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South Africa faces ‘grey list’ risk from global financial watchdog

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South Africa must urgently address the systemic rot in law enforcement institutions if it is to avoid being put on the global watchdog’s so-called ‘grey list’ financial crimes, bank executives have warned.

South Africa has until October to show the Paris-based Financial Action Task Force that it is overcoming the dismantling of law enforcement under former President Jacob Zuma.

If it fails to convince them at the October meetings, it could become the second G20 country after Turkey to be added to the watch list of what the FATF calls “jurisdictions under heightened scrutiny”. The FATF is due to issue its final decision in February 2023. Countries on the gray list include Panama, Syria and Yemen.

The label triggers greater financial and investment scrutiny and could increase the cost of doing business in an already struggling economy, said Sim Tshabalala, chief executive of Standard Bank, and Mike Brown, head of Nedbank.

“You’re not going to fall off the cliff, but it’s going to add to the increased cost of doing business. I’m sure it would lead to more inflation, higher interest rates and higher unemployment,” Tshabalala said. “Even wealthy South Africans would find it harder to invest abroad.”

The weakening of police, prosecutors and financial watchdogs has been a key chapter in the so-called ‘capture’ and looting of the state that has become South Africa’s biggest ever corruption scandal before that Zuma leaves power in 2018.

The FATF warned last year that the slow progress in investigating state capture and recovering looted assets counted against South Africa, and it said that “there are significant shortcomings in the financial information”.

In the “relay race” to restore South Africa’s image as a soft touch for money laundering, “the weakest part of the South African system, by far, is the legs of investigation and prosecution of this race,” Brown said.

Compliance with the FATF is “a very important building block in ensuring that something like state capture can never happen again,” he said. “It must be a good result for our country.”

Cyril Ramaphosa’s cabinet sent an omnibus bill to parliament in August to address FATF concerns, such as changes to trusts law and strengthening the country’s financial intelligence watchdog.

“We are doing everything in our power to prevent greylisting,” said Ismail Momoniat, acting director general of the South African Treasury.

But, in addition to legal changes, South Africa “needs to show progress in detecting financial crime”, Tshabalala said. South African prosecutors have begun to bring some state capture cases to court, a development seen as a sign of progress.

Some experts have said South Africa may find it difficult to avoid being greylisted. “I think it’s almost inevitable at this point . . . it’s been a long time coming,” said Julian Rademeyer, director covering eastern and southern Africa at the Global Initiative against Transnational Organized Crime. we are dealing with a lot of damage that has been done over the past 20 years.”

The FATF has raised more serious concerns about South Africa than about the United Arab Emirates, which was on the gray list earlier this year, Rademeyer said.

“I think there is an awareness of the potential seriousness of this, but it requires a government response that goes hand in hand with what the financial sector is doing,” he added.

Mauritius, South Africa’s financial hub in the region, is seen as a model after the Indian Ocean island’s government launched a nationwide reform drive following its own FATF gray list in 2020.

The effort, which was personally overseen by the Prime Minister of Mauritius, bore fruit with delisting and an EU blacklist last year.

“South Africans tend to wait until they are on the brink to act,” Tshabalala said. In Mauritius, “everyone is committed, that’s what we stand for in South Africa,” he added. “I believe that South Africa is capable of[such co-ordination]. . . but I think it needs strong leadership.