South Africa needs to urgently tackle systemic rot in law enforcement institutions if it wants to avoid being put on the global financial crimes watchdog’s so-called “grey list”, bank executives have warned.
South Africa has until October to show the Paris-based Financial Action Task Force that it is overcoming the dismantling of law enforcement under former president Jacob Zuma.
If it fails to convince them at the October meetings, it could become the second G20 nation after Turkey to be added to the watchlist of what the FATF calls “jurisdictions under increased monitoring”. FATF is due to make its final decision in February 2023. Grey list countries include Panama, Syria and Yemen.
The label triggers greater scrutiny of finance and investment and could add to the cost of doing business in an already struggling economy, said Standard Bank chief executive Sim Tshabalala and Mike Brown, head of Nedbank.
“You’re not going to fall off the cliff, but it is going to add to the increased cost of doing business. I’m sure it would cause more inflation, higher interest rates and higher unemployment,” Tshabalala said. “Even wealthy South Africans would find it harder to invest offshore.”
The weakening of police, prosecutors and financial watchdogs was a key chapter in the so-called “capture” and looting of the state that became South Africa’s biggest-ever corruption scandal before Zuma quit power in 2018.
The FATF warned last year that slow progress in investigating state capture and recovering looted assets counted against South Africa, and it said that “significant gaps in financial intelligence exist”.
In the “relay race” to fix South Africa’s image as a soft touch for money laundering, “the weakest part of the South African system, by far, is the investigative and prosecutorial legs of that race”, Brown said.
Compliance with the FATF is “a very important building block to ensuring that something like state capture can never happen again”, he said. “That has got to be a good outcome for our country.”
Cyril Ramaphosa’s cabinet sent an omnibus bill of legislation to parliament in August to address FATF concerns, such as changes to trust law and strengthening of the country’s financial intelligence watchdog.
“We are doing everything within our power to prevent grey-listing,” said Ismail Momoniat, acting director-general of the South African Treasury.
But, in addition to legal changes, South Africa “needs to show progress at detection of financial crime”, Tshabalala said. South African prosecutors have begun bringing some state capture cases to court, a development seen as a sign of progress.
Some experts said South Africa may struggle to avert grey-listing. “I think that it is almost inevitable at this point . . . this has been a long time coming,” said Julian Rademeyer, a director covering east and southern Africa at the Global Initiative Against Transnational Organised Crime. “We are dealing with a lot of damage that was done in the last 20 years.”
The FATF has raised more serious concerns about South Africa than it did about the United Arab Emirates, which was grey-listed earlier this year, Rademeyer said.
“I think there is a realisation that has dawned about the potential seriousness of this, but it does require a government response that is in tandem with what the financial sector does,” he added.
Mauritius, South Africa’s fellow financial centre in the region, is seen as a model after the Indian Ocean island’s government mounted a nationwide reform drive following its own FATF grey-listing in 2020.
The effort, which was personally overseen by the Mauritian prime minister, paid off with removal from the grey list and an EU blacklist last year.
“South Africans have a tendency to wait until right at the edge of the abyss to act,” Tshabalala said. In Mauritius, “everybody pulled in, which is what we are arguing for in South Africa”, he added. “I believe South Africa is capable of [such co-ordination] . . . but I think it needs muscular leadership.”
