Illicit economy could put SA back on greylist

South Africa escaped the FATF greylist on October 24, but the country isn’t out of the woods yet.

A new report commissioned from an advisory firm finds that illicit economic activity has ballooned to the point where it’s beginning to rival aspects of the regulated formal economy. International regulators may conclude that South Africa cannot effectively enforce its anti-money laundering laws, exposing the nation to renewed scrutiny.

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The report estimated the scale of the shadow economy in terms of its cost to the tax system. That cost is conservatively put at least at R84.6 billion every year. That figure equals about 1% of GDP, 3.9% of government revenue, 3.3% of public spending, and roughly 23% of the annual budget deficit. It represents the amount of tax the underground market would have contributed if it were regulated.

Six risks to the financial system

The report outlines six specific risks to the integrity of South Africa’s financial system and its anti-money laundering controls. The first is that the shadow economy generates vast criminal revenues that must be laundered. Illegal mining, cigarette smuggling, counterfeit goods, fuel theft, drug trafficking and illicit alcohol all produce large amounts of cash.

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Criminal groups must introduce that money into the legitimate economy through businesses, property, banks and cross-border transactions. The second risk involves front companies. Illicit operators can establish apparently legitimate transport companies, wholesalers, exporters, mining contractors, security firms and retailers. These companies may mix criminal revenue with lawful income, submit false invoices, or move money between related entities.

The task force places considerable importance on the ability of authorities to identify the real individuals who own and control companies. If criminals can hide behind shell companies, trusts, nominees or politically connected partners, South Africa could again be judged deficient in beneficial ownership transparency. The third risk is that illegal trade has established conduits for moving money across borders. Criminal networks falsify the price, quantity or description of imports and exports — overstating machinery values, understating mineral values, or creating invoices for goods never supplied.

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Corruption and political influence

The fourth risk is that corruption threatens to neutralise law enforcement systems. Large illicit industries often depend on compromised police officers, customs officials, border personnel, regulators and politicians. Bribes can prevent inspections, make evidence disappear, disclose planned raids or protect criminal businesses from prosecution. The task force evaluates whether investigations and prosecutions produce meaningful results.

The fifth risk is that criminal money can enter politics and shape policy. Illicit profits can finance political campaigns, patronage networks, local power brokers or individual officials. This gives criminal organizations influence over appointments, procurement decisions and enforcement priorities.