SOUTH Africa’s much-vaunted financial systems may face an existential threat that could further derail its economy, according to Yolande Butchart, a foreign exchange consultant at Brent Wealth Management.
In an Investment Report published by Brenthurst Wealth, Butchart said if the Financial Action Task Force (FATF), a global anti-money laundering body, placed the country on notice that unless certain changes were made South Africa would be lumped with pariah states like Pakistan, Myanmar, South Sudan and Syria.
“The danger to the economy lies in further loss of credibility as an investment destination, which is already hampered by the junk investment status conferred by the major rating agencies,” Butchart said.
According to Butchart, the bad news for South African citizens would be fighting worsening economic conditions, and efforts to diversify risk by investing offshore would become ever more onerous if the country was placed on a grey list.
If South Africa wanted to avoid being put on a grey list it needed to up its systems and policies.
“After being warned in 2021 of these deficiencies, South Africa has been given until October 2022 to at least demonstrate how it intends to remedy matters.”
Should the country not tighten its systems and policies, South Africa could be greylisted by February 2023. “And even though National Treasury has expressed a willingness to make the needed changes, the department’s acting director-general, Ismail Momoniat, said recently that there’s a good chance we could miss the October deadline,” Butchart said.
He said the increased scrutiny that followed being greylisted meant that every counterpart across the world would have to apply higher levels of due diligence to South African businesses and individuals with offshore interests.
“International banks will also be required to add an extra layer of bureaucracy when dealing with South African clients, while international funders like the World Bank and EU will apply additional restrictions to support the country.”
Consumers and investors may be denied access to products or markets that refuse to deal with countries on the FATF grey list, said Butchart.
“Restrictions don’t mean exclusion from international markets and banking systems, but it does add layers of complexity, bureaucracy, and inconvenience. You will still be able to invest offshore and open bank accounts, but this will come with enhanced due diligence (EDD) that is more vigorous than the usual KYC (know your client) checks.
“At a macroeconomic level, our status with the FATF might also place a damper on the country’s credit ratings, which will add costs to common transactions because of the added admin and due diligence requirements. For businesses, these extra checks could also demand hiring or contracting needed skills to ensure compliance,” she said.
Butchart said the process to remedy policies and procedures lay with National Treasury and the government. The February 2023 greylisting can be avoided if the country demonstrates that it has a credible action plan and that meaningful steps have been taken in this direction.
“For now, our fate is in the hands of politicians and bureaucrats who don’t appear to be aligned. Certainly not around the urgency of this matter. As an individual, I would suggest we assume that we’ll be placed on the grey list and ready ourselves for administrative delays and disruptions,” she said.
DA finance spokesperson Dion George said the DA demanded that Treasury acted with haste to implement the recommendations by the FATF to avoid the country from sliding into an economic catastrophe.
He said the governor of the South African Reserve Bank, Lesetja Kganyago, confirmed during a meeting of Parliament’s Standing Committee on Finance (SCoF) that if the country were to be greylisted it would have dire consequences for the economy, as this would hamper South Africa’s ability to attract investments and international financial transactions.
“The impact on the economy and the financial system is expected to become progressively worse. Together with a deteriorating balance-of-payments situation, being greylisted will compound economic stagnation,” George said.
Addressing the SCoF, Kganyago, said the report recommended that all regulatory authorities should subject beneficial owners to fit and proper assessments. Beyond this, all regulatory authorities should verify that directors, senior management and beneficial owners or their associates are not criminals.
However, Kganyago said, the process to avoid greylisting was more than what the Prudential Authourity (PA) was doing, and that it would involve, among others, law enforcement and prosecuting authorities.
The structure regulated by the PA consists of 31 registered banks and local branches of foreign banks, four mutual banks, five cooperative banks, 24 cooperative financial institutions, 69 life insurers, 70 non-life insurers, eight reinsurers and nine market infrastructures.
Kganyago, however, said South Africa could avoid possible greylisting if it were to implement recommendations contained in the FATF mutual evaluation report.
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