Fighting from the trenches: is there a benefit to South Africa’s grey listing?

After any months of speculation and concern, the Financial Action Task Force finally greylisted South Africa at the end of February citing concerns about financial laws that enabled corruption within the country.

The move came as a massive shock as it will have significant implications for the country. Those wanting to do business with South Africa will face increased bureaucratic red tape from their own countries, and South African companies who are servicing international loans/funding will need to dig deeper into their pockets to service these liabilities.

However, the greylisting does not only come with bad news. Webber Wenzel points out that the move has shifted the spotlight onto beneficial ownership.

Technical compliance

The Webber Wenzel article points out that the FATF listed eight deficiencies, seven of which are largely dependent on state action, including investigations, sanctions, and other matters. The eighth deficiency relates to the beneficial ownership of entities and legal arrangements. While some of the responsibility for addressing this deficiency rests with the State, South African businesses and financial institutions also have an important role to play.

The FATF wants South Africa to have laws and practices that provide for transparent ownership and control structures of legal structures and entities. In its Mutual Evaluation Report on the country published in November 2021, the FATF found that, although publicly-available beneficial ownership information exists, it is basic and often difficult to access.

Beneficial ownership amendments

The article points out that two FATF recommendations on beneficial ownership are relevant: Recommendations 24 and 25. Recommendation 24 stipulates that countries should have adequate, accurate and up-to-date information on beneficial ownership that can be obtained rapidly by the authorities, either through a register or an alternative mechanism.

South Africa enacted various laws and amendments in December 2022 to try to stave off greylisting. Provisions relating to beneficial ownership affect a number of acts: the Companies Act, Financial Sector Regulation Act, Non-Profit Organisations Act and Trust Property Control Act.

The article adds that the Financial Intelligence Centre Act (FICA) defines a beneficial owner as a natural person who, directly or indirectly, ultimately owns or effectively controls the client of an accountable institution or a legal person/trust/partnership that controls the client of an accountable institution or controls a client of an institution on whose behalf a transaction is being conducted. The elements of “natural person” and “ultimately owns or effectively control” are also seen in several other definitions of beneficial owner.

FATF guidance on the disclosure of beneficial ownership is that it goes beyond mere legal ownership and control to consider actual/ultimate ownership/control. That means the natural persons who actually own and take advantage of the assets, as well as those who factually or actually exert control over them.

The Webber Wenzel article points out that recommendation 24 suggests determining the controlling shareholders of a financial institution based on a threshold, e.g. any persons owning more than 25%. The percentage of shares with voting rights is usually a good indication of control. In South Africa, these thresholds are stipulated in the Companies Act but not in FICA.

The primary obligations of an accountable institution are firstly, to identify the beneficial owner and secondly, take reasonable steps to verify the identity of that owner.

The article adds that, in the context of determining beneficial ownership of partnerships, FICA (section 21B) goes into detail. The institution has to establish the identifying name of the partnership, and the identity of every partner, even silent partners. It must be determined whether the partnership acts on behalf of another natural person and whether there are people who exercise control over the partnership or those authorised to act for the partnership. After establishing this information, the institution has to take reasonable steps to verify it, e.g. through identity documents.

In the case of trusts, the accountable institution has to identify the trustees, and if beneficiaries are specifically cited, verify each one. If they are not specified but are a group, it is necessary to understand the methodology for appointing those beneficiaries.

The article adds that the Companies Act requires companies, not only accountable institutions, to identify the natural person that owns or exercises control over the company. Under section 56 of the Companies Act, a company is required to maintain a register of persons holding a beneficial interest of 5% or more of the company in a particular class of securities. It is anticipated that companies may find it practically difficult to identify beneficial owners.

In addition to maintaining beneficial owner registers, a company also has to file the prescribed beneficial ownership information with the Companies and Intellectual Property Commission (CIPC) on a prescribed form and provide the prescribed information.

The article adds that the Financial Sector Regulation Act 9 of 2017 (“FSR Act”) now defines a beneficial owner as a natural person that owns or controls a financial institution. Section 159B of the FSR Act gives the relevant regulator (Financial Sector Conduct Authority or Prudential Authority) the power to issue standards in relation to beneficial owners of financial institutions. In addition, section 159C of the FSR Act empowers the relevant regulator to issue written directives to beneficial owners if they have contravened, or are likely to contravene, a financial sector law.

Enforcement

The article points out that Although National Treasury has said that South Africa’s financial sector on the whole is compliant with the FATF requirements, there are compliance concerns in the non-financial space (for example, estate agents, law firms).

It is anticipated that further enforcement and supervision, particularly of high-risk financial institutions, will occur in the foreseeable future and financial institutions should be prepared for it. We need to increase our focus on corporate governance as well as financial management. We need to become increasingly stringent about the systems that govern our companies and look for any gaps that can be addressed. This will see fewer companies become financially distressed.

​ Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner