The 2021 Report included 67 recommendations (action points) and highlighted several deficiencies in its assessment of the country. South Africa was given one year to provide evidence of its efforts to adhere to the FATF's recommendations, failing which the country would face the risk of being greylisted. 

This article discusses the background to greylisting and the various role players, South Africa's shortcoming, the reasons for being placed on the grey list, the actions taken to prevent (albeit unsuccessfully) being placed on the grey list, the next steps and actions required to be successfully lifted from the grey list, and, finally, the effects of greylisting on investment managers and investors, both local and abroad, from a legal and practical perspective.

Background to greylisting

What is the FATF and what role does it play?

The FATF is an independent inter-governmental body founded in 1989, mandated to develop and promote policies and set international standards relating to the combating of money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction.

The FATF maintains two lists: the grey list and the black list. Jurisdictions are assessed, through a peer review, which is a mutual evaluation exercise, on their compliance with the Recommendations. The mutual evaluation also includes an evaluation of the effectiveness of a country's implementation of the Recommendations through 11 "immediate outcomes". Deficiencies are identified during the mutual evaluation exercise and countries are then required to address their shortcomings, thereby strengthening the integrity of their financial system and the global financial system as a whole.

The FATF currently consists of 39 members, 37 jurisdictions and two regional organisations (the Gulf Cooperation Council and the European Commission). Additionally, there are a further 31 regional and international organisations that are associate members or observers of the FATF and contribute and/or participate in its mandate. South Africa is currently the only African member of the FATF, while other African countries participate through various FATF regional bodies that are associate members of the FATF.

What is the FATF "grey list"?

The FATF grey list refers to the FATF's practice of publicly identifying a country with serious AML/CTF deficiencies and as a result subjecting the country to, among other things, increased monitoring by the FATF.

A country is typically placed on the grey list when there are serious deficiencies identified through the mutual evaluation exercise, but despite such deficiencies, the country is actively working with the FATF to address the deficiencies in their regimes.

By being placed under increased monitoring, the country has committed to resolve the identified deficiencies within an agreed time frame and with the FATF monitoring such implementation.

It must be emphasised that greylisting is not a punitive measure but is rather aimed at providing additional support and motivation for co-operative countries needing assistance in developing and maintaining their AML/CTF system.

What is the FATF "black list"

The FATF black list refers to the FATF's practice of publicly identifying those jurisdictions with serious deficiencies that are not actively engaging with the FATF to address these deficiencies.

Blacklisting is a formal sanction which calls on other countries to conduct enhanced due diligence on transactions from these countries and in more serious cases to apply counter measures to protect the international financial system from money laundering, terrorist financing and proliferation financing risks emanating from the blacklisted country. These counter measures could lead to restrictions of financial transactions and international trade with the blacklisted country.

North Korea, Iran and Myanmar and currently the only countries on the FATF's blacklist.

How and why was South Africa greylisted?

In 2019, South Africa was subjected to an onsite visit by FATF where the country was assessed on its compliance with the Recommendations. The initial report had 67 recommendations which South Africa had to action. State capture, money laundering risks, law enforcement, inadequate records and monitoring of beneficial ownership and judicial capacity were cited as the main areas requiring corrective action.

The FATF submitted a follow-up report in October 2021 supplementing the 2019 report and included 12 key findings or shortcomings in South Africa's AML/CTF framework. In summary, the FATF came to the conclusion that the current legal framework was incapable of addressing the scope of risks within the FATF mandate and those adequately legislated areas lacked the necessary implementation and oversight.

South Africa was given one year to report on the progress made to achieve the recommendations set out in the 2021 Report, failing which the country would be added to the list of "jurisdictions under increased monitoring" (the "grey list") at the following FATF plenary meeting in February 2023.

At the plenary meeting, the FATF determined that South Africa had serious weaknesses in its AML/CTF framework and had not successfully demonstrated sufficient compliance with the Recommendations. This posed a threat to the international finance system and as a result South Africa was added to the grey list.

It must be noted that in February 2023, at the time the greylisting decision was made, the FATF acknowledged that South Africa had made significant progress and the 67 actions identified in 2019 had been reduced to 15 actions, linked to eight strategic actions (which will be discussed in more detail below).

South Africa's risk profile/environment

South Africa has a relatively high volume and intensity of crime, with more than half of the reported crimes falling into categories that generate proceeds from crimes such as tax crimes, bribery and corruption, fraud, trafficking in illicit drugs and other environmental crimes.

As a result of South Africa's geographical location and it being the regional financial hub for sub-Saharan Africa, it is increasingly vulnerable to the threat of foreign money laundering risks as well as terrorist financing risks associated with the financing of foreign terrorism and potential domestic terrorism.

Although South Africa has a well-developed banking and finance industry, which acts as the main entry point of the financial system both locally and abroad, South Africa's large informal economy which involves the widespread use of cash, increases the risks of money laundering and terrorist financing threats.

There is inadequate transparency in relation to beneficial ownership resulting in increased risk of the misuse of companies and trusts for money laundering and terrorist financing.

Rampant corruption in the public sector is a major weakness in the AML/CTF system in South Africa, and the resulting degradation of its law enforcement agencies (LEAs) has led to ineffective crime prevention and detection capabilities.

The FATF’s 12 key findings

The 12 key findings identified by the FATF in the 2021 Report can be summarised as follows:

1. The domestic money laundering crime threats are understood by the authorities, however, the authorities lack understanding of their relative scale, money laundering vulnerabilities and international money laundering threats. Additionally, the local authorities have an underdeveloped understanding of terrorist financing and terrorist financing risks are not being adequately addressed.
2. South Africa has suffered from a prolonged period of "state capture" which led to significant financial losses and undermined key agencies directed at combating such activity.
3. The Financial Intelligence Centre (FIC) efficiently collects and produces operational financial intelligence that LEAs use to investigate predicate crimes and trace criminal assets, however the LEAs lack the skills and resources to proactively investigate money laundering and terrorist financing.
4. Although a reasonable number of money laundering convictions are being achieved, the scope and level of convictions is not consistent with South Africa's risk profile in that:
   1. the convictions relate mainly to self-laundering cases and there are very few cases of third-party money laundering convictions (professional enablers of money laundering) and foreign predicate cases that result in prosecution;
   2. there is not enough commitment to the proactive identification and investigation of networks and professional enablers of money laundering; and
   3. the majority of the convictions relate to incidences of fraud and there is insufficient investigation and successful prosecution of cases relating to "state capture" and other high-risk crimes.
5. South Africa has been unsuccessful in recovering assets from "state capture" and those proceeds which have been moved to other countries.
6. The detection and recovery of cash proceeds of crimes is a continuous challenge and efforts to detect and confiscate falsely or undeclared cross-border movement of currency requires significant improvement.
7. South Africa has adopted a conservative approach to classifying politically motivated acts of violence as terrorism, which negatively impacts the investigation and prosecution of potential terrorist financing. Additionally, South Africa had only prosecuted one person for terrorist financing since the last mutual evaluation, which is inconsistent with the considerable terrorist financing risks facing the country. Evidence has shown that South Africa does not readily use targeted financial sanctions to prevent terrorism and the implementation of the United Nations Security Council Resolutions relating to terrorist financing has not occurred since 2017.
8. Enforcement agencies face challenges in obtaining accurate and updated information relating to the beneficial ownership of companies and trusts to adequately enable them to investigate money laundering and terrorist financing.
9. South Africa's co-operation with other jurisdictions and providing constructive mutual legal assistance to help solve criminal cases in other countries needs substantial improvement.
10. There has been inconsistent and unsatisfactory implementation of the risk based approach (as defined in FICA):
    1. While larger financial institutions are well developed at understanding money laundering risks and implementing measures to mitigate such risks, the smaller financial institutions and designated non-financial businesses and professions (DNFBPs) are focused on compliance and not on identifying and understanding money laundering and terrorist financing risks.
    2. Basic customer due diligence (CDD) is adequately conducted by many accountable institutions, however, the beneficial ownership requirements are not consistently complied with.
    3. High-risk sectors such as dealers in precious metals and stones and company service providers as well as virtual asset service providers are not AML/CTF regulated, save for the general reporting requirements.
11. Regulation and supervision of risk based AML/CTF is relatively new in South Africa and supervision of the smaller financial institutions and DNFBPs is inadequate as the risk based approach is not properly implemented. The inspection of other non-financial sectors is too infrequent and such inspections are focused on basic compliance and controls while neglecting to assess the effectiveness of the AML/CTF programmes.
12. The implementation of targeted financial sanctions for proliferation financing[1] has been fairly successful since April 2019, however substantial improvements are needed as the private sector's understanding is inconsistent and supervision of the proliferation financing-related obligations is still relatively new in South Africa.

