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What is Greylisting?

May 29, 2023

Greylisting is a term used to describe a situation in which a country or financial institution is not blacklisted (i.e. not wholly barred from doing business) but is subjected to increased scrutiny and monitoring when conducting business with foreign nations or financial institutions.

How did South Africa get here?

The Financial Action Task Force (FATF) published its Mutual Evaluation report on South Africa in October 2021. FATF is an independent inter-governmental body that develops and promotes anti-money laundering (AML) and counter-terrorist financing (CTF) standards to create common legislation and regulation that helps countries prevent illegal activities such as organised crime, corruption and terrorism.

According to the report, South Africa only followed three FATF technical compliance recommendations and partially followed seventeen. According to the peer review, South Africa failed to demonstrate sufficient progress in meeting all the recommendations made by the (FATF). Hence, South Africa was also rated low or moderate in its compliance with all eleven immediate outcomes, which test the effectiveness of South Africa’s frameworks. This cast doubts on the country’s ability to ensure that the safeguards in place meet international legal standards. South Africa was given a year to implement the necessary corrective measures.

However, during its February 2023 plenary session, FATF announced that it had greylisted South Africa effective 24 February 2023. Due to shortcomings in South Africa’s response, the global money laundering and terrorist financing watchdog placed the country on its “Increased Monitoring” list, also known as the greylist. Being placed on the greylist indicates that the country is still actively working with the FATF to address flaws in its legal systems. The country is closely monitored as it addresses identified deficiencies within the agreed-upon timeframes.

When a country is placed on the greylist, any financial transactions conducted by its citizens are treated with greater caution, and firms in FATF-compliant countries will take additional precautions to protect themselves. Greylisting has the unavoidable consequence of making future dealings with companies, particularly financial institutions, more difficult.

What adverse measures are usually put in place against greylisted entities?

Some of the critical common measures that most financial institutions may take when dealing with greylisted countries or institutions are as follows:

  • Due diligence: Financial institutions may be required to conduct extensive background checks on clients and transactions involving greylisted countries or institutions. Verifying the source of funds, the purpose of the transaction, and identifying the beneficial ownership of the entities involved.
  • Increased scrutiny: Transactions involving greylisted countries or institutions may face additional scrutiny from compliance officers or external regulators. This scrutiny can result in more extended transaction processing times and delays in the release of funds.
  • Restrictions on transactions: Financial institutions may be required to limit or restrict certain transactions involving greylisted countries or institutions. Restriction on wire transfers or other high-value transactions is one example.
  • Higher fees: Because other institutions may be hesitant to do business with greylisted institutions or institutions from greylisted countries, they may levy higher fees and charges for transactions.
  • Risk of a stigma effect on a country’s reputation: A tarnished reputation may result in lower export demand, lower remittance receipts, reduced access to international lending and donor funding, and weaker investment prospects. Suppose a country is labelled as having a high level of risk; in that case, it may drive investors away and attract the wrong kind of attention from those looking for easier conduits for their criminal activities.

For South African organisations, greylisting could increase the cost of raising finance and trading with global counterparties. Organisations will face increased scrutiny, higher fees, restricted access to financial services, increased risk, and additional compliance requirements.

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