poor anti-money-laundering controls in non-financial sectors, including the legal profession, real estate and trust service providers.
The country’s response to the state capture scandal and its ability to prosecute the culprits is under scrutiny. The watchdog has pointed to a need to increase criminal investigations, prosecutions and asset recovery in money-laundering and terror financing cases. The budget allocates R1.3 billion for the National Prosecuting Authority over two years, with the funding intended to allow it to hire 120 employees with a focus on solving complex financial crime cases.
Godongwana has allocated an additional R265.3 million to the Financial Intelligence Centre over the medium term to implement the recommendations of the FAFT and the Zondo commission on state capture.
The budget review hinted at the hope that should South Africa be grey-listed, this could be for a short period.
“Government has asked the FAFT to formally reassess South Africa’s compliance during its June 2023 plenary,” it said.
Analysts have said the damage wrought by grey-listing would be limited if the conclusion was that further progress was required and the country managed to comply within a short period.
But in a worst case scenario, in which South Africa is perceived as being inactive in addressing the FATF’s concerns, sustained grey-listing could see the loss of up to 3% of GDP a year because the reputational damage would slow investment flows and increase financing costs.