South Africa Battles to Remove Financial Stigma: A Year More on the FATF Grey List

South Africa, a key economy in the African continent, is facing prolonged scrutiny on the international stage. The Financial Action Task Force (FATF), an influential global financial watchdog, has cast a shadow over the nation's credibility by keeping it on its grey list—a decision that signals concern over the country's commitment to stemming financial crimes. The National Treasury's projection depicts a daunting timeline with South Africa remaining under this classification for the majority of 2024, thereby entering the second year in such a precarious position.

The FATF's assessment exposed gaps in South Africa's framework designed to battle money laundering and terrorist financing. Among the numerous points of FATF’s critique, South African law enforcement's lackluster approach to prosecuting high-profile cases, notably those linked to the State Capture scandal, was particularly detrimental. This indicates a significant discrepancy between the set standards and actual practice in enforcing laws that safeguard the financial system from abuse.

This extended grey listing spells trouble for the country economically. It is not just a matter of reputation; the practical implications are far-reaching. Standard business operations for South African entities, particularly banks, have become increasingly convoluted and expensive. Enhanced due diligence has been mandated to scrutinize the origins of client funds, a process that adds to the operational costs and complicates international financial relations—including securing international loans and engaging in cross-border financial activities.

Despite the considerable steps taken by the government—seen in the efforts to expand financial intelligence use from the Financial Intelligence Centre (FIC) and boost funding for relevant regulatory bodies—South Africa is still grappling with what the FATF calls "five outstanding technical deficiencies." These persistent gaps reflect a combination of systemic issues and the challenging task of altering entrenched processes and mindsets.

The Treasury does not downplay the magnitude of the task. It concedes in its financial sector review that the path to eradication of these deficiencies, and to ultimately satisfy the FATF, necessitates a concerted and sustainable effort from all pertinent authorities. This includes the introduction of legislative amendments, currently under parliamentary consideration, to fortify the country's commitment to fighting financial crimes.

The upcoming assessment in February 2025 is already being anticipated as a crucial milestone. It will determine South Africa's success in implementing the recommended changes and lay bare the effectiveness of the nation's strategy against financial crime.

Until South Africa demonstrably rectifies the technical and strategic shortcomings identified by FATF, the grey list designation will continue to serve as an admonitory marker of international concern, and a constant reminder of the work that lies ahead for the government and financial institutions of South Africa.