Nigeria and South Africa added to FATF “grey list”

The “grey listing”

On 24 February 2023 the Financial Action Task Force (FATF) concluded the second plenary of the organisation at its headquarters in Paris, after participation in discussions by delegates from more than 200 jurisdictions. Among other outcomes published on the same day on the FATF website, it was announced that Nigeria and South Africa were added to the list of Jurisdictions Under Increased Monitoring, commonly referred to by parties external to the FATF as the “grey list”. The two countries join fellow sub-Saharan African countries Burkina Faso, Democratic Republic of the Congo, Mozambique, Senegal, South Sudan, Tanzania, and Uganda on the list.  South Africa is only the second of the G20 countries (after Turkey) to which the dubious grey listed status has been awarded.

FATF includes countries on the list of Jurisdictions Under Increased Monitoring when they conclude that a country has strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.  

The announcement, as exampled in the selection of tweets in the graphic above, drew widespread reaction from commentators in both countries, and the sentiment expressed is mostly that the governments of the two countries could have done more to avoid the “grey listing”. For Nigeria, the timing couldn’t have been worse as the announcement came on the eve of national elections which were held on 25 February 2023. At the time of this writing, it is however not yet known whether the decision may have been a factor in the outcome of the elections.

The consequences

The most immediate and important consequence of inclusion on the list, is that the two countries will now face increased scrutiny from the international community, particularly from financial institutions, which may be hesitant to engage in transactions with business and other corporate entities based in those countries. Another serious consequence of the grey listing is that the countries may find it increasingly difficult to continue to gain access to the global financial system, even to the point of being excluded therefrom in certain extreme circumstances. Reduced access to the global financial system can have serious implications for Nigeria and South Africa, as international trade is a feature of the economies in both countries. Much needed foreign investment may also be adversely affected, and again it almost goes without saying that it may lead to a slowdown in economic growth and shrinking employment opportunities. To illustrate the point, a May 2021 Working Paper compiled by the International Monetary Fund (IMF)’s Finance Department, empirically found, through a machine learning technique known as “lasso”, that grey listing has a significant negative effect of 9.5% of Gross Domestic Product (GDP) on all investment inflows (average declines per type are 3% on Foreign Direct Investment (FDI), 2.9% on portfolio inflows, and 3.6% on other investment inflows).

In addition to these tangible consequences, there is also the reputational fall-out that the newly listed countries will have to manage. Some long-term implications in this respect may be their ability to engage in diplomacy, global trade, and other international activities.

The effects of being FATF grey listed can, moreover, extend beyond the financial industry and have implications for the day-to-day running of businesses in other industries. Business owners in Nigeria and South Africa may now become more cautious about investing or operating in their home jurisdictions resulting from increased regulatory scrutiny and reputational risks. More intense scrutiny may require enhanced due diligence checks on third parties such as suppliers, intermediaries, and customers, to ensure compliance with AML/CFT regulations, which likely would lead to an increase in administrative costs and delays in business transactions.

The general populace in the two newly listed countries may also be impacted by being on the FATF grey list. An example hereof, particularly in relation to South Africa, is the potential which reputational risks may have on the tourism sector. This sector has traditionally been an important contributor to the economy but has already been under severe pressure after the Covid-19 pandemic with significant reduction in employment opportunities. Furthermore, increased regulatory requirements and compliance costs may be passed on to consumers, resulting in higher prices for goods and services.

The length of time it takes for a country to be removed from the FATF grey list can vary depending on a number of factors, such as the severity of the deficiencies in its AML/CFT measures, the resources available to the country to address those deficiencies, and the political will of the country's leaders to make the necessary changes.

In a fact sheet published by the South African National Treasury Department immediately after the FATF announcement, the Government conceded that it may take anything between one and three years to address the deficiencies and to be removed from the grey list. Official reaction from the Nigerian Government is yet to be published.

Are there any benefits of being grey listed?

Generally speaking, the immediate and short-term consequences as highlighted above, are direct and considered to be negative, but it can be argued that being grey listed can create incentives for a country to improve its AML/CFT measures, and that this can have indirect positive long-term benefits on a country's overall governance and rule of law. Should a country demonstrate strong political will to address and rectify identified deficiencies, it may succeed in turning around negative perceptions and thereby enhancing its international reputation, making it among others attractive for foreign investors and foreign visitors.

We can assist you in managing consequences that your business may have to deal with resulting from the grey listing

With our track record of assisting clients in sub-Saharan Africa over more than two decades with risk consulting services, we are available to assist clients with the following services which may become a requirement during the grey listing period:

• Conducting integrity due diligence (normal as well as enhanced versions) on third parties such as potential business partners or clients in all nine of the sub-Saharan grey listed countries.
• Through AML/CFT risk assessments we can assist clients with the identification and assessment of your AML/CFT risks.
• Conducting independent audits of businesses or financial institutions to ensure compliance with AML/CFT regulations.

Contacts:

Nokwazi Hlubi: +27 79 411 2667

Christo du Plessis: +27 82 956 1386

Website: https://www.ddafrica.co.za/

Email: info@ddafrica.co.za