From October, the world might have to be a lot more careful about doing business with South Africa. It will mean more form-filling and hassles for those overseas wanting to make payments into a South African bank account. 

A year after a warning from a global body that the country’s actions against dirty money flows are insufficient, we might find ourselves on the “grey list” of countries that face more intense scrutiny.

This is an own goal, from the failure to go aggressively after “State Capture” and prosecute more money laundering cases. The innocent could well suffer in a wave of hassles as they go about their business. A position on the “grey list” amounts to major damage to the country’s reputation, and will drive up the cost of doing business. It is also pressure to get our act together and go after dirty money and corruption. The obstacle in many cases appears to be political more than anything else. 

report by the Financial Action Task Force, FATF, on SA, released last year, should have been a wake-up call to local law enforcement, regulators, bankers, dealers, and others. FATF describes itself as, “the global standard setting body for combating money laundering, terrorist financing and the money flows behind the proliferation of weapons of mass destruction”. 

In its latest Financial Stability Review, the Reserve Bank says the SA financial system would suffer “wide ranging consequences, particularly from a reputational risk perspective” if we were placed on the “grey list”.

Now South Africa must prove to the FATF that it is beefing up its measures to deal with money laundering. Lack of action on dealing with high profile individuals involved in “State Capture” is the big issue the FATF has identified. Following up with investigations on suspicious payments is also a key issue, says the report. 

While a legal process around the $4 million allegedly stolen from President Cyril Ramaphosa’s game farm has yet to run its course, this could be the sort of thing that might raise a red flag for FATF.  The FATF might like to see that the authorities have made an effort to seek, at the least, an explanation of the incident. 

It is not only South Africa that is under pressure to improve its act on tracking down and dealing with illicit financial flows. The United Arab Emirates (UAE), of which Dubai is the financial centre, was placed on the “grey list” in March. Getting itself removed from the “grey list” is key to Dubai maintaining its position and growing as a global financial centre. That is a big incentive for it to meet its vision of a future global economic role.

Just weeks ago, Rajesh and Atul Gupta, the two alleged big guys of “State Capture”, were arrested in Dubai, showing what the UAE government says is a commitment to fighting “illicit finance”.  FATF could be working as intended.

The Paris-based body has two lists of countries that it views as being weak on dirty money. On the “black list” are North Korea and Iran with “serious strategic deficiencies to counter money laundering, terrorist financing, and financing of proliferation.” FATF requires its members to be extremely cautious in dealing with these countries.

Then there are countries that have received warnings from the FATF and are under “increased monitoring” and should work with the body to improve deficiencies in their regimes to counter dirty money. When a country is on the “grey list” it agrees to deal with its problems in a specific time period.

As of March this year, these are the countries identified as having “strategic deficiencies”: Barbados, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Jordan, Mali, Malta, Morocco, Myanmar, Nicaragua, Pakistan, PanamaPhilippines, Senegal, South Sudan, Syria, Turkey, Uganda, UAE, and Yemen. FATF recently said it is reviewing Russia’s role in view of its invasion of Ukraine. 

Being on the “grey list” is not a life sentence. Most countries that have been on the list have managed to get off within a year or so. Zimbabwe is no longer on the list, and Mauritius, which is keen to maintain its position as a financial centre, is now off the list.

There is no reason for some of our politicians to slam the report as a colonial conspiracy designed to push us down. FATF cooperates with the local authorities as well as technocrats from the region in writing the document, so it does have all the political credibility it needs.

Showing a clear track record in dealing with dirty money has become central to full participation in global finance. If we can’t get to grips with this, it will be an increasingly long and slippery slide for us into becoming an increasingly cut-off country. Failure to deal with money laundering could also indicate a failure to deal with other sorts of dirty money and crime. 

Tracking down suspicious transactions is increasingly possible with improved IT systems. And there is the added incentive to do so with the high penalties imposed by many regulators for failure to exercise due diligence. South Africa’s banking system appears to have had little impact in curtailing the attempts at “State Capture” or extensive corruption. It took some time for the bank accounts of the prime suspects in state capture to be frozen, and then it was only upon the insistence of the Reserve Bank that this happened.

Ultimately, if the problem is to be dealt with, the banking system will have to play a far more proactive role in watching the accounts of “tenderpreneurs” and the beneficiaries of state contracts.

We are moving to payment systems in which cash will have a greatly diminished role. Around the world, law enforcement authorities and central banks want to withdraw large denomination notes. Large cash notes are overwhelmingly used for two purposes – for crime and sometimes as a store of value. Withdrawing large denomination notes has proved extremely difficult in India as it led to cash shortages and enormous economic losses. Nevertheless, with a sufficiently widespread and easy-to-use electronic payments system, such problems need not necessarily arise.

The imposition of limits for cash transactions are difficult to impose, but would also help curtail illicit flows. The convenience of cash for small transactions means only the very distant future might be cashless. The informal economy and the poor are far more reliant on cash payments and taking physical money out of the economy would have a large adverse impact.

Nevertheless, the more we approach a cashless payment society the easier it might be to control dirty money flows. The advent of Central Bank Digital Currencies, a form of electronic cash based on a blockchain ledger, would certainly help curtail illicit flows. All individual payments could be easily identified on the ledger by a central bank, who might well share them with law enforcement. The easy infringement of privacy would be made possible by such digital currencies, but with safeguards might arguably be justified. 

It may only need time and political will for this to happen.

The views of the author are not necessarily those of the Daily Friend or the IRR

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.