Actions already taken to avoid greylisting

The majority of the progress made in terms of compliance with the Recommendations relates to legislative interventions. Although these legislative interventions were enacted prior to the February 2023 deadline, the FATF found that, due to the delayed enactment of the legislation, there was insufficient time for South Africa to demonstrate any meaningful implementation of the legislative interventions.

The crucial actions taken by various stakeholders since 2021 include:

• The most notable progress was made through the General Laws (Anti Money Laundering and Combating the Financing of Terrorism) Amendment Act 23 of 2022 (Amendment Act) which, among other things, introduced the concept of beneficial ownership into the relevant pieces of legislation.

• Expanding the mandate of the Financial Intelligence Centre Act 38 of 2002, as amended (FICA) to allow for more effective monitoring and detection capabilities and beefed up the administrative sanctions for non-compliance.
• The establishment of the Fusion Centre, which is an alliance of various law enforcement agencies and investigative bodies in the Justice, Crime Prevention and Security Cluster and the FIC. It includes bodies such as the National Prosecuting Authority, Special Investigating Unit, South African Revenue Service, Hawks, Crime Intelligence and State Security Agency. Since its inception, the Fusion Centre has successfully recovered approximately R1,75 billion in criminal assets.
• The FATF has acknowledged that the Prudential Authority has made the most progress in terms of the risk based approach to supervision, including:
  • the issuance of second round of sectoral risk assessments;
  • instituting a new risk rating tool;
  • enhancing the frequency of inspections;
  • holding regular outreach and awareness sessions with banks and life insurers; and
  • seeking to engage foreign supervisors in host jurisdictions concerning cross-border subsidiaries and their respective money laundering and terrorist financing risks.
• In its Mid-Term Budget Policy Statement, National Treasury announced that it has allocated R14 billion to capacitate agencies that are crucial in the fight against crime, including financial crimes.

Steps to be taken to be lifted from the grey list

The FATF has prescribed an eight-step action plan which, if achieved, will result in South Africa being lifted from the grey list. The action plan is detailed as follows:

• Demonstrate a sustained increase in outbound mutual legal assistance requests that help facilitate money laundering and terrorist financing investigations and confiscations of different types of assets in line with its risk profile.
• Improve risk based supervision of DNFBPs and demonstrate that all AML/CTF supervisors apply effective, proportionate, and effective sanctions for noncompliance.
• Ensure that competent authorities have timely access to accurate and up-to-date beneficial ownership information on legal persons and arrangements and applying sanctions for breaches of violations by legal persons to beneficial ownership obligations.
• Demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the FIC for its money laundering and terrorist financing investigations
• Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorist financing activities in line with its risk profile.
• Enhance its identification, seizure, and confiscation of proceeds and instrumentalities of a wider range of predicate crimes, in line with its risk profile.
• Update its terrorist financing risk assessment to inform the implementation of a comprehensive national counter-financing of terrorism strategy.
• Ensure the effective implementation of targeted financial sanctions and demonstrate an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.
• Prioritise law enforcement initiatives where regulators are required to increase their level of supervision, ensuring that investigations are sufficiently and effectively supported, both locally and internationally.

Estimated timeline for implementation the eight-step action plan

South Africa has committed to resolving the eight strategic actions by January 2025. The length of time that South Africa will remain on the grey list will depend on the speed at which the deficiencies are resolved.

