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Amid escalating global crackdowns on financial entities, the Financial Action Task Force (FATF) recently announced it has added South Africa to its “grey list” due to the insufficiency of anti-money laundering, terrorism financing, and proliferation financing frameworks. The country’s addition to the list has serious implications for investment, which may have a knock-on effect on companies that do business with South African third parties if the issues are not resolved.
What is the grey list?
While the FATF is not a true regulator in terms of its ability to impose legal or financial consequences, it is a globally respected watchdog for the international financial system. The FATF sets the standard for the integrity of financial systems and helps member countries implement the standard by addressing various deficiencies. When a country is placed on the grey list, it’s because policies addressing illicit money flows are either insufficient or not being enforced consistently.
Why has South Africa been greylisted?
The FATF reported in October 2021 that South Africa was falling short of compliance recommendations. The original evaluation surfaced 67 individual actions for the country to take, and as of February 2023, 15 of those actions remained outstanding. At this time, South Africa is on a timeline to complete its remaining remedial actions by 2025 and must provide updates to FATF along the way as part of an increased review frequency.
Short and long-term effects
Being greylisted is not necessarily a death knell for the South African economy. Its cooperation with the FATF requirements and aggressive timeline for improvements are helping to minimize negative reactions from companies doing business in the country. It is also worth noting that the specific deficiencies indicated by the FATF are not directly tied to the financial sector, so stability and costs of business are not expected to rise dramatically.
The central concern for South African companies is that once a country is greylisted, it will typically be added to the EU’s list of high-risk third countries and the high-risk jurisdiction list in the UK. These additions mean investments in the country will be subject to more scrutiny.
Impact on supply chains
At present, the South African greylisting primarily impacts the financial sector–but the hit to capital flow will likely have ripple effects that make business more challenging across the board. It is unlikely that multinationals will cut off current business operations in the country, but those without current ties may become more likely to steer clear of new engagements. Although South Africa was already considered a medium-to-high-risk country, the official greylisting from the FATF adds another layer to its risk profile. Multinationals that are considering working with South African intermediaries may take a step back to reevaluate the level of due diligence they apply with an eye toward the perceived increase in risk, making it more difficult for the intermediaries to build new relationships.
A combination of decreased capital flow and increased due diligence may have the unintended effect of actually worsening compliance among intermediaries. When investments become scarcer and require more effort to obtain, the financial tightening sometimes leads to cut corners–especially in regard to labor practices. It is imperative to find a due diligence solution that breaks down this dangerous cycle.
Reevaluating the burden of due diligence
Even if South Africa’s greylisting has minimal real-world impact on supply chains, it highlights the unsustainable nature of traditional due diligence efforts. Where greater due diligence is required, it places strain on both the multinational companies and the intermediaries they seek to do business with. The multinational has to spend more time and capital to perform more extensive vetting on each intermediary, and each intermediary has to go through the same expanded set of tedious steps to prove compliance for each individual contract.
To reduce the risk of backsliding and increase compliance while fostering mutual growth, companies need to embrace the portable model of due diligence. Under this model, intermediaries are responsible for providing their own proof of compliance through standardized, internationally-recognized certifications according to risk level. The certification must be renewed periodically, but the intermediary can use it to satisfy due diligence requirements at any number of companies.
With situations like greylisting, it’s critical from a risk management standpoint to take a step back and consider the worst-case scenario–and what should be done to avoid it while remaining open to opportunities. Should enhanced due diligence overflow from the financial sector to other industries, both multinational companies and South African third parties must be ready to level up to the mutually beneficial portable model.
