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. While South Africa’s inclusion on the list was widely flagged as a risk, the addition of Nigeria came as a surprise. 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 these jurisdictions” that have been added to the list, it said.
The rand slumped as much as 1.2% against the dollar after the decision as announced.
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.
Both 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, the FATF said.
South Africa’s central bank has previously warned that gray-listing could have wide-reaching consequences for the country’s financial system, including triggering capital and currency outflows, and increasing transactional, administrative and funding costs for banks.
Finance Minister Enoch Godongwana last month said the country was “hopeful” that the regulatory amendments to address the country’s shortcomings in tackling illicit financial flows would help it avert 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. South Africa’s National 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.