Evidence has shown that those jurisdictions with serious deficiencies coupled with a slow rectification process and lack of buy-in from the government have remained on the grey list for many years. For example, Yemen and the Democratic Republic of the Congo have remained on the grey list since 2010 and Syria since 2013. Whereas countries such as Mauritius, Iceland and Serbia were lifted from the grey list within one to two years.

South Africa has already made good progress in terms of the enactment of the legislative interventions. The length of time spent on the grey list will depend on the successful implementation of the legislative interventions and the level of commitment from both the state and the private sector.

One of South Africa's major weaknesses relates to the enforcement and prosecution of money laundering and terrorist financing related crimes. Although there has been positive progress in this area, improvement of the investigation and prosecution of these crimes could take considerable time and therefore it is likely that it will take South Africa 24 to 36 months to be lifted from the grey list.

Overview of the legislative interventions

The Amendment Act sought to combat money laundering (and prevent the country from being greylisted, albeit unsuccessfully) by rectifying gaps in laws that prevent terrorism financing and money laundering.

Execution of the Amendment Act commenced on 29 December 2022, and the next phase of its execution is set to continue on 1 April 2023.

The Amendment Act affects five different pieces of legislation:

1. Companies Act 71 of 2008 (Companies Act)
2. Trust Property Control Act 57 of 1988 (TPC Act)
3. Nonprofit Organisation Act 71 of 1997 (NPO Act)
4. FICA
5. Financial Sector Regulation Act 9 of 2017 (FSR Act)

Amendments to the Companies Act

The Amendment Act inserts the definition of "beneficial owner" as an individual who directly or indirectly, ultimately owns a company or exercises effective control of that company through:

• the holding of beneficial interests in the securities of that company;
• the exercise of, or control of the exercise of voting rights associated with securities of that company;
• the exercise of, or control of the exercise of the right to appoint or remove members of the board of directors of that company;
• the holding of beneficial interests in the securities, or the ability to exercise control, including through a chain of ownership or control, of a holding company of that company;
• the ability to exercise control, including through a chain of ownership or control, of:
  • a juristic person other than a holding company of that company;
  • a body of person corporate or unincorporate;
  • a person acting on behalf of a partnership;
  • a person acting in pursuance of the provisions of a trust agreement; or
• the ability to otherwise materially influence the management of that company.

The Amendment Act inserts the definition of "affected company" as:

• a regulated company which includes a:
  • public company;
  • a state owned entity; and
  • a private company if more than 10% of the issued securities of the company have been transferred, other than by a transfer between related or inter-related persons within the preceding 24 months immediately before the date of an affected transaction; or
• a private company that is controlled by or a subsidiary of a regulated company (as defined above).

The Amendment Act further provides an extensive mechanism in section 33 of the Companies Act through which the Companies and Intellectual Property Commission (CIPC) can accurately store updated beneficial ownership information and requires the company to file a copy (i) its securities register, and (ii) a copy of the disclosure of beneficial interest as required in terms of section 56(7)(aA) of the Companies Act on an annual basis. The CIPC must make such annual returns available to any person as prescribed.

Through the insertion of section 50(3)(3A)(a), the Amendment Act requires that a company that does not fall into the definition of an "affected company", must record in its securities register information regarding those natural persons who are the beneficial owners of the company and ensure that this information is kept up to date within the prescribed period after any changes in beneficial ownership have occurred.

In terms of Amendment Act, section 56(7)(a)(A) of the Companies Act now requires an affected company to establish and maintain a register of persons who hold beneficial interests equal to or in excess of 5% of the total number of securities of that class issued by the company, as well as the extent of those beneficial interests and ensure that this register is updated within the prescribed period of time after receiving a notice contemplated in section 122(1) in respect of the change in ownership.

The addition of section 56(12) of the Companies Act prescribes that a company that does not fall within the meaning of an "affected company" must file a record with the CIPC containing the prescribed information regarding individuals who are the beneficial owners of the company and such information must be updated accordingly and within the prescribed period after any changes in beneficial ownership has occurred.

The Amendment Act has placed additional reporting requirement on companies in terms of section 122(1) notification of change in beneficial ownership. Companies are now required to file such notices with CIPC.

