Global anti-money laundering watchdog the Financial Action Task Force (FATF) has included Nigeria and South Africa on its ‘grey list’ of countries that are subject to enhanced monitoring. Deficiencies in both jurisdictions’ anti-money laundering (AML) and countering the financing of terrorism (CFT) frameworks prompted the decision, which was announced on February 24.

The so-called ‘greylisting’ of Africa’s two biggest economies will deepen existing economic challenges in both markets, by stifling investment and increasing the costs of doing business. Countries added to FATF’s grey list, officially known as ‘jurisdictions under increased monitoring’, endure heightened observation by the international body until specific weaknesses in their AML/CFT regimes are addressed.

Until then, the effects of greylisting touch almost every corner of the economy through negative reputational costs and increased due diligence measures. Countries on FATF’s grey list suffer an average net loss of 7.68% of capital inflow across their borders relative to gross domestic product, according to the International Monetary Fund.

For some South African market participants, greylisting is evidence of the country’s accelerating political and economic decline. “It would have been a miracle for South Africa not to have been greylisted, given what is happening in the country, particularly in the socio-economic sphere, over the last seven years,” says Dumiso Vilakazi, an AML and CFT compliance specialist working for a large international bank in Johannesburg.

A long time coming

South Africa was put on notice by FATF in October 2021 when, in a mutual evaluation report, the watchdog highlighted a failure to prosecute money laundering cases linked to the period of ‘state capture’ under former president Jacob Zuma. The South African government was slow to respond to these concerns and only implemented significant legislative changes to its AML/CFT framework by December 2022. Moreover, the judiciary has been sluggish in dealing with cases of corruption and money laundering linked to this period. 

“In the 18 months since FATF’s last mutual evaluation report, there have been no convictions in South Africa linked to state capture, thus exposing our judicial system’s lack of credibility, as well as its weakness. All this undermines the constitution,” says Mr Vilakazi. 

Given that the current president, Cyril Ramaphosa, is embroiled in ongoing investigations into the alleged theft of large sums of US dollar-denominated cash stashed within a sofa on his farm, there is little optimism that the country will exit FATF’s grey list in good time. 

“It pains me to realise how far we’ve regressed as a country. South Africa is a mafia state, which is undemocratic by any means,” says Mr Vilakazi. “As nepotism and corruption reach new highs, there’s no way that South Africa can meet its set 2025 FATF deadline or turn things around more quickly. Unless, of course, our governance changes for the better, with honesty, transparency and ethics at the forefront of such a change,” he adds. 

Uphill battle

Meanwhile, Nigeria is also expected to face an uphill battle to exit FATF’s grey list. Weaknesses identified in the country’s AML/CFT regime are significant, although the greatest problems lie with law enforcement agencies’ ability to coordinate with one another, conduct investigations and secure notable money laundering and terrorist financing convictions. 

“Nigeria’s listing on the FATF grey list does not come as a surprise as it is a reflection of the country’s leadership and lack of decisive action in dealing with corruption and counter terrorism. The onus lies more with law enforcement and prosecution to take charge and get Nigeria up to par with international norms,” says Chioma Unah, a financial crimes consultant based in Toronto. 

According to Ms Unah, more work needs to be done to strengthen the country’s AML/CFT regulatory framework, while attention must be paid to the prosecution of officials implicated in the looting of public funds. 

“The Nigerian government needs to strengthen controls and show a serious resolve to decisively deal with financial crime, money laundering and terrorist activity.  The Nigerian Financial Intelligence Unit should be on its toes to avoid the country slipping into the black list,” says Ms Unah. 

Nigeria’s presidential election, held on February 25, is unlikely to help this process. Against the backdrop of an election that was shrouded in controversy, it could take the president-elect, Bola Ahmed Tinubu, some time before he appoints a new leadership team. This, in turn, makes it difficult to determine how seriously the new administration will address FATF’s concerns. 

“We have a new president-elect who is not going to be sworn in until May. He needs to put his cabinet and [leadership team] in place. So I don’t think we’ll know how Nigeria [will progress] until we have people in play and we see what they are doing,” says Dayo Okusami, a partner with Templars, a Nigerian law firm. 

Nevertheless, Mr Okusami expects Nigeria’s exit from FATF’s grey list to take at least two years, given the complexity of the task. “It often takes two to five years for a country to meet its mandated AML/CFT requirements. Considering Nigeria has a nine point list from FATF, which includes improved prosecution of anti-money laundering cases, it will take time to address.” 

The structure of Nigeria’s import-dependent economy may, however, provide the authorities with an added impetus to address AML/CFT deficiencies. “The inclusion of Nigeria on the FATF grey list will increase costs associated with the flow of foreign currency to, from and within Nigerian finance institutions,” says Ada Ufomadu, head of financial institutions at GCR Ratings. 

“Foreign currency funding from the international market is important for Nigeria, [it] being an import-dependent country. Therefore, GCR believes that the government will implement the necessary regulatory and legislative changes to move off the grey list as soon as it can,” says Ms Ufomadu.