The international financial crime watchdog, the Financial Action Task Force (FATF), has added South Africa to its "grey list" of countries under special scrutiny to implement standards to prevent money laundering and terrorism financing. 
 

This decision will result in a reputational setback for Africa's most advanced economy, which has been trying to address shortcomings identified by the FATF.
 

The rand has plummeted by 1.3% against the dollar following the watchdog's decision. 
 

Analysts have warned that increased FATF monitoring could subject South African clients at international financial institutions to enhanced due diligence checks, potentially complicating the country's attempts to obtain funding and support from multilateral development institutions and official lenders.
 

South Africa's central bank and National Treasury have acknowledged the decision and pledged to work towards addressing the FATF's concerns. 
 

The Treasury has also anticipated a limited impact from the grey-listing on financial stability and the costs of doing business with South Africa, stating that “the costs of increased monitoring will be substantially lower than the long-term costs of allowing South Africa’s economy to be contaminated by the flows of proceeds of crime and corruption.
 

Nigeria, Africa's biggest economy, has also been added to the FATF grey list on Friday. The FATF acknowledged that both South Africa and Nigeria had made high-level political commitments to address the deficiencies it had found. 
 

The analyst also stated that the move could complicate South Africa's efforts to secure funding and support from multilateral development institutions and official lenders. 
 

Peter Attard Montalto, a managing director at research firm Intellidex said

 

"We see limited market and growth impacts short run but this will grow over time if foreign banks think SA (South Africa) will be stuck on the list" 
 

The International Monetary Fund has found that being put on the grey list could disrupt a country's capital flows, potentially leading banks to exit relationships with high-risk customers to reduce compliance costs.

 

The move was widely anticipated, said Razia Khan, Standard Chartered managing director and chief economist, Africa and Middle East.

 

"What matters a whole lot more is the remedial action pledged by the authorities, including the SARB and Treasury, which raises hope of an eventual exit from the grey list," she said.

 

The full effect of this development is yet to be seen and will be observed in the coming months.

 

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