Shaking up South Africa’s Anti-Money Laundering and Counter-Terrorism Financing measures Quarter 1 2022

By DEIRDRE VAN DER BERG, Published in Financial Law

Global watchdog, the Financial Action Task Force (FATF), recently concluded its latest mutual evaluation of South Africa's system for anti-money laundering (AML), counter financing of terrorism (CFT) and counter proliferation financing (CPF).

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The FATF has an important role to play in setting international standards and coordinating global efforts in the fight against organised crime, corruption, and terrorism amongst its membership of 39 countries and regional organisations, as well its associate members and observers. South Africa, a member since 2003, has highlighted the extent to which a country can be susceptible to corruption through the State Capture Inquiry. Indeed, the FATF Plenary concluded that South Africa "has a solid legal framework for combatting money laundering and terrorist financing but significant shortcomings remain". Unfortunately, this implies that unless the country gets its house in order, we could be placed on the FATF "grey list". The implications are a drop in foreign direct investment, with a knock-on effect on economic growth and, ultimately, the financial wellbeing of all citizens.

The findings of the FATF's mutual evaluation for South Africa were met with a commitment by the South African government to resolve the identified weaknesses and implement the recommendations to avoid the country being placed on the grey list. It is presented with a huge challenge, however, given that corruption has become endemic within many public bodies, as well as the private sector. The collective mindset needs to be turned around.

What government has undertaken to do

As described in the Anti-Money Laundering and Counter-Terrorism Financing measures – South Africa, Fourth Round Mutual Evaluation Report[1], there are a number of shortcomings to address, namely:

  • Revise the targeted financial sanctions legal framework to address the major shortcomings identified.
  • Develop policies to address higher money laundering and terrorist financing risks for beneficial owners; the use of cash and its cross-border movement; third-party money laundering; foreign predicate crimes; and terrorist financing.
  • Increase supervisory resources and ensure that all financial institutions, designated non-financial businesses and professions (attorneys, estate agents, trust service providers, corporate service providers, dealers in precious metals and stones, and crypto asset service providers) are subject to AML/CFT obligations and are appropriately supervised.
  • Analyse how to substantially improve the availability of information on domestic politically exposed persons (PEPs);
  • Provide the SAPS Directorate for Priority Crimes Investigations with more staff, especially financial investigators and forensic accountants.
  • Actively seek formal and timely mutual legal assistance for money laundering, including proactively pursuing "State Capture" requests through all available channels.
  • Make major enhancements to the effectiveness of measures at borders to detect and seize illicit cash flows and to identify and address unlicensed cross-border money value transfer services.
  • Significantly improve mechanisms to collect beneficial owner information about companies and trusts.
  • Ensure that accountable institutions adequately implement a riskbased approach, including through better assessing and understanding their inherent risks and refining and implementing their risk management and compliance programs to mitigate their risks.
  • Supervisory Authorities should improve how they conduct and prioritise risk-based AML/CFT supervision, by improving their understanding of inherent money laundering and terrorist financing risks at sector and institutional levels.

Corporates need to play their part

While the majority of the shortcomings are matters that only the South African government can address, the role that corporates play should not be underestimated. As State Capture has evidenced, it is the professional enablers who facilitate money laundering.

Corporates need to ensure that they fully understand inherent risks and commit to move beyond a tick-box approach by implementing riskbased AML/CFT policies and setting an ethical example to staff and clients alike. Corporates can do their bit by critically assessing the following aspects of their internal governance framework:

  • Regulatory permissions
    Being able to show that a corporate is subject to regulation and in good standing with regulatory authorities provides risk mitigation for clients and counterparties. While financial institutions and certain designated non-financial businesses and professions are already caught in the regulatory net, we are witnessing the likes of corporate service providers and crypto asset service providers voluntarily adopting AML/CFT measures in advance of becoming subject to regulatory obligations.
  • Governance structure
    The governance structure should be fit for purpose in view of size and complexity of the business. Implementing layered lines of defence provides the board of directors with independent assurance of the risks and the adequacy and effectiveness of internal controls. Boards need to conclude risk appetite and tolerance statements based on their understanding of the risks.
  • AML/CFT framework
    AML/CFT frameworks should be built on an understanding of inherent risks. This requires a robust business risk assessment which incorporates the National Risk Assessment and the risk assigned to the sector in which the business operates. Service risk assessments provide more granularity regarding the risks of the business' products and services being abused for money laundering or terrorist financing purposes. The outcome of the risk assessments will inform the application of the risk-based approach and governance oversight.
  • Oversight framework
    A risk which is often overlooked is the downstream third-party risk of service providers. An effective oversight framework which ensures appropriate levels of engagement, assurance and reporting of key performance indicators should be in place to mitigate this risk.
    Through having an effective internal governance framework in place, corporates can play their part in supporting and strengthening the South African government's efforts in the prevention and detection of money laundering and terrorist financing.

The way forward for South Africa

South Africa has been placed on a one-year observation period, during which the FATF will closely monitor the progress of the measures to be addressed. If satisfactory progress has not been achieved by October 2022, the FATF can place South Africa on its grey list in its February 2023 Plenary.

Van der Berg is Head of Compliance – Fund Services with Maitland Group (South Africa).