What is the grey list?
On 24 February 2023, the Financial Action Task Force (“FATF”), an intergovernmental organisation with a mandate to combat money laundering and terrorism financing, placed South Africa and Nigeria on its grey list. FATF’s grey list, which is issued three times per year, includes countries in which there are major issues with anti-money laundering and countering terrorism financing (“AML/CFT”) legislation and regulation. Addition to the grey list places those countries under increased monitoring by the FATF to ensure the country reforms its legislation and regulations within an agreed timeframe.
What does this mean for South Africa and Nigeria?
Inclusion on the grey list is seen as a warning to investors and the international community that the country's lax AML/CFT legislation may permit money laundering and terrorism. In South Africa, the Rand dropped to its lowest point against the USD since November and the Johannesburg Stock Exchange dropped close to 3% on the week. However, South Africa and Nigeria’s addition to the list did not come as a surprise to most investors and had been factored into investment plans several months ago.
The FATF grey list does not legally mandate companies, investors or financial institutions to implement any changes to their own internal controls if they operate or invest in these countries, but in practice, banks and investors do tend to scrutinise any transactions in grey listed countries at a higher level. This increases due diligence costs in these countries, which may lead to a reduced interest in investment in Africa’s two largest economies.
What does this mean for investors?
International investors can expect more difficulty in obtaining funding for potential investments in South Africa and Nigeria, as financial institutions will want additional assurance that their funds will not be invested in a company that may, for example, funnel the money to Boko Haram in northern Nigeria, or be involved in corrupt deals involving politically exposed persons in South Africa.
Investors may be asked to increase their level of due diligence into any potential acquisitions or partners in these countries, with a goal of identifying any issues of concern with the background of individuals involved in the project or the ultimate beneficial owners of a company. Small-cap investors in particular, who are usually less able to finance the enhanced due diligences needed to find this information, may find it harder to obtain funding approvals from international institutions without a deeper look into the people and companies involved in a potential acquisition.
How long will this last?
The good news is that the FATF evaluates countries and changes the grey list every four months. The FATF noted in its statement that South Africa “had made significant progress” and Nigeria has “made progress” to improve its AML/CFT system in line with the FATF’s recommendations. From past experience, investors are quick to shift away from countries that are included on the list, but are just as quick to move back once a country is removed.
South Africa and Nigeria’s inclusion on the FATF’s grey list will not be forever, but as intended, should be seen as a warning to investors to ensure they have conducted their full due diligence and are able to invest funds in these countries without any concern about who they are dealing with and where their funds end up.