WHAT GREYLISTING MEANS FOR SA

The negative effects of the FATF decision cannot be overstated. To turn things around, compliance with global regulations on financial crimes will have to become more than a ‘tick-box’ exercise

For more than 25 years, I have participated in the capital markets, entering the industry at the height of the euphoria that followed South Africa’s re-entry to the global stage in 1994.

The opening of the South African economy catalysed a flurry of economic activity and investment, stimulating widespread innovation and development, including advancements to our financial market infrastructure. A wave of new stock market listings led to a sharp rise in trading volumes in our bond and equity markets, our derivatives market flourished, electronic trading was introduced and we saw improvements in the clearing and settlement of securities. Many foreign financial institutions established a presence in South Africa, enhancing liquidity and contributing to job creation and skills development.

But this time of exuberance didn’t last long, and it has since given way to despair and hopelessness where the ease of doing business has dwindled.

I spend the bulk of my time taking care of the hard-earned savings of South Africans, knowing full well the sacrifices made — be it the mineworker spending hours underground in extreme temperatures, or the factory worker exposed to hazardous conditions — to secure a promising retirement.

For me to carry out my job effectively and efficiently, a functional capital market must be in place, with a strong regulatory and policy framework, and robust market infrastructure, along with a skilled workforce.

The complex value chain of transferring our nation’s savings to the capital market and back involves a multitude of financial institutions and counterparties, both within the country and globally. So it is our responsibility to ensure that our citizens have confidence and trust in the financial system and that it functions properly. Our international counterparties and trade partners also demand this. Any risk to the system makes us vulnerable, and introduces uncertainty and instability.

On Friday the Financial Action Task Force (FATF) confirmed that it had greylisted South Africa.

The FATF is a global watchdog against money-laundering and financing of terrorism. The greylisting means it has placed South Africa in the “increased monitoring” category. The FATF says this means “the country has committed to resolve swiftly the identified strategic deficiencies within agreed time frames and is subject to increased monitoring”.

In simple terms, the greylisting implies that our policy on, and enforcement against, illicit activities including moneylaundering and financing of terrorism are not up to standard and require drastic improvement.

Increasing cost of investment

The negative implications for the country’s economy and citizens cannot be overstated. The greylisting could result in many problems — eroding foreign capital inflows, for example, and being viewed as an unsafe place to invest money and conduct business. It also affects the reverse flow of investment — the ability of domestic investors such as retirement funds, companies and individuals from investing abroad.

The process of investing globally will become extremely costly and burdensome as offshore counterparties subject South African investors to more stringent and rigorous compliance due-diligence checks. Domestic investors, therefore, face higher costs. Sadly, these will be passed back to the public.

In recent years, South Africa has lagged behind global standards when it comes to updating laws and regulations related to illicit activities, and has been lax in adequately monitoring and preventing them. Pre-empting the greylisting, legislative amendments were fast-tracked — but it was too late.

Consequently, the FATF has identified eight strategic deficiencies that need to be remedied through the implementation of an action plan.

One is the requirement for improved risk-based supervision to ensure all money-laundering and terror-financing supervisors apply proportionate and effective sanctions for noncompliance.

In practice, demonstration of compliance in South Africa is often a “tick-box” exercise, conducted without an understanding of the inherent risks of a transaction or activity. We will need a greater commitment to upskilling compliance and risk-management personnel within financial institutions and regulatory supervisory departments. At the same time, we must guard against burdening the system where the ease of doing business becomes too complex and keeps investors away.

South Africa’s greylisting must be taken seriously. It is indicative of a greater overall problem and could have serious ramifications for the country’s economy and its citizens. To escape this, the government needs to take appropriate steps to demonstrate its commitment to stopping moneylaundering and terror-financing activities, as well as efficiently prosecuting those responsible for such crimes.

Furthermore, cohesion within government departments — including among regulatory authorities — is desperately required. Work also needs to be done on closing the trust deficit between the public and private sector.

Yes, we have been placed in a perilous situation. But with the right leadership and strong decisive action, we can make progress and return to the vibrant capital markets and strong institutional capacity we once enjoyed.