Government over ambitious with greylisting deadlines but it’s not all gloomy

Connie Queline

Government over ambitious with greylisting deadlines but it’s not all gloomy

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JEREMY MAGGS: National Treasury says, while South Africa is on track to address all outstanding action items by the Financial Action Task Force (FATF) with regard to the country’s greylisting, it remains a challenge to address all 17 of the remaining action items by February next year. So what has been the tangible economic impact of South Africa being placed on the grey list, particularly in terms of foreign investment and financial sector confidence? Kevin Lings, chief economist at Stanlib, welcome to you.

KEVIN LINGS: Yeah, I think we have, obviously it’s part of a package of disappointing developments in South Africa. So the fact that our credit rating dropped below investment grade, that’s also clearly (not) helped us, the fact that we haven’t been able to generate decent economic growth overall, that has discouraged foreign investments. So I think there are a range of things, the Lady R ship, the Russia involvement, that’s clearly also been unhelpful…

The feedback we get, particularly in the financial services sector, is that the cost implications of this has been significant.

So all of these transactions have a much, much higher degree of compliance, so you’ve got to provide a huge amount more information, that’s expensive. Also, the process of getting transactions approved, that has become a lot longer, and so that has added to the complexity, the delay, and obviously the cost of it.

So I think that there are very tangible factors that have stifled South Africa as a consequence of being grey listed. It’s not that people are saying, well, we won’t do business with you. That’s not happening, we’re still doing business, but the process of trying to get that business approved, the hurdles, the information, a lot more onerous. Clearly, if they then end up with a choice, so let’s say foreigners have got a choice of who do they sign contracts with, there is a tendency to go with countries that are not grey listed.

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JEREMY MAGGS: And difficult, I imagine, to put a number to that.

KEVIN LINGS: Very difficult because we can see that foreigners have, for example, reduced their holdings of South African government bonds. At one stage they owned 42% of government bonds. That’s enormous and over the years that has dwindled down to just over 20%. Now, what portion of that relates to credit rating? What portion relates to grey listing? That’s difficult to discern.

We know the currency has been under pressure.

I’ve got no doubt that relates to a worsening international perception of South Africa and the grey listing is part of that, but you can’t really say or isolate what actual component of this deterioration is just greylisting and what component is an overall perception about South Africa that is worsened?

JEREMY MAGGS: So Kevin, one imagines that work behind the scenes has been ongoing. How then do you assess the effectiveness of the reforms so far in addressing the concerns and are there areas where progress you think has been either notably faster or slower?

KEVIN LINGS: So there is progress. So government, and it sounds obvious, but it’s not, there are many countries that when they were grey listed, they didn’t react, they didn’t try and implement reforms and they ultimately got blacklisted. So you can get worse than this and you don’t want to be blacklisted…

South Africa responded and obviously was engaging prior to the actual grey listing and trying to avoid grey listing. So we were trying to introduce remedies at that point, it obviously wasn’t enough, and that has broadly continued on.

Now we’ve got this Financial Action Task Force that has been set up to try and get us off the grey list. They’ve got various initiatives, but I would say that there’s progress, but it’s a long way to go. Part of this has to do with the fact that it’s not, I think there’s a perception that this is all in the hands of government, that government must initiate all these reforms and implement these reforms and then we won’t be grey listed. That’s unfair.

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Obviously, government does have a significant role, but the private sector equally has a huge role. Let me give you some examples. So you’ve got to get a high degree of compliance from casinos. You’ve got to get a high degree of compliance from estate agents, from lawyers, from companies that sell luxury goods. So if you take a luxury goods brand, Gucci or Louis Vuitton, those brands, they’ve got a high degree of compliance.

Now what we’ve made progress in is identifying these sectors, which is what other countries do. We’ve got a list of companies that are involved in these sectors, but now you need those companies to furnish a huge amount of information, and the progress on getting that in place is slow.

Non-compliance

Many of these sectors, if I look at the lawyers, less than 50% have responded. You need these percentages to go up dramatically so that you’re collecting the right set of information so that you can demonstrate that these companies are monitoring and adhering to the money laundering type criteria and to a whole lot of measures that help to guard against corruption and so on.

So I know there’s this idea of, well, we want to get off [the] grey list in a year’s time. We’ve already been grey listed for a year. I think it’s too optimistic. I would say it’s going to take us still a couple of years to move far enough forward with the basic reforms to show that we are making meaningful progress, and then there are other big issues that clearly are going to take longer.

We’ve got to be able to demonstrate that we can prosecute the complex money laundering cases and that we can prosecute corruption and that we can collect the proceeds of corruption. I think we’ve got a long way to go to demonstrate that, that we’ve got that prosecutorial capacity.

So there’s progress, we’re trying, it’s on the agenda, but I think government is being too ambitious with their statements around we will get off grey listing early next year.

JEREMY MAGGS: Appreciate the analysis. Kevin Lings, thank you very much indeed.

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