Corruption might seem normal in South Africa, but an international financial task force disagrees, writes RUSI Centre for Financial Crime and Security Studies’s Sasha Erskine and Tom Keatinge.
A pandemic, two catastrophic floods, three sovereign credit downgrades, damaging riots and high unemployment meet a close friend, South Africa, at a bar.
They’ve had a difficult few years and look forward to their beer. Opening up a menu, they look at the special. This week corruption is the appetiser, with a main course of greylisting by the Financial Action Task Force (FATF). In hushed tones, they discuss the consequences of ordering the greylist: how banks might not be able to transact internationally, the increased cost of receiving remittances from abroad, the reduced access companies might have to the international financial system – all implications that would weigh on South Africa’s economy.
Unemployment looks worried, poverty fears the worst. The remaining misfortunes leave the bar, deeply concerned.
Complicity and corruption
Corruption has previously been stressed as a major risk in South Africa by FATF. Indeed, the terms “state capture” and “corruption” appear 57 and 100 times respectively in the watchdog’s 2021 240-page Report on the integrity of South Africa’s financial system.
Corruption is seemingly such an everyday part of South African culture that it is invoked freely to explain all manner of economic sins and state failures. The abandonment of the country’s public railways to theft and rot, the frequent power cuts – euphemistically known as loadshedding; all are casually attributed to corruption and dismissed with a resigned shrug.
South Africans live with the international consequences of these corruption scandals every day. Since 2017, the country has been downgraded to junk status by three international credit rating agencies. Now, another consequence awaits: South Africa’s likely greylisting by FATF. Of the 54 countries in Africa, only six are currently greylisted.
The consequences of inaction
Why does greylisting matter? A 2021 study by the International Monetary Fund (IMF) found that, on average, being greylisted resulted in a 7.6% decrease of capital inflows of Gross Domestic Product (GDP). Money given by foreign charities to combat the HIV/Aids epidemic, international banks operating in South Africa, foreigners buying property or companies such as Apple and Starbucks all comprise money coming into the country. This income could drop sharply if South Africa is greylisted.
Indeed, the 2021 IMF study found that decreased foreign direct investment (FDI) inflows – the amount of money brought in by foreigners to buy goods or establish businesses – reduces GDP by 3% in greylisted countries. When Pakistan was added to the greylist in 2018, it is estimated that $35 billion of foreign capital left the country.
In 2021, South Africa was ranked as the top destination for FDI in Africa, with this investment creating jobs in the services industry and technology – such as the Google-led subsea fibre cable with Portugal. France, the UK and US – some of South Africa’s top investors – also have their own rules governing how their banks interact with greylisted countries. The implications of greylisting are very real.
Internationally, South African businesses and banks may have reduced access to global markets and be subject to enhanced due dilligence, which can be time and resource consuming, and may lead international banks to de-risk (the process by which they close accounts they deem uneconomic to operate in the face of rising compliance costs).
International banks and businesses already in South Africa may find compliance challenges too expensive or time consuming, choosing to relocate elsewhere. South Africa – which is highly economically attractive with its vast mineral resources, and has the largest port and second largest financial sector on the continent – could face increased challenges in attracting valuable FDI.
In a worst case scenario, rising costs could set off protests and potentially riots, in which the tourism sector – accounting for 3.7% of GDP in 2019 before the pandemic – would shrink. Ratings agencies pay close attention to FATF decisions and greylisting might undermine the country’s recent move from negative to stable.
With these economic pressures, the rand would lose value and inflation would rise above already high levels of 6.5%. It will be more expensive to pay for fuel, buy cars or feed families. Indeed, a banking CEO cited greylisting could be worse than the junk status downgrade for South Africa.
Greylisting and the political agenda
There are also political challenges to greylisting. Whilst the Treasury and FIC are vocal about introducing changes, Parliament – that can pass rapid laws to tackle financial crime – lacks awareness and impetus. The financial sector, led by South Africa’s Reserve Bank and “big 5″ financial institutions have been at the forefront of this conversation. Banks are well-versed in following international financial standards, having been required to implement controls for years as part of the global financial system. Parliament is not so sure.
With this background in mind, later this year, South Africa will face a judgement for which it must be prepared. Raising awareness and political will is key to South Africa instituting an action plan to combat the shortcomings FATF has raised.
Parliament must prove itself capable of addressing FATF’s concerns by strengthening the nation’s financial integrity. This must be done before the knock-on effects come into play: higher unemployment or the loss of foreign investment. Funds and expertise to enforce these changes in the law enforcement sector are needed for change “on the ground” to take place. As important, is the priority of coordinating this with the private sector to ensure that compliance measures are effective.
More than a technical decision by a Western organisation, greylisting poses reputational risks for the country as the FATF’s decision is mirrored by key partners of South Africa, notably the UK and the EU which will automatically add South Africa to their “High-Risk Third Countries” lists. The risks posed by greylisting are not merely technical, they have meaningful implications for the international banks, companies and countries on which South Africa relies.
Try, beloved country
Greylisting could be an inadvertent panacea to the stream of corruption and financial integrity scandals suffered by South Africa. A country on the greylist commits to address shortcomings identified by FATF in a “swift” timeframe. This should lead to South Africa raising its game to meet international standards and strengthen the integrity of its financial system.
Almost 30 years ago, South Africa was seen an example to the world for negotiating an end to apartheid without descending into civil war. It’s time for the country to rediscover that example of leadership and curb corruption. The alternative is not one South Africa can afford.
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