Section 69(8) of the Companies Act is amended by specifically stating that persons who are convicted of any offences related to terrorist financing, money laundering, proliferation financing activities or persons who are subject to a resolution of the UN Security Council are prohibited from becoming directors of a company.

Amendments to the TPC Act

Similar to the amendments to the Companies Act, a definition has now been inserted into the TPC Act for a "beneficial owner" along with an "accountable institution".

Section 6 of the TPC Act now makes provision for a person to be disqualified from being authorised as a trustee in certain circumstances, most notably and not limited to the following:

• If they are an unrehabilitated insolvent.
• If they have been declared a delinquent director in terms of section 162 of the Companies Act, or are prohibited by any law to be a director of a company, or have been removed from an office of trust on the grounds of misconduct involving dishonesty.
• If they have been convicted of any crime within South Africa or elsewhere and imprisoned without the option of a fine, or fined more than the prescribed amount in terms of section 69 of the Companies Act for, inter alia, theft, forgery, perjury and other offences relating to fraud, misrepresentation, dishonesty, money laundering or terrorist financing or proliferation of terrorist financing (as those terms are defined in FICA).

Section 10(2) of the TPC Act stipulates that a trustee must disclose their position as trustee to any accountable institution with which the trust engages in that capacity and must make it known to the accountable institution that the relevant transaction or business relationship relates to trust property.

In terms of section 11A(1) of the TPC Act, the trustee must establish and record the beneficial ownership of the trust, lodge a register of such information with the Master's Office and ensure that such information if kept up to date.

Section 19(2) of the TPC prescribes that a trustee who fails to comply with the obligations in section 10(2) and 11A(1) commits an offence and if convicted is liable to a fine not exceeding R10 million or imprisonment for a period not exceeding five years, or both.

The Amendment Act also imposes anti-money laundering requirements on trustees. It further requires the Master to maintain a register of beneficial ownerships of trusts and specifies offences.

Previously, there were no money laundering provisions regarding beneficial owners in the TPC Act.

Amendments to the NPO Act

The NPO Act has been amended by providing that specified non-profit organisations need to be registered, and enables the Nonprofit Organisations Directorate to function effectively and enter into agreements with other organs of state.

The Amendment Act requires registered non-profit organisations to provide information about office-bearers, internal structures and operations to the Director, and that this information must be included in the Director's register.

The Amendment Act further provides for the removal and grounds for disqualification of an office bearer by inserting Chapter 3A into the NPO Act.

The main purpose for these amendments is to prevent abuse of non-profit organisations and encourages further disclosure of any such abuse.

Amendments to FICA

General

The Amendment Act enhanced the powers of FIC promoting information sharing between bodies, enhancing risk management and compliance programmes, and aligning the definitions of public officials with the more common international terminology of politically exposed persons. The amendments to FICA were the most substantial and only those amendments relevant to this memo will be discussed below.

Definitions

The term "beneficial owner" is now defined as any person who directly or indirectly, ultimately owns or exercises effective control of a client of an accountable institution or a legal person, partnership or trust that owns or exercises effective control of a client of an accountable institution or exercises control of a client of an accountable institution on whose behalf a transaction is being conducted.

Most notable is the schedule of "accountable institutions" which has been replaced with a more comprehensive list which now requires previously unregulated sectors to register with FIC and comply with FICA's risk based approach to AML and CTF. The following additional sectors are now considered "accountable institutions" under FICA:

• All high-value goods dealers who sell a single item for R100,000 or more, regardless of how the payment made
• Advocates who practice with a fidelity fund certificate
• Trust and company service providers
• Credit providers who are subject to the National Credit Act 34 of 2005 (NCA) and a person who carries on the business of providing credit in terms of any credit agreement outside of the NCA
• Crypto asset service providers
• Co-operative banks
• The South African Mint Company regarding the distribution of non-circulation coins in retail trade
• Money or "value" transfer providers (e.g. clearing system participant under the National Payment Systems Act 78 of 1998 foreign exchange providers; non-bank mobile money service providers)

The Amendment Act has also aligned certain provisions and Schedules 3A and 3B to appropriately refer to domestic and foreign "politically exposed persons", as distinct from a new category of persons, namely, "prominently influential person", who will be dealt with separately in the new Schedule 3C.

