Financial watchdog puts South Africa, Nigeria on dirty-money gray list
South Africa and Nigeria have been placed on a global financial watchdog’s so-called gray list denoting nations with shortcomings in tackling illicit financial flows, a move that scars their international reputations and may raise costs for banks and asset managers.
The decisions were announced by the Financial Action Task Force on Friday. While South Africa’s inclusion on the list was widely flagged as a risk, the possible addition of Nigeria attracted little attention. Morocco and Cambodia were taken off the list after improving their controls.
“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 Paris-based agency said in a statement on its website. “The FATF does not call for the application of enhanced due diligence measures to be applied” to jurisdictions that have been added to the list, it said.
The rand slumped as much as 1.5% against the dollar after the decision was announced and as stronger-than-expected US inflation data fueled gains in the greenback.
Endemic Graft
A 2019 evaluation concluded that South Africa fell short in meeting all 11 of the FATF’s effectiveness measures to combat money laundering and the financing of terrorism. Those findings followed an era of endemic graft during former President Jacob Zuma’s nine-year rule.
While President Cyril Ramaphosa’s administration, which took over after the ruling party forced Zuma to quit in early 2018, has sought to address the deficiencies, it failed to do enough to avoid censure.
South Africa’s National Treasury said it expects the move will have limited impact on financial stability and the costs of doing business, but that it will continue working to address the FATF’s concerns. The central bank pledged to strengthen its supervision and ensure commercial lenders and other financial institutions comply fully with their obligations to safeguard and protect the financial system’s integrity.
The government recognizes that addressing its shortcomings is in South Africa’s interests and is consistent with its existing commitment to fighting crime, Finance Minister Enoch Godongwana said in a emailed statement.
‘Deeply Unfortunate’
The FATF said South Africa and Nigeria have undertaken to increase investigations into money laundering and terrorist financing, ensure related assets are confiscated and take other measures to beef up controls.
“This move was expected but is deeply unfortunate and was ultimately avoidable,” said Peter Attard Montalto, head of capital markets research at Intellidex. “It would be wishful thinking to think South Africa is off the list within a year unless there is now a proper step up” in efforts to turn the situation around.
The central bank had previously warned that gray-listing could have far-reaching consequences for the country’s financial system, including triggering capital and currency outflows, and increasing transactional, administrative and funding costs for banks.
“While gray-listing can make it more onerous and costly to do business with South Africa and will detract from its reputation as an investment destination, it is important to note that the FATF does not automatically call for the application of enhanced due diligence measures to gray-listed jurisdictions,” the Banking Association of South Africa said in a statement. “The priority now is to ensure that South Africa is removed from the gray list as soon as possible.”
New Laws
As recently as last month, Godongwana said he was hopeful that regulatory amendments to clamp down on illicit financial flows would help South Africa avoid being classified as a jurisdiction subject to increased monitoring. In December, Ramaphosa signed two key pieces of legislation into law that addressed some of the watchdog’s concerns.
Nigeria and South Africa respectively have Africa’s two biggest economies and their inclusion on the gray list puts them on a par with the likes of Syria, the Democratic Republic of Congo and South Sudan. The Treasury has said it is studying how Mauritius and other nations managed to get themselves removed from the gray list, and will ask the FATF to review its status in its June plenary session.
While graylisting may increase the government’s foreign-funding costs and weigh on trade flows, it’s unlikely to “significantly” affect South Africa’s creditworthiness, S&P Global Ratings analysts Samira Mensah, Zahabia Gupta and Omega Collocott said last week.
There was no immediate reaction from the government in Nigeria, which is holding elections on Saturday.
Morocco, which has close trading and political links with the European Union, was first included on the list in 2017, mainly due to concerns about the preferential tax regimes it has instituted for foreign companies operating in free trade zones and in Casablanca’s financial hub.
Its removal comes as the continent’s fifth-biggest economy promotes its first sovereign dollar-bond sale since 2020. Prime Minister Aziz Akhannouch said the move augurs well for the north African kingdom’s sovereign’s ratings and should boost investor confidence.
