South Africa and Nigeria have been added to a global financial watchdog’s so-called grey list, which identifies countries with deficiencies in combating illicit financial flows, a move that will damage their international reputations and may increase costs for banks and asset managers.
The Financial Action Task Force announced the decisions on Friday. While the inclusion of South Africa on the list was widely anticipated as a risk, the addition of Nigeria was unexpected. Morocco and Cambodia were removed from the list after they improved 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.
Following the announcement of the decision, the rand fell as much as 1.2% against the dollar.
According to a 2019 evaluation, South Africa fell short of meeting all 11 of the FATF’s effectiveness measures to combat money laundering and terrorism financing. Those findings came after a nine-year period of endemic graft under former President Jacob Zuma.
While President Cyril Ramaphosa’s administration, which took over after the ruling party forced Zuma to resign in early 2018, has attempted to address the shortcomings, it has fallen short of the mark.
According to the FATF, both South Africa and Nigeria have agreed to increase investigations into money laundering and terrorist financing, confiscate related assets, and take other measures to tighten controls.
The South African central bank has previously warned that grey-listing could have far-reaching consequences for the country’s financial system, including capital and currency outflows and higher transactional, administrative, and funding costs for banks.
Last month, Finance Minister Enoch Godongwana stated that the country is “hopeful” that regulatory changes to address the country’s shortcomings in combating illicit financial flows will help it avoid being designated as a jurisdiction subject to increased monitoring. Ramaphosa signed two key pieces of legislation into law in December, addressing some of the watchdog’s concerns.
Nigeria and South Africa have Africa’s two largest economies, and their inclusion on the grey list places them on par with Syria, the Democratic Republic of the Congo, and South Sudan.
While greylisting may increase the government’s foreign-funding costs and impede trade flows, it is unlikely to have a “significant” impact on South Africa’s creditworthiness, according to S&P Global Ratings analysts Samira Mensah, Zahabia Gupta, and Omega Collocott.