In February 2023, the Financial Action Task Force (FATF) added South Africa to its grey list. This decision from the global watchdog for financial crime signalled that the country had work to do in meeting international standards for combating money laundering and terrorist financing.
When the FATF places a country on its greylist, it places the jurisdiction “under increased monitoring” due to identified weaknesses in anti-money laundering (AML) and counter financing of terrorism (CFT) legislation.
Greylisted countries must actively work with the FATF to address the identified strategic deficiencies in their regimes within agreed time frames to counter money laundering, terrorist financing, and proliferation financing before they can be removed. The FATF identified 20 legislative deficiencies that South Africa needed to address.
This placed South Africa in a precarious position, because failure to resolve the deficiencies raised by the FATF as expediently as possible would have implications for the country’s risk premium, market depth, and liquidity, mainly because of capital outflows from foreign investors.
Impact on equities
The risk posed to foreign investors arguably had the biggest impact on investment portfolios. An IMF study estimated that greylisting causes a decline in capital inflows of 7.6% of GDP over nine months.
According to a Financial Stability Review (FSR) from the South African Reserve Bank (SARB), the greylisting emerged as one of the reasons for the continued “record” outflows from the country’s capital markets in 2023.
However, it was just one of numerous existing risks that dampened foreign appetite for domestic equities, such as low growth expectations, rising interest rates, heightened exchange rate risk and the impact of load-shedding on economic growth.
In the year to November 2023, non-residents were net sellers of R98.1 billion of domestic equities and bonds, much higher than the net sales of R43.4 billion over the same period in 2022.
However, the SARB FSR highlighted that events such as the downgrading of South Africa to sub-investment grade had a greater impact on stock market returns than did grey-listing, and markets had largely priced in the greylisting, which reduced its potential impact on markets.
Admin burden
Due to the FATF greylisting, the European Union (EU) added South Africa to its list of high-risk countries in June 2023.
This magnified the compliance burden on financial institutions in the EU, which had to apply enhanced due diligence to South African investors when processing cross-border transactions, vetting clients, verifying the sources of funds, and tracking their use.
This resulted in delays in processing times and increased documentation requirements, leading to higher monitoring and reporting costs. It also increased the costs and bureaucracy for offshore investing.
South African investors making offshore investments faced slower processing times as international institutions performed additional AML checks, and were generally required to provide more documentation about the source of funds for any offshore investments.
Looking ahead
Thanks to concerted efforts from the government and the financial services sector in South Africa, the country was removed from the FATF greylist on October 24, 2025, as all conditions were met.
Removal from the greylist improves South Africa’s international standing, which lowers the perceived risk of investing in the country.
While the AML and CFT regulatory standards implemented to exit the greylist are now permanent features of the financial system, investors should experience decreased due diligence requirements and transaction costs, making South African assets more attractive.
An improved risk profile is expected to encourage greater foreign direct investment (FDI) and boost portfolio flows into South African equities and bonds.
The increase in foreign investment should lead to a stronger and more stable rand (ZAR), which can help keep inflation in check to boost real returns.
Furthermore, a stronger rand and reduced inflation could create room for the SARB to consider further interest rate cuts, which is generally positive for risk assets like equities as lower borrowing costs generally boost economic activity and corporate profits, especially for interest-rate-sensitive sectors.
In this environment, DIY investors should keep an eye on local sectors like property and financial services, including banking and insurance, with local companies with broad offshore exposure likely to benefit most from the increased ease of doing international business.
However, it is important to keep in mind that while South Africa’s removal from the FATF greylist is a net positive, it does not solve the country’s other systemic issues, such as low economic growth, political uncertainty, and unstable energy supply. The long-term performance of your portfolio still depends on progress in these areas.
