The country will now become a “jurisdiction under increased monitoring” and countries will have to actively work with the FATF to address strategic deficiencies to counter money laundering, terrorist financing and proliferation financing.

South Africa now becomes the second G20 country to be on the greylist after Turkey were added in 2021.

FATF said on 24 February that South Africa had “made a high-level political commitment to work” with the body to strengthen the effectiveness of its anti-money laundering regime.

It added that since 2021 it has made “significant progress” on recommended actions to improve its system including by developing national anti-money laundering and counter terrorism financing policies.

The body said that South Africa will have to implement eight steps of a FATF action plan to get itself of the greylist.

International Adviser spoke with a range of firms to discuss how the greylisting will impact the South African advice and investment markets.

‘Good position’

Francis Marais, product director at Morningstar Investment Management South Africa, said: “What is perhaps a bit more obvious is the risk that greylisting poses to foreign direct investments, specifically from European countries. It is therefore imperative that South Africa address these weaknesses or shortcomings as identified as soon as possible. The longer the greylisting continues the worse these effects could be which would then inevitably feed through to asset class returns.

“South Africa is, however, in a relatively good position, when compared to some of the incumbents on the grey list and has already shown intent by addressing some of the concerns and weaknesses. Indeed, should the country not be greylisted, the two laws already passed, in record time, should put us on an even stronger footing going forward and re-establish South Africa as an important global participant in the world financial markets.”

Lindsay Bateman, head of business development at Brooks Macdonald International, said: “While the move wasn’t a surprise, it has resulted in an immediate depreciation of the South African Rand on global currency markets and has dealt a significant reputational blow to the country.

“In addition to the potential currency impact, the costs of conducting global business for asset managers, banks, and other financial intermediaries will be impacted. This is due to the need for ‘enhanced due diligence’ on factors such as the source of wealth and funds, as well as greater ongoing supervision. The country faces increased risks, including concerns about greater capital outflows, as well as higher transactional, administrative, and funding costs, particularly in the banking sector.

“The listing is expected to be challenged for review in June and since many financial firms will initially bear additional expenses, the immediate influence on international financial transactions may be subdued.”

Rex Cowley, director at Overseas Trust & Pension, said: “The grey listing of South Africa is very unfortunate given the efforts taken by legislature, administrative bodies, and other authorities to address the issues identified in the 2021 mutual evaluation report. The grey listing will increase the administrative burden on the average person and all foreign provider of accounts to South Africans.

“Whether these costs are passed on or not time will tell but it is a far from desirable position. What seem unfair is that the majority of impact will be on the joe public when the drivers for the grey listing had nothing to do with them, and comes from state corruption, associated criminal activity and failures to convict or address perpetrators.”

Impact for intermediary market

The country is set for more disturbance, but what does this mean for South Africans who may be concerned about their investments, pensions and overall financial planning?

Michael Yuille, managing director at Northern Cross Wealth Management, added: Well, the immediate effect is that South African companies and individuals that trade or invest internationally will be subject to enhanced due diligence, which will add complexity and costs to these transactions.

“In addition, the likelihood is that the Rand may depreciate further against major international currencies, such as the US dollar and British pound.

“This, in turn, will make trading and investing internationally more expensive for South Africans, and may dissuade people from diversifying their portfolios into overseas markets, which should be one of the fundamental aspects of a truly diversified investment portfolio. South Africa clearly has a plan to be taken off the grey-list, it is now a question of how quickly it can be implemented.

Rashay Makan, managing director at Carrick Wealth South Africa, added: “Carrick Wealth are expecting increased transaction costs from international fiduciary, life, platform and investment providers. In addition, clients can expect increased scrutiny and enhanced due diligence, particularly surrounding source of wealth.

“These enhanced due diligence processes will certainly add to the overall transaction costs and increase processing turnaround times for clients.”

The move comes after the recently released ratings by the OECD Global Forum for Transparency and Exchange of Information.

Dominica received a “partially compliant” rating from the Global Forum and the EU requires jurisdictions to be at least “largely compliant” with the international standard on transparency and data exchanges on request.

The Council said: “The list includes jurisdictions worldwide that either have not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement the reforms necessary to comply with a set of objective tax good governance criteria.

“These criteria relate to tax transparency, fair taxation and implementation of international standards designed to prevent tax base erosion and profit shifting.”

Other countries

At the same time, the Council removed Barbados from the list after adding the country in October 2020.

It was first put on it because, like Dominica, it received a “partially complaint” rating from the Global Forum, but it has since been granted a supplementary review by the OECD and moved to a “state-of-play document”, pending the review’s outcome.

Jamaica joins Barbados on the document after its commitment to “amend or abolish its harmful tax regime”, also known as special economic zone regime, by the end of 2022.

