​​​What's the impact of the FATF ​g​​reylisting for South African fintech firms?

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The revelation of South African's greylisting by the Financial Action Task Force[​1​​​​​](​FATF) on 24 February 2023, has come and gone. The greylisting is the result of the mutual evaluation process conducted by the FATF to assess technical compliance with the FATF recommendations as well as the effectiveness of the anti-money laundering and counter-financing of terrorism regime by South Africa. The mutual evaluation report of South Africa was published in October 2021 and contained findings and recommended actions across eleven assessed areas. Due to the results achieved by the country, South Africa was afforded a 12-month period within which it was required to demonstrate substantial progress in addressing the deficiencies.  Whilst South Africa made significant effort to address all identified items during the 12-month observation period afforded by the FATF, some areas require more progress. So, what exactly does the greylisting mean for fintech firms?

The term 'grey listing' is the informal language used to describe what is commonly understood in the FATF jargon as 'a country under increased monitoring'.  Essentially, this means that the impacted country is actively working with FATF to address the strategic deficiencies that have been identified following the mutual evaluation process. It differs significantly from a "blacklist," which identifies jurisdictions with significant strategic deficiencies in their regimes to counter money laundering, terrorist financing and financing of proliferation. Jurisdictions on the blacklist are identified as "high risk and subject to a call for action" according to the FATF. The current blacklist features three countries, namely Myanmar (recently added due to it being unable to address all the action items required to be remediated by September 2021), Iran and the Democratic People's Republic of Korea.

For South Africa, the public statement released by the FATF on 24 February 2023 primarily addresses the eight strategic areas that the country needs to enhance to be removed from the greylist.  Additionally, this needs to be done within specific timeframes as provided by the FATF.  The action item list is broadly concerned with a host of issues which will assist South Africa in improving the overall effectiveness of its anti-money laundering (AML) and counter-financing of terrorism (CFT) regime.[2​] The issues are as follows:

During the period of the review, South Africa (i.e. next two years) will need to:

(i) demonstrate a sustained increase in outbound Mutual Legal Assistance requests that help facilitate money laundering/terrorism financing (ML/TF) investigations and confiscations of different types of assets in line with its risk profile;

(ii) improve risk-based supervision of Designated Non-Financial Businesses and Professions and demonstrate that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for non-compliance;

(iii) ensure that competent authorities have timely access to accurate and up-to-date Beneficial Ownership (BO) information on legal persons and arrangements and applying sanctions for breaches of violations by legal persons to BO obligations;

(iv) demonstrate a sustained increase in law enforcement agencies' requests for financial intelligence from the Financial Intelligence Centre for its ML/TFML/TF investigations;

(v) demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile;

(vi) enhance its identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile;

(vii) update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy; and

(viii) ensure the effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.

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In terms of the impact on fintech firms, operating within a country on the greylist can create reputational harm as the effectiveness of the AML/CFT regime in South Africa may be perceived as lower than its international counterparts. The second implication potentially arises from consequential action taken by foreign investors, banks providing correspondent services and certain jurisdictions having a specific legislative/policy stance towards jurisdictions that are greylisted. For example, some jurisdictions through their own internal requirements, are expected to undertake enhanced monitoring and due diligence in respect of business relationships which may involve dealings with South African businesses.  Fintechs may find that potentially more rigorous scrutiny is applied to their sector from potential external investors in terms of due diligence measures. For South Africa, the financial sector was not identified on the list of strategic deficiencies required to be addressed, which is a positive aspect.  

Through the remediation process, if all action items are addressed before the deadlines, the impact of the greylisting will be reduced. In addition, the strong political commitment from all key stakeholders, coupled with effective and responsive action, will serve South Africa well in ensuring it is removed from the greylist as soon as possible. 

Notes

[​1] The Financial Action Task Force is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.

[​2​​] ​https://www.treasury.gov.za/comm_media/press/2023/2023022501%20FATF%20Grey%20Listi​ng%20Fact%​20Sheet.pdf​ 

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