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What does South Africa’s grey listing mean for you?

What does the grey listing of South Africa mean for me?

It would have been hard to miss the articles in February this year, announcing that after months of speculation South Africa had finally been grey listed and warning of the dire implications of this action.

The lowdown

Grey listing is the public identification of a territory (in this case, South Africa) that has inadequacies in adhering to global standards related to Anti-Money Laundering and Countering the Financing of Terrorism. It means that South Africa now has to work to address these inadequacies by creating and implementing an action plan in order to avoid facing further consequences.

Who is in charge of global grey listing?

On an international level, grey listing is instituted and managed by the Financial Action Task Force (FATF). It sets international standards relating to the combating of money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction. South Africa is a member of FATF, along with 36 other jurisdictions, two regional bodies and 31 associate members.

In order to assess countries’ adherence to these internationally agreed standards, FATF carries out “mutual evaluations” or peer reviews. This evaluation is used to identify issues in a country’s meeting of the agreed standards, which the country in question then attends to in order to strengthen its financial system and combat money laundering etc.

If a country is found to have deficiencies in adhering to these standards it can be grey listed while it works to address them in order to be removed from the grey list. Countries that have been added and then “delisted” include Morocco, Pakistan and Ghana.

There are only three countries on FATF’s black list of countries deemed to be non-cooperative: North Korea, Iran and Myanmar.

What does it mean to be grey listed?

There are two main negative implications for any country that is grey listed.

The first is that the country suffers reputational damage, which carries macro-economic costs. In South Africa’s case, being added to the grey list does nothing to help the perception that South Africa is moving closer to becoming a “failed state”. This has implications for obtaining direct foreign investment. World bodies such as the IMF and the World Bank also do not look kindly on countries that have been placed on the grey list, while development finance institutions are likely to add a risk premium to their lending terms – thus increasing the cost of capital for the country. And as Webber Wenzel pointed out, grey listing could even affect South Africa reaching its ESG goals because of the increased cost of funding for the transition to a lower carbon economy.

The second is felt more practically. Trading with international partners becomes harder because financial institutions based outside a country’s borders, but involved in doing business with local companies, are likely require more onerous due diligence to be undertaken – which has implications for time and money. The global village depends on ease of capital flows, and if trading with international partners is made more difficult it can have a serious impact on the ease of doing business, and the cost of doing business for both companies and individuals.

South Africa’s case

For its 2021 mutual evaluation, South Africa did not fare well, with FATF determining that the country did not adequately meet many of its recommendations.

“South Africa needed to work on resolving 20 of the 40 FATF standards which requires a complete overhaul of legislation and processes. And as with any changes of legislation and processes, there are multiple steps that need to be followed. These steps are time exhaustive in nature and South Africa ultimately just did not have the sufficient time to make these necessary changes prior to the decision to grey list,” says DMA’s Cuan Sauter.

It was put under a one-year observation period in October 2021 to allow it to address the 67 Recommended Actions. South Africa made great strides in addressing these with the Recommended Actions being reduced to 8 strategic deficiencies. But despite this progress, FATF announced this February that South Africa would still be grey listed while it worked to address these.

What it means for you

As mentioned previously, one of the key effects of being grey listed is that it increases the due diligence requirements for international banks and other investors doing business with South Africa. The more onerous due diligence load increases costs.

It is probable that any individual or institution sending money offshore or receiving money from offshore will have to bear at least a portion of these increased costs. That makes it more expensive for South African investors to trade or to have bank or investment accounts offshore. 

There is also likely to be a time cost, as there will be a greater requirement for investors to submit additional documentation and verification.

And besides the direct costs that the grey listing carries, the indirect costs can be even more damaging.

“The increased cost of doing business offshore would be considered the immediate consequence. However, the main consequence is the reputational damage and discouragement of foreign investment into South Africa which will ultimately ripple through the entire economy,” adds Sauter.

Silver linings

If you’re looking for a silver lining, the South African government was quick to find one. In a letter to the country after the announcement of the grey listing, President Cyril Ramaphosa stated that although the grey listing was “concerning” it was “less dire” that some suggest. He pointed to the fact that the country had been diligent in addressing the shortcomings identified by the FATF, and concluded that the grey listing gave the country an opportunity to tighten its financial controls and response to organised crime.

Other, more neutral commentators do agree that this could act as a wake-up call for the government, and result in improved regulations.

It is also unlikely that South Africa’s grey listing will result in the termination of existing relationships. Unlike a credit downgrade, which comes with specific actions required, institutions can individually decide how to respond to South Africa’s grey listing.

written by moneybetter

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