The FATF acronym now rolls off the tongue of many South Africans. The economic impact of greylisting by the international money laundering and terror finance watchdog is difficult to put hard numbers to, but you can be sure it is a quiet suppressor of the economy.

Many SA financial institutions have been excluded from global financial infrastructure because of it, while every South African individual and company must be subject to enhanced due diligence for financial transactions with the rest of the world. The macro impact of second-class citizenship in the global financial system is material.

Last week’s FATF (Financial Action Task Force) global plenary led to some indicators of reprieve for SA. Of the 22 actions that the body determined SA should take to escape the grey list, we’ve now met the mark on 16 of them.

Unfortunately, the remaining six are hard. Three of them require that SA “demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of task force activities in line with its risk profile”. In other words, our criminal justice system needs to actually work.

For an FATF evaluator, reading the Sunday newspapers would have given few grounds to believe that is the case. The Sunday Times reported on the crime intelligence unit, which seems to be embroiled in an internal war related to a drugs bust, in which it was quite unclear which police forces were the criminals or the investigators.

City Press reported on an internal ANC document that claimed the party’s inability to deal with corruption was due to its leadership structures being held hostage by the beneficiaries. Heady stuff.

Challenges

What the FATF wants to see, before its next important plenary in February 2025, are examples of thorough investigation and successful prosecution of money laundering and terror financing. Will the task team that has been driving the effort to meet FATF’s requirements, led by the National Treasury, be able to provide a convincing case? Despite the efforts of many, particularly in the National Prosecuting Authority, it is going to be hard.

The case must be made in February 2025, which, if the FATF is reasonably convinced, will trigger an on-the-ground review. If that confirms compliance, official exit from the greylist will happen in June 2025. I think the baseline must be that we will fail to make the grade, though every effort should be made.

However, last week’s FATF announcements also revealed a level of introspection, publishing a “stocktake” about unintended consequences stemming from its actions. In part, that has been driven by some pushback from various South African quarters. The FATF is somewhat concerned about the financial inclusion implications of its measures.

For example, our Financial Intelligence Centre Act, and the various requirements that are applied to those trying to open and operate bank accounts, are a direct result of FATF rules.

The financial inclusion implications have long been considerable. For example, if you’re not able to produce proof of address, you cannot open a bank account. The most disenfranchised are those who will most struggle to meet bank requirements.

The FATF protests that it requires accountable institutions to take a “risk weighted” approach, which seems to mean if you’re a small scale underresourced client, you pose little risk and banks should be relaxed in having you as a client. However, in practice that just doesn’t work — banks cannot apply subjectivity at the small scale effectively — it is far too expensive. So, the default is that people just get excluded.

Also, if a bank has a whiff of suspicion or reputational concern about a client, it can summarily close bank accounts. In an increasingly cashless world having a bank account is fundamental to being able to exercise many rights, so there has long been need for some proper rules about how banks can do this.

Many countries have put rules in place compelling banks to give bank accounts to all who ask, with few exceptions. Again, “de-risking”, as closing accounts is sometimes euphemistically called, is at least in part attributable to the FATF’s concerns.

One of the major points of contention in SA has been the FATF requirement that nonprofit organisations (NPOs) identify their owners in an official register. This was eventually watered down to require it only of NPOs involved in international financing. The FATF has now noted the risks that countries use it as a reason for heavy-handed intrusion on the activities of NPOs by some governments, which it calls an “abuse” of its standards.

Sunday’s papers also reported the strong denials by Gift of the Givers that it was financing terrorism, after allegations in an Israeli newspaper. Nonprofits are now under considerable scrutiny because of the FATF, which will make it harder to operate bank accounts and impose additional compliance requirements on them.

SA’s FATF experience has certainly had many implications. The effort to escape greylisting has been an important driver of efforts to fix the criminal justice system (even though fundamental principles of justice should be the real driver). That is certainly good for the country. But there are unintended implications, which even the FATF is starting to take note of.

Perhaps, when SA eventually escapes the greylist, both the FATF and SA will be left better off.

Stuart Theobald is chair of research-led consultancy Krutham (formerly Intellidex).
This article first appeared in Business Day.