Schedule 3C defines a "prominent influential person" as an individual who holds or has held in the preceding 12 months, the position of chairperson of the board of directors; chairperson of the audit committee; executive office; or chief financial officer of a company that has provided goods or services to an organ of state and the annual transactional value of the goods and/or services exceeds the amount determined by the Minister

Financial Intelligence

The object of the FIC has been updated to include, among other things, identification of persons involved in the proliferation of financing activities and the definition of "proliferation financing" and "proliferation financing activity" has now been included in the definitions section of FICA.

Customer due diligence

In terms of section 21G of FICA, if a relationship with a "prominent influential person" entails higher risk, then the accountable institution must:

• obtain senior management approval for establishing the business relationship;
• take reasonable measures to establish the source of wealth and source of funds of the client; and
• conduct enhanced ongoing monitoring of the business relationship.

Section 21B of FICA, dealing with additional due diligence measures relating to legal persons, trusts and partnerships has been supplemented as follows:

• If a client is a legal person and it is in doubt whether (i) the natural person (who, independently, or together, has a controlling ownership interest in the legal person) is the beneficial owner of the legal person or (ii) no natural person has a controlling interest in the legal person, the accountable institution must determine the identity of each natural person who exercises control of that legal person through other means, including through his or her ownership of control of other legal persons, partnerships or trusts (section 21(2)(ii)).
• If a person, in entering into a single transaction or establishing a business relationship as contemplated in section 21, is acting on behalf of a partnership, and a partner in that partnership is a legal person or a natural person acting on behalf of a partnership or in pursuance of the provisions of a trust agreement, the accountable institution must establish the identity of the beneficial owner of that legal person, partnership or trust (section 21(3)(b)(ii)).
• If a person, in entering into a single transaction or establishing a business relationship as contemplated in section 21, is acting pursuant to the provisions of a trust agreement, an accountable institution must:
  • In respect of the founders of the trust, establish the identity of each founder; and if a founder is a legal person or a person acting on behalf of a partnership or in pursuance of the provisions of a trust agreement, the beneficial owner of that legal person, partnership or trust.
  • In respect of the trustees of the trust, establish the identify of each trustee, and if a trustee is a legal person or a person acting on behalf of a partnership, the beneficial owner of that legal person, partnership or trust. The accountable institution must also establish whether the natural person purporting to enter into the transaction or establish the business relationship with the accountable institution is appointed as a trustee of the trust or not.
  • In respect of the beneficiaries of the trust, if the beneficiary is a legal person or a person acting on behalf of a partnership or in pursuance of the provisions of a trust agreement, the beneficial owner of that legal person, partnership or trust.

The addition of section 21(C)(2) now allows an accountable institution to suspend the due diligence process and consider making a report under section 29 if it suspects that (i) the transaction or activity is suspicious or unusual as contemplated in section 29 and (ii) it reasonably believes that the due diligence process will result in the accountable institution having to make a report in terms of section 29.

The amendment of Section 21D provides that when reporting suspicious and unusual transaction in terms of section 29 before entering into a single transaction or establishing a business relationship the accountable institution must repeat the steps contemplated in section 21 and 21B in accordance with its risk management and compliance programme (RMCP) and to the extent necessary to confirm the information previously obtained.

The Amendment Act further provides additional due diligence measures and amends access by authorised representatives to accountable institutions' records.

Financial Sanctions

As per the amendments to section 26A, a resolution adopted by the UN Security Council when acting under Charter VII of the Charter of the UN, providing for financial sanctions which entail the identification of persons or entities against whom member states of the UN must take the actions specified in the resolution now has immediate effect for the purposes of FICA upon its adoption by the UN Security Council. There is no longer a requirement for the Minister to publish the adoption of such resolutions in the Government Gazette.

Measures to promote compliance by accountable institutions

The Amendment Act has expanded the scope of an accountable institution's RMCP in section 42(1) of FICA to include mitigation of the risk of proliferation financing.

