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KEY POINTS

• The decision to “grey list” South Africa will damage its reputation abroad and could result in higher costs for banks and asset managers.
• Being added to the gray list places South Africa and Nigeria on par with countries like Syria, the Democratic Republic of the Congo, and South Sudan.
• Following the announcement of the judgment, the rand fell against the dollar by as much as 1.2%.

The Financial Action Task Force (FATF) has officially added South Africa and Nigeria to the grey list of countries with high money laundering and illicit financial flows. The anti-money laundering watchdog made the decision on Friday, and this will damage the reputation of these two countries abroad and could result in higher costs for banks and asset managers.

The central bank of South Africa has already issued a warning that the practice of “grey listing” might have significant negative effects on the nation’s financial system, including causing capital and currency outflows and raising transactional, administrative, and funding expenses for banks. Following the announcement of the judgment, the rand fell against the dollar by as much as 1.2%.

Nigeria was expectedly included on the list; however, South Africa’s addition is widely seen as risky. Cambodia and Morocco were removed from the list after tightening their rules.

According to a statement on its website, the FATF stated that “when the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed time frames.” “The FATF does not call for the application of enhanced due diligence measures to be applied to these jurisdictions,” it said.

Rampant Corruption

According to a 2019 evaluation, South Africa failed to adhere to all 11 of the FATF’s effectiveness measures to prevent the funding of terrorism and money laundering. Such revelations came after a period of widespread corruption during former President Jacob Zuma’s nine-year administration.

While trying to resolve the issues, President Cyril Ramaphosa’s administration, which took office after the ruling party forced Zuma to resign in early 2018, fell short of what was required to avert criticism.

According to the FATF, both South Africa and Nigeria have committed to stepping up investigations into money laundering and terrorism funding, ensuring that linked assets are seized, and taking other steps to tighten controls.

New laws

According to Finance Minister Enoch Godongwana, the country is hopeful that the legal changes to address the country’s weaknesses in addressing illicit financial flows will help it avoid being labeled as a jurisdiction subject to heightened surveillance. Two significant pieces of legislation that addressed some of the watchdog’s concerns were signed into law by Ramaphosa in December.

The two largest economies in Africa are those of Nigeria and South Africa, and their position on the “grey list” places them on par with countries like Syria, the Democratic Republic of the Congo, and South Sudan.

According to the National Treasury of South Africa, the country is investigating how Mauritius and other countries were able to remove themselves from the gray list and will request a review of its position from the FATF at its June plenary meeting.According to S&P Global Ratings analysts Samira Mensah, Zahabia Gupta, and Omega Collocott, while graylisting may increase the government’s foreign finance costs and have an impact on trade flows, it is unlikely to “seriously” harm South Africa’s rating.