How to mitigate the risks of SA’s grey listing

South Africa has been given until October 2022 to demonstrate that it is able to deal with the rules and regulations set out by the FATF (Financial Action Task Force). The FATF is an international body that regulates policies to combat money laundering, terrorist financing, and the financing of weapons of mass destruction.

If South Africa fails to meet the FATF standards, the country will be put under increased monitoring by February 2023 and would be placed on the FATF’s “grey list”. Other countries included on the “grey list” are Panama, The Philippines, Turkey, Uganda, and Yemen.

The impact of sanctions on the economy:

The South African Reserve Bank Financial Stability Review of 2022 commented that “grey listing” would carry the following consequences:

• Higher transactional, administrative, and funding costs for domestic banks.
• Restrictions on cross-border transactions, which will affect imports and exports, leading to a decline in GDP.
• Reputational damage to South Africa’s financial system could have negative capital and currency implications; and
• The inability of South African banks to maintain corresponding banking relationships with offshore institutions.

For the consumer, the following impacts could be expected:

• Some global financial institutions would be deterred from dealing with South Africa and therefore global investment choices will be limited.
• Increase in compliance costs which will be passed onto the investor
• Increased administration, due diligence checks, and paperwork for South Africans wanting to invest offshore.

A government-led, inter-departmental committee has drawn up a response on how they aim to satisfy the FATF requirements, however, there is still a risk that this might not be implemented in time.
Last week, cabinet approved a bill addressing 14 of the 20 deficiencies identified by the task force. The remaining six deficiencies will be addressed before year-end. However, an important issue is how effective SA will be in implementing these regulation changes.

The Acting Treasury Director general, Ismail Momoniat, noted that, “we must do all it takes to prevent a grey listing, but it will be hard to escape.”

How to mitigate the risks of a “grey list” scenario.

1. Ensure you have sufficient offshore exposure in line with your risk profile. Please click here to review your risk profile, or click here to speak with one of our Client Portfolio Managers who can assess your current investment strategy.
2. For investors who wish to invest offshore soon, it’s advisable to finalise any direct offshore accounts now, as a grey list scenario would include more onerous due diligence requirements to externalise funds in the future.

Investonline’s preferred direct offshore provider is situated in the Isle of Man, a highly respected domicile from a compliance perspective. This may yet be advantageous for clients if the Grey-listing occurs. Below we list several key benefits to our preferred offshore platform provider, which is structured in an International Wrapper:

• The growth of the investment will not form part of your personal tax liability, due to the investment growth being taxed in the hands of the insurer, thus decreasing your effective tax rate on all other investments.
• Maximum capital gains tax rate of 12% versus 18% for natural persons. This benefits both the growth of the investment and reduces the CGT liability on death (no CGT on death provided capital remains invested and there is enough liquidity to cover estate costs).
• Income tax rate is 0% (income distributions are rolled up into the unit price of the funds) rather than at one’s marginal tax rate of up to 45%.
• Tax is only withheld from the account upon the sale or disinvestment from a fund.
• You can nominate a beneficiary for ownership on the account.
• No executor’s fees will apply on death, saving up to 4.03% on the value of the asset.
• The Capital Gains Tax payable is calculated on the foreign currency growth of the investment and not the Rand depreciation.

Click here to speak with one of our Client Portfolio Managers or call us directly on 021 001 2323 if you have any queries.