Earlier this year, South Africa was graylisted by the Financial Action Task Force (FATF) for failing to comply with international standards concerning the prevention of terrorist funding, money laundering, and proliferation financing. The decision, which came despite a last-minute scramble by the government to return to compliance, dealt a body blow to an already struggling economy.
In addition to increasing the cost of doing business in South Africa, graylisting means additional layers of due diligence for any company wishing to invest in South Africa and increased difficulty for any South African seeking to transfer money offshore or transact with international banks. It could also result in lower levels of foreign direct investment and portfolio inflows. Since the graylisting decision, South Africa has made significant progress in addressing the FATF’s concerns (something the body has commended). However, what if it hadn’t? What if it had continued down the path of non-compliance and ultimately been blacklisted, joining the likes of North Korea, Myanmar, and Iran?
Dire consequences
In short, the consequences would have been dire. Blacklisting would severely limit access to international financial services. Some financial institutions might even completely cease providing services to South African businesses. Consequently, it would become more challenging for South African businesses to engage in cross-border transactions, access loans, or establish international banking relationships.
While they would likely have acted before then, the country’s largest trading partners could also reduce or even terminate their trade agreements with South Africa. This hesitance would stem from increased regulatory risks and concerns about money laundering or terrorist financing. Put simply, those trading partners would be jeopardizing their own companies and other trading relationships by continuing to trade with South Africa. And even if South Africa managed to maintain some trading relationships, they would become significantly more expensive.
With restricted access to international financial services, South African businesses would have to rely on alternative, potentially more costly channels to facilitate transactions. South African businesses seeking to engage in international trade would also face stricter regulatory measures, as would any international businesses wishing to trade with South Africa. As a result, trade would once again become more expensive and less attractive.
Not the only threat
While South Africa’s response to date makes blacklisting unlikely (it may even be removed from the FATF’s gray list within one to three years), it’s important to remember that other actions by the country could lead to similar consequences.
The government’s apparent support for Russia (despite claims of neutrality) has already jeopardized relations with the United States of America (USA), the country’s second-largest trading partner. In May, the US Ambassador to South Africa, Reuben Brigety, accused the country of covertly supplying arms to Russia. Consequently, South Africa lost further credibility as an investment destination, and an already embattled Rand experienced a momentary freefall. That’s not to mention the issues of load shedding and the failure to effectively prosecute and punish corruption.
Within such a challenging environment, it is crucial for businesses that frequently make international payments to ensure they always secure the best deal possible on those transactions. One of the most effective ways to do so is by shifting their payments away from traditional banks and forex services, which often include hidden fees in their transactions. Instead, they should seek to maximize the value they derive from each transaction by utilizing a forex provider committed to offering transactions at the lowest possible cost and with maximum transparency. Such a provider should also be capable of assisting with regulations and compliance and providing supporting documents to ensure timely deal execution. Additionally, personalized service, hassle-free onboarding, and instant conversions should be part of their offerings.
Act now, reap rewards later
While it is unlikely that South Africa will be blacklisted by the FATF in the near future (despite the country’s shortcomings, it is far from being North Korea), it doesn’t mean that it is completely out of danger. Therefore, it remains imperative for businesses to do everything in their power to keep costs down, particularly when it comes to international payments.
By Harry Scherzer, CEO, Future Forex
