The global Financial Action Task Force (FATF) announced on the 24th of February that South Africa will be added to the ‘grey list’.
As noted by the FATF: “When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring.”
Q1) WHO IS THE FATF?
The FATF is a global intergovernmental organisation. Their main focus is to audit and evaluate countries based on 40 technical compliance ratings. They set international standards relating to combating of money laundering, terrorist financing, and the financing of weapons of mass destruction.
South Africa is the only African member of the FATF.
Q2) WHAT IS THE GREY LIST?
Similar to the term ‘black list’ which we are more familiar with, a grey listing essentially flag a country as risky in certain aspects. In 2021, the FATF published their findings and highlighted certain vulnerabilities in the country’s anti-money laundering system.
Q3) WHY WAS SA GREY LISTED?
In 2019, following state capture, South Africa was deemed to have too many weaknesses in their legal framework. We made some progress during the one-year observation period (ending October 2021). From the initial 67 recommended action items, only 8 strategic deficiencies remain.
Q4) HOW DID THIS IMPACT MARKETS AND ASSET CLASSES?
At the time of the announcement, the SA bond market ended a bit stronger, and the yield curve flattened. We saw the rand weaken somewhat to the dollar and our financial sector shares closed lower.
Q5) WHAT COULD THIS MEAN FOR SA INVESTORS?
The IMF published a white paper in 2021 stating that countries with a grey listing typically saw a drop in capital inflows. They did however mention that the drop typically occurs after the announcement and subsequently flows would reverse.
It is interesting to note a country such as Mauritius was grey listed back in 2020 yet remain a firm favourite for foreign investors.
In summary, South African investors could experience some additional administration burdens and even more scrutiny in their attempts to invest and take money abroad. National Treasury (NT) released a statement on 24 February where it commented on the fact that none of the required eight areas for action relate directly to preventative measures in the financial sector.
While investors may seem concerned over the uncertainty and volatility that the grey listing may cause, many of the South African LISP providers have very stringent processes in place when it comes to investing- especially offshore investing. We too will advocate that clients remain invested and follow the guidelines and investment plans set out by their financial advisors.
The fact remains that South Africa still has other more challenging concerns to deal with, such as low economic growth, political uncertainty, a national energy crisis, and potential credit downgrades. For now, US monetary policy also remains much more prevalent. Our equity market, bond market, and currency all react swiftly to the release of new US economic data—more so, it seems, than to an announcement by the FATF.
Credit: Amity Investment Solutions