But Morocco, Namibia, and Saint Lucia have been taken off the document as they have “fulfilled all their commitments”, the Council added.

Australia and Jordan have been granted an extension to implement their commitment, while Turkey was requested to resolve the issues regarding its exchange of information with all EU member states.

First published in December 2017, the EU “blacklist” did not include Jersey or any other crown dependency.

The islands were, however, placed on a “grey-list”, meaning they had agreed to meet issues of “economic substance” within one year or risk being downgraded.

Economic substance

In June, the EU Code of Conduct Group published information on how grey-listed jurisdictions could meet the “substance” requirements.

One factor taken into account is whether companies claiming tax residency in a jurisdiction have physical offices and high-level employees based there.

The conduct group said resident firms should be required to produce business plans explaining the commercial reasons for holding intangible assets in a jurisdiction.

Meeting requirements

Jersey’s consultation, which began on 6 August and ends on 31 August, looks to produce legislation that meets these tax residency requirements.

“This consultation is designed to seek feedback on the outline proposal so as to inform drafting of the relevant laws and allow government to ensure a smooth transition for companies carrying on relevant activities,” the consultation paper says.

Ian Gorst, minister for external relations for Jersey, said the consultation on the policy proposals represents the “latest step” in the evolution of the island’s international tax policy, and maintains its “longstanding commitment to tax neutrality combined with transparency”.

“Our island is one of a number of jurisdictions that have been engaged in dialogue with the EU as part of the ‘listing process’,” he said.

Other jurisdictions on the grey-listed include Guernsey, the Isle of Man, Bermuda and the Cayman Islands.

“The government of Jersey continues to work in lockstep with the governments of the other crown dependencies to ensure a fully coordinated and consistent approach to the development and delivery of this policy,” Gorst said.

It says the measures “mark the first step” in stopping the movement of EU funds through blacklist jurisdictions.

“They [the guidelines] will ensure that EU funds do not inadvertently contribute to global tax avoidance,” the commission said.

‘Wake-up call’

The sanctions, announced by the commission on 22 March, focus on EU external development funds, and aims to stop them being channelled or transited through entities in countries on the blacklist.

The first blacklist was published in December 2017 and contained 17 jurisdictions, but eight were removed after one month.

Currently, the Bahamas, the US Virgin Islands, St Kitts and Nevis, Trinidad and Tobago, American Samoa, Guam, Namibia, Palau, and Samoa are on the list.

Last week Panama, Uruguay, Peru, Aruba and Belize, which appear on the so-called EU tax haven grey list, had their tax commitments published by the EU.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs union said the commission will not allow EU funds to contribute to global tax avoidance.

“These EU level countermeasures should act as a wake-up call for those jurisdictions as they show the EU is serious about tackling tax avoidance on a global scale,” Moscovici said.

Blacklist sanctions

The guidelines provide information on how EU members should assess projects that involve entities in jurisdictions listed on the blacklist.

Further, the sanctions include a series of checks that should help EU jurisdictions pinpoint a risk of tax avoidance with a business entity.

“For example, before channelling funding through an entity, it should be established that there are sound business reasons for how a project is structured that do not take advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing a tax bill,” the commission said.

The Commission also called on international financial institutions and other bodies involved in the management of the EU budget to review their internal policies on non-cooperative jurisdictions in the course of 2018.

The additions follow strong criticism of the list, that highlighted that no British Overseas Territory (Bot) or EU country was included.

While the Bahamas and St Kitts and Nevis are not Bots, the are members of the Commonwealth and have Queen Elizabeth II as their head of state.

The inclusion of the US Virgin Islands will likely add fuel to the fire, after US treasury secretary Steve Mnuchin wrote a strongly worded letter to the EU criticising the inclusion of US Samoa and Guam.

It is understood that the ministers will also remove Bahrain, the Marshall Islands and Saint Lucia from the list in the same meeting.

Once the changes are made, the blacklist will remain at nine jurisdictions, being Bahamas, US Virgin Islands, Saint Kitts and Nevis, American Samoa, Guam, Namibia, Palau, Samoa and Trinidad and Tobago.

The original blacklist, released in December last year, contained 17 jurisdictions, but eight were removed after one month.

For a jurisdiction to be taken off the blacklist, they must meet “specific commitments” to bring their tax practices in line with EU standards. These commitments have drawn criticism from members of the EU Parliament (Meps) as they are not made public.

Grey list

In addition to the blacklist changes, it is believed the EU ministers will add Anguilla, The British Virgin Islands, Dominica and Antigua and Barbuda to the so-called EU “grey list”.

These jurisdictions will join more than 50 others already on the list, which do not meet the EU’s anti-tax avoidance standards but have committed to change their practices.