DealMakers - Q3 2022 (released November 2022)
Fifty shades of greylisting
by Ricci Hackner
If Fifty Shades of Grey got your pulse racing, then keep your defibrillator on standby as you explore the various nuances of South Africa’s potential greylisting by the Financial Action Task Force (FATF). This is a ‘naughty list’ that we really have no desire to be on.
Who is the FATF?
South Africa is a member of the FATF, which is an inter-governmental, policy-making body that acts as a global money laundering, corruption and terrorist financing watchdog.
Why does SA risk greylisting?
In 2019, the FATF conducted a mutual evaluation (peer review) of SA’s Anti- Money Laundering and Combating of the Financing of Terrorism system. It published a report in October 2021 (FATF report), in which the country rated poorly and failed in 20 of the 40 FATF standards and in all 11 effectiveness measures.
What are the implications of being on the grey list?
The label would raise SA’s risk profile, causing greater scrutiny of finance and investment, ultimately increasing the cost of doing business and affecting the growth of the country.
What needs to be done to avert greylisting?
In order to satisfy the FATF, SA has to implement legislation or policies that address the deficiencies identified in the FATF report.
The General Laws (Anti Money Laundering & Combating Terrorism Financing) Amendment Bill (GLA Bill), which has recently been approved by Cabinet, attempts to address 14 of the 20 deficiencies identified by the FATF. The GLA Bill is an omnibus Bill that proposes amendments to the Financial Intelligence Centre Act, the Non-Profit Organisation Act, the Trust Property Control Act, the Companies Act and the Financial Sector Regulations Act; and
The Protection of Constitutional Democracy against Terrorist & Related Activities Amendment Bill will address two deficiencies identified by the FATF report, with the remaining four to be dealt with by regulations. It is expected to be enacted by November 2022.
SA will have to ensure that these Bills are in effect by early January 2023. The more difficult part will be to demonstrate that the laws are effective. These issues relate, for instance, to the country having a national risk-assessment plan, how effective the authorities are in
investigating and prosecuting the crimes, and whether the proceeds of illicit activity are confiscated.
What are the most radical changes to be introduced to the Companies Act?
The Companies Act enables a company’s issued securities to be held by and registered in the name of one person (nominee) for the beneficial interest of another person (owner), subject to the provisions of the company’s memorandum of incorporation.
The owner is entitled to the rights attached to the share, notwithstanding that the shares are registered in the nominee’s name. There are a number of reasons why an owner may not want the shares of a company to be registered in its name, and – although such reasons may not be sinister – it is imperative from the perspective of the FATF that the identity of such owner is easily attainable and accessible in order to avoid the abuse of company ownership for crimes and illicit purposes.
Some also argue the import of corporate transparency to protect the board of the company, the shareholders and the public for purposes of detecting insider trading; minority shareholders being able to identify a change in the controlling shareholder; and the board of directors and shareholders being in a position to predict a hostile takeover. This does, however, need to be carefully balanced with what is reasonable and practically enforceable.
The Companies Amendment Bill, 2021 (Companies Bill), which has been in the pipeline for several years, recognised the need for more transparent companies, and proposes, among other significant changes, extensive amendments to the disclosure requirements contained in the Companies Act.
Subsequent to the publication of the last draft of the Companies Bill, the GLA Bill was released for comment, which also proposes changes to the same provisions of the Companies Act as the Companies Bill, with the aim of creating transparent companies.
Whilst it is not yet clear which iteration of these amendments will ultimately come into force, what is apparent is that corporates will soon be faced with more onerous beneficial owner disclosure obligations. Disclosure obligations are likely to apply both to public and private companies, and apply up the ownership chain, well beyond what is currently required, to the natural persons ultimately behind the ownership. The same is true for beneficiaries behind trusts. Disclosures will be required in securities registers, recorded at the Companies and Intellectual Property Commission, and filed with annual returns, with that information to be available for inspection.
The proposed amendments by the GLA and the Companies Bill to the Companies Act have been hotly contested by corporates that foresee the obstacles in compliance, based on experience in other jurisdictions that have implemented other variations of similar laws. It has also been contested by the Johannesburg Stock Exchange, South Africa’s primary exchange (the JSE), which denounces the proposed beneficial- owner disclosure and reporting requirements as too onerous on publicly listed companies. This is because listed companies have significantly more shareholders than non-listed companies, which undergo frequent changes. The Treasury has rejected a plea by the JSE for listed companies to be entirely exempt from the requirement to register their beneficial owners. However, it undertook to refine the proposals to make them “reasonably implementable” by listed companies.
How long do we have?
SA had until the end of October 2022 to satisfy the FATF that it has addressed its concerns. The FATF will make its final decision in February 2023.
Should SA, notwithstanding its efforts, ultimately be greylisted, then the country will have to do further work to be removed from the list. In the best- case scenario, we can try emulating Mauritius, which was able to get off the greylist in less than two years.
A report commissioned by Business Leadership SA determined that there is an 85% chance that SA will be greylisted. Although there is hope that we can avert this altogether, extensive legislative changes are on their way. Best be prepared.
Hackner is a Knowledge Lawyer | Bowmans South Africa