Summer killer or just another cloudy day?

Author: Abu Cassim

19 December 2022

Just when most South Africans were getting ready to bask in the summer sun after a long and chaotic year, the impending threat of South Africa landing on the Financial Action Task Force (FATF) global greylist is a cloud casting a shadow on our summer break. And rightly so. 

FATF was established to protect the global financial system. Their role is to monitor the financing of terrorist activities, development of weapons of mass destruction and other related activities. As a means to achieve this, FATF provides guidance on the combating of money laundering. Countries get greylisted once shortcomings are identified. FATF reports delivered to the South African government in 2019 and again in 2021 identified 12 key areas that the South African financial system needed to strengthen. This included state capture, money laundering risks, law enforcement and judicial capacity.

In response to the recommendations, National Treasury has tabled a number of amendments to the country’s financial legislative framework. FATF will decide whether or not the changes implemented are sufficient for South Africa to avoid the greylist at its conference in February 2023. Worryingly, study commissioned by Business Leadership SA concluded that South Africa has an 85% probability of being placed on the greylist.

Throughout this year, Jozi Angels has seen a surge of dual structure investment proposals or overseas headquartered company structures tabled by South African based entrepreneurs. Startups set up offshore entities for one of three reasons (or combination thereof): firstly for capital raising purposes, secondly for servicing customers in and around that market, and lastly to create a more tax efficient group. Given the economic backdrop this makes sense. While funding volumes have increased on the continent, they are still some way off more developed markets. Furthermore, South Africa’s GDP only contributes 0.6% to global GDP, making it a relatively small market. Entrepreneurs want to tap in to these bigger markets and as investors we want to benefit too. 

The threat of the FATF to greylist South Africa will undoubtedly add complexity to an already complex investment procedure for South African residents. If FATF does decide to greylist South Africa, the effect would be that SA resident investors will be subject to more know-your-customer and other compliance checks to ensure that the investment sources which are being used abroad are from legitimate means. Coupled with this, there’s potential for an additional due diligence layer which will undoubtedly increase the cost of any offshore transaction.

But there is a ray of sunshine to this dark tale. A few years back, Mauritius was also greylisted and managed to get out of it. I say this flippantly, but in reality it was very tough for Mauritius. They were also placed on the European Union’s blacklist and the United Kingdom’s List of High Risk Third Countries. Doing international business, particularly with European countries, was difficult. Cross-border transactions slowed to a glacial pace and some businesses changed their headquarters from Mauritius to other tax havens (presumably with a similar exotic location where you can wear suit shorts to work). The Mauritian government worked very hard to address FATF’s concerns and they eventually succeeded after almost two years. We can only hope that our government will act with the same sense of expediency, should South Africa find itself in a similar position.

So what does this mean for our Jozi Angel members? In short, if FATF does put South Africa on the greylist, planning and patience is needed. Overseas deals may become more expensive and deal closure may take longer than usual. As your positions are all unique, it is worth a conversation with your tax and financial advisor to get a more complete sense of what a greylisting would mean for you. 

Until then, our government’s agility is being tested. There are bills tabled before parliament and for public comment that seek to avert the country from being greylisted. While reports suggest a greylisting is probable, what we do know is that we have a window and a new calendar year of allowances in our pockets. We will just make hay while the sun shines.