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Vulnerabilities in South African Non-Profit Organizations Leave Country at Risk of Grey Listing

A recent report has highlighted significant vulnerabilities in the non-profit organization (NPO) sector in South Africa, leaving the country at risk of being placed on the Financial Action Task Force’s (FATF) grey list.

Vulnerabilities in NPO Sector

The Mutual Evaluation Report (MER) found that:

  • Many NPOs provide relief in areas of conflict where exploitation by terrorists is a high risk.
  • Not all NPO funding channels are overseen, and there is a lack of regulation and oversight in the sector.
  • Beneficiaries of NPO funding are not always identified, and there is no method to ensure that funds are not diverted to terrorists.
  • Cash transactions are prevalent, with many cross-border transactions, resulting in a less regulated environment.

Regulatory Challenges

The report also revealed:

  • Registration for NPOs is voluntary, making it possible for terrorist-led NPOs to thrive.
  • Regulations over NPOs are lacking and oversight is limited, with those charged with oversight not being trained on the risks associated with terrorist financing (TF) abuse and NPOs.

Consequences of Grey Listing

If South Africa does not improve its ratings by the end of the one-year observation period, it could be placed on the grey list in February 2023. This would result in:

  • Being deemed a “high-risk environment” by the rest of the world.
  • Stringent due diligence from investors and international banks.
  • Increased cost of transacting internationally.
  • Some international banks and investment companies refusing to engage with SA.

Unintended Consequences

The FATF has warned that grey listing could lead to:

  • De-risking: financial institutions ending or restricting business relationships with certain clients to avoid risks.
  • Undue targeting of NPOs: intrusive supervision, limitations on access to accounts and funds, forced dissolution, and de-registration or suspension of NPOs.

Lessons from Other Countries

It typically takes countries between 5 and 10 years to get off the grey list once they are placed on it. However:

  • Mauritius managed to improve its rating within a period of two years.
  • Zimbabwe recently improved its Recommendation 8 rating from “non-compliant” to “partially compliant”.

These examples can serve as a case study for South Africa on how to address low ratings and prevent the country from being placed on the grey list.

Conclusion

The vulnerabilities in South Africa’s NPO sector are significant, and urgent action is needed to address these issues. Failure to do so may result in the country being placed on the grey list, with negative consequences for its economy and reputation.