What is grey listing?
The Financial Action Task Force (FATF) is an inter-governmental body that sets and monitors international standards against money laundering and terrorism financing. The FATF conducts peer reviews of over 200 countries globally, including South Africa, on an ongoing basis to assess levels of implementation of these standards.
South Africa’s latest peer review was conducted in 2019 and the FATF issued a report on the review in October 2021, concluding that South Africa had deficiencies in relation to inter alia:
- The prevention, monitoring and prosecution of terrorism finance
- Transparency around politically exposed persons
- The beneficial ownership of companies and trusts
South Africa was given until October 2022 to rectify and address the areas of concern.
At the FATF plenary meeting held last week in Paris, the actions taken by South Africa post the 2021 report were again peer-reviewed. FATF concluded that insufficient steps had been taken to address their concerns and as a result, South Africa was placed under “Increased Monitoring”. This means that South Africa and FATF are working together to resolve the concerns identified within agreed timeframes. "Increased Monitoring" refers to the state of undergoing heightened surveillance, also referred to as being greylisted.
The principal effect of greylisting is that global organisations that receive fund flows from South African entities are likely to conduct enhanced due diligence on the source of these funds to ensure that they are not related to money laundering or terrorist financing.
There is unlikely to be any impact on service provision by South African businesses to global organisations, including the provision of fund management services such as those that Ninety One SA provides to our global client base.
Why has South Africa been greylisted?
South Africa has been placed on the grey list because concerns have not been rectified to the satisfaction of FATF. Specifically, the FATF requires South Africa to implement an action plan that will amongst other things materially improve its supervision of the non-financial sector (Real Estate Agents, Accountants, Lawyers), create greater visibility of beneficial ownership of financial assets, increase the number of investigations and prosecutions for financial crimes and ensure the effective implementation of targeted financial sanctions to counter the financing of terrorism.
Is greylisting permanent?
No. When a country has resolved the deficiencies, it may be removed from the grey list. Mauritius and Iceland are examples of countries that have moved off the grey list. Mauritius was greylisted largely on technical grounds while Iceland was greylisted on effectiveness and was able to turn this around in 12 months.
How soon can South Africa be removed from the grey list?
The lists are reviewed at the FATF plenary sessions which are hosted three times per year, and there are additional opportunities for review intra-cyclically.
The time it takes varies, with Pakistan spending more than four years on the list, Mauritius two years and Botswana three years. The quickest turnaround was Iceland, which only spent a year on the list.
In addition, once removed from the grey list it takes around three additional months for the UK and EU to remove a country from their high-risk third country-lists.
To be removed from the FATF greylist, a country must address all or nearly all the identified issues. Once the FATF has determined that a country has done so, it will organise an on-site visit to confirm that the implementation of the necessary legal, regulatory, and/or operational reforms is underway and that there is the necessary political commitment and institutional capacity to sustain implementation. If the on-site visit has a positive outcome, the FATF will decide on removing the jurisdiction from the grey list at the next FATF plenary. The country in question will then continue to work within the FATF, through its normal follow-up process, to improve its anti-money laundering policies and counter the financing of terrorism (AML/CFT) regime.
Ultimately, the length of South Africa’s stay on the grey list will depend on how seriously the recommendations are taken, and how effectively the deficiencies are addressed.
Are there any implications for Ninety One’s ability to operate in South Africa?
No, but due diligence of South African investors by international financial institutions (banks, investment managers, etc) is likely to be enhanced, which means that the process of investing outside of South Africa is likely to be more complicated and lengthier.
Are there any implications for Ninety One’s ability to manage assets for clients globally?
No, it is important to emphasise that the principal focus of the FATF review is on the quality of AML/CFT controls. These do not affect the provision of investment management services and therefore there is no impact on the ability of Ninety One SA to continue to provide these services.
Is there any other business impact on Ninety One?
Other than the point on enhanced due diligence above, we don’t expect greylisting to have a material business impact. This is a widely anticipated outcome and we have been working for a substantial time to ensure that our business and clients are not adversely impacted.
What are the implications for Ninety One’s clients globally?
The grey list concerns the flow of money out of South Africa. It does not affect international investors doing business with our non-South African-domiciled business. It only affects investors wishing to invest abroad with funds sourced from South Africa.
What are the implications for Ninety One’s South African clients?
Any South African investor investing in a non-South African-domiciled investment product will be subject to enhanced AML due diligence. Essentially, this means investors will have to provide more information about the source of the funds as well as the identity of the investor and/or the beneficial owner of the legal entity investing. We also expect an increase in the frequency of AML due diligence refreshes.
Which of Ninety One’s South African products are affected by the enhanced due diligence?
The enhanced due diligence process will only affect South African investors taking funds overseas and investing those funds in foreign-domiciled investments. We are still in negotiations with the various jurisdictions where Ninety One has products that are made available to South African investors. At this stage, we expect that the following products could be affected:
- Direct investments into a Ninety One offshore fund from our Luxembourg or Guernsey range
- Investments in the Ninety One IP Global Life Portfolio
We anticipate that the impact will not be significant, but we will confirm the final details after concluding discussions with the various global regulators involved.
What is the economic impact of greylisting?
Clearly, greylisting will be negative for South Africa in terms of reputational damage, and higher transactional, administrative, and funding costs will result in a less efficient economy with more frictional costs.
While there have been several studies assessing the economic impact of greylisting, the results are for the most part inconclusive. The International Monetary Fund1 has done extensive research on the impact of greylisting on capital flows (both foreign direct investments and portfolio flows). The research highlights the potential negative impact, especially in the first year following the announcement of greylisting. In most cases, capital flows recovered in subsequent years, especially in those countries that actively and successfully worked to get their grey-listed status removed.
However, the IMF research measured the impact in aggregate. When looking at different countries individually, the outcomes differed substantially. While there was a direct negative impact on overall levels of economic growth in Mauritius, countries such as Indonesia attracted positive capital flows in the year that they were greylisted. That said, in aggregate, countries that receive a greylisting status struggle to attract foreign investment.
Research by Intellidex2, which specifically covered the potential impact of greylisting on South Africa, expects the impact on capital markets to be relatively minor in the short term, given that bond and equity investors do not have an automatic response to greylisting and are already aware of the risks. However, there will be some down-weighting of South African exposure by ESG funds that use greylisting as a proxy for governance.
Related content: Enoch Godongwana and Hendrik du Toit talk about the FATF greylisting with Ryk van Niekerk of Moneyweb
1 The Impact of Gray-Listing on Capital Flows by Mizuho Kida and Simon Paetzold, published in May 2021.
2 Intellidex, Sword of Damocles: South Africa’s FATF Greylisting, October 2022.