In addition, section 42(2)(q) requires an institution to apply enhanced and increased measures in respect of the implementation of its RMCP in foreign branches, subsidiaries or other operations, in order to adequately manage the risks when the host country does not permit the implementation of measures required under FICA.

The addition of section 42(2)(qA) requires that the RMCP must provide for the manner in which and the processes by which group-wide programmes of an accountable institution for all its branches and majority-owned subsidiaries in South Africa is implemented to enable the institution to exchange information with branches or subsidiaries relating to the CDD requirements and to the analysis of transactions or activities which the institution suspects to be suspicious or unusual and to comply with the obligations of FICA.

Reporting duties and access to information

Section 35 of the Amendment Act also provides for the safeguarding of personal information.

The objectives and functions of the FIC have been amended to include forensic information and allow the centre to the right to request information held by the various state organs.

Compliance and enforcement

The Amendment Act now makes non-compliance with certain sections of FICA subject to an administrative sanction.

The failure of an accountable institution, reporting institution or any other person:

• to comply with a provision of section 26B (UN financial sanctions); or
• to inform the FIC in accordance with section 27; or
• to report to the FIC:
  • the prescribed information relating to a suspicious or unusual transaction or series of transactions in accordance with section 29(1) and (2); or
  • in circumstances where the applicable institution or other person ought reasonably to have known or suspected any of the facts referred to in section 29(1)(a), (b), or (c) exists and who negligently fails to report the prescribed information in respect of a suspicious or unusual transaction; or
• to comply with a request made by the FIC in terms of section 32(2) or a supervisory body in terms of section 45(1B)(d); or
• to comply with an order by a judge in accordance with section 35; or
• that conducts or causes to be conducted, two or more transactions with the purpose, in whole or in part, of avoiding complying with a duty to report under FICA,

is non-compliant and is subject to an administrative sanction.

Amendments to the FSR Act

The Amendment Act also creates a new chapter in the FSR Act regarding beneficial owners and states that where a regulator's directive is made, a financial institution, key person, representative or contractor must comply with such directive.

Practical implications of the legislative interventions for investment managers and investors

General

The Amendment Act has introduced the definition of "beneficial owner" into all inspired pieces of legislation and now includes natural persons at the end of the chain, who ultimately own or control the legal arrangement, including those persons who exercise ultimate control over the legal arrangement, and/or the natural person(s) on whose behalf the transaction is being conducted.

Investors and investment managers are required to obtain information and report on those individuals that have ultimate effective control or ownership of their clients.

The legislative interventions also give supervising authorities the power to collect beneficial ownership information relating to institutions and their clients.

The Companies Act

Filing of annual returns with the CIPC (Section 33)

In addition to the filing of annual financial statements, if required, all companies will be required to file with the CIPC on an annual basis:

• a copy of their securities register (including information of beneficial owners if not an affected company); and
• if the company is an "affected company", a copy of the disclosures of beneficial interest as required in terms of section 56(7)(aA).

Securities Register (Sector 50) and Section 56(12): Private Companies

A company that is not an affected company (i.e. a private company that is not a regulated company and is not controlled by or a subsidiary of a regulated company) must record the information regarding those natural persons who are the beneficial owners of the company in its securities register and ensure that this information is kept up to date within the prescribed period after any changes in beneficial ownership have occurred.

Disclosures of beneficial interests: Affected companies

An affected company shall:

• Establish and maintain a register of persons holding interests equal to or exceeding 5% of the issued shares of each class of shares and ensure that this is updated within the prescribed period of time after receiving a notice in terms of section 122(1) of the Companies Act (section 56(7)(aA).
• After a receipt of a notice in terms of section 122 in respect of the change in beneficial ownership, file a record of that notice with the CIPC (prior to the amendment, the notice was only filed with the Take-over Regulation Panel) (section122(3)(A)).

TPC Act

A trustee is obligated to establish and record the beneficial owner of the trust and lodge such information with the Master and ensure that such information is kept up to date.

Failure to comply with such disclosure of beneficial ownership is an offence punishable by fine, imprisonment or both.

FICA

New accountable institutions

The expansion of the list of entities that are deemed to be "accountable institutions" means that those institutions that were previously exempt from adopting a RMCP are now obligated to do so.

These new accountable institutions will have to register with the FIC within 90 days, perform risk assessments on their business to identify whether any money laundering or terrorist financing risks appear in their businesses and put together an AML/CTF policy.

Existing accountable institutions

Existing accountable institutions will need to perform due diligences on themselves in order to assess how they have been implementing the risk based approach, identify gaps and start creating controls and protocols to address these gaps.

The RMCP of each accountable institution will need to be updated to include the enhanced CDD procedures as a result of the introduction of the concept of beneficial ownership, as well as provide for the mitigation of risks relating to proliferation financing.

Customer due diligence

Accountable institutions should align their CDD process with the new definitions in respect of politically exposed persons and prominent influential persons to ensure that the necessary approvals and procedures are followed in respect of existing and new clients classified as such.

Additional due diligence measures relating to legal persons, trusts and partnerships

Accountable institutions need to align their CDD process to ensure that the ultimate beneficial ownership of legal persons, trusts and partnerships is established as contemplated by the amendments to section 21B(2)(ii), 21B(2)(b)(ii) and 21B(4) of FICA.

Compliance and enforcement

Accountable institutions need to ensure that they comply with all applicable provisions of FICA, as non-compliance with the section detailed above may result in administrative sanctions.

Practical consequences of greylisting for investors and investment managers in SA and abroad

Reputational damage

Several sources have emphasised that greylisting carries with it reputational damage and leads to heightened risk factor assessments by foreign businesses and banks when trading with their South African counterparts.

Furthermore, South African clients’ risk ratings would be increased at many international institutions, such as the European Union and in the UK. This will strain the prospects of doing business internationally for both South African companies and individuals owing to high premiums.

Administrative and bureaucratic hurdles

Although the FATF itself does not prescribe enhanced due diligence procedures when a jurisdiction is greylisted, foreign jurisdictions and banks will likely take it upon themselves to implement enhanced due diligence procedures when doing business in South Africa and with South African investors.

As a result, South African investors should be prepared for more frequent reviews in relation to beneficial ownership and the source of funds.

This will lead to increased bureaucratic hurdles for international companies wishing to do business in South Africa while simultaneously decreasing access to capital for existing companies doing business in South Africa.

Due to the additional documentation required, brought upon by more extensive due diligence processes, the main consequence for ordinary investors will be a delay in the execution of offshore transactions.

Banks in South Africa will have to fork out more on managing banking relationships with correspondents and global infrastructure providers, which would result in increased costs.

Negative impact on South Africa's capital flow

It is anticipated that greylisting could discourage foreign investors from doing business in South Africa, which could in turn affect South Africa’s GDP by approximately 1-3%.

Greylisting will most likely lead to less capital inflow into the country and we may see increased incidences of foreign direct investment leaving the country.

Additionally, there may be certain investors that will be prohibited from doing business with countries that are included on the grey list or their ability to do business in South Africa will be restricted or limited.

The negative impact on South Africa's capital flow, as a result of greylisting, will likely affect the currency and the local bond and equity markets over time.

It must be emphasised that the impact of greylisting on the currency and equity markets should not be exaggerated as many commentators are of the opinion that, due to the high probability of South Africa's greylisting, the market has already factored in the effects of greylisting prior to the February 2023 announcement.

Despite these factors, the South African Government has taken urgent attempts to avoid being grey listed by introducing amendments to the financial regulation system.

Experts are of the opinion that the economic impact would be minimal depending on how South Africa addresses the concerns of the FATF moving forward, while some, on the other hand point to a more severe situation for South Africa in terms of elevated scrutiny for individuals and companies alike.

Concluding remarks

South Africa's placement on the grey list, although not ideal, should be viewed as an opportunity to increase our defences against money laundering and terrorist financing in a short amount of time. Evidence has shown that the countries that are successfully lifted from the grey list end up with stronger AML/CTF systems than those countries that have never been greylisted.

 

[1] "Proliferation financing" refers to the "risk of raising, moving, or making available funds, other assets or other economic resources, or financing, to persons or entities for purposes of weapons of mass destruction proliferation, including the proliferation of their means of delivery or related materials".