SA’s largest banks are at “high risk” of falling foul of money laundering, terrorism and proliferation financing activity, according to a new report by the Prudential Authority (PA), a division of the Reserve Bank that regulates financial institutions.
The PA released its second banking sector risk assessment on Tuesday. It surveyed 34 lenders active in SA, including five large banks, nine medium to small locally controlled banks, 17 foreign-controlled banks and branches of foreign banks, and three mutual banks. The assessment focused on the money laundering, terrorist financing and proliferation financing risks identified in the banking sector between October 2018 and December 2020.
“The nature and extent of money laundering, terrorist financing (TF) and proliferation financing threats the banking sector in SA is facing is assessed to be a high risk,” the PA said in its report.
“The banking sector is exposed to possible terrorism and TF risks due to a lack of understanding of TF vulnerabilities and how terrorist financiers operate. SA’s proximity to terrorism prone countries such as Mozambique, Nigeria, Kenya and the Democratic Republic of Congo could potentially increase the terrorism risk and terrorist financing risk for SA banks.”
SA is at risk of being added to a so-called grey list of countries deemed as having insufficient measures in place to combat money laundering and terrorist financing by the Financial Action Task Force (FATF), an intergovernmental body that sets standards for combating illicit financial activity.
The Paris-headquartered FATF gave SA 18 months to tackle shortcomings in its ability to prevent financial crimes, which were outlined in a mutual evaluation report published in October 2021.
The PA report said the five largest banks in SA, which hold 89% of the banking sector’s total assets, face a high overall money laundering and terrorist financing risk given their wide range of complex products, their propensity to on-board clients digitally and their exposure to high-risk client types such as foreign embassies, nonprofit organisations active in high-risk jurisdictions and prominent and influential people domestically.
For example, the PA report found one large bank had 8,388 clients with unknown citizenship, while on average large banks in SA had 24,786 clients considered to be high risk.
Though 60% of all high-risk clients were banked by locally controlled banks, the branches of foreign banks and foreign-controlled banks active in SA were also assessed to have a high money laundering and terrorist financing risk.
While foreign banks in SA banked fewer clients than their local counterparts, they had exposure to a small pool of high-risk clients engaged in cross-border transactions using complex products such as trade finance or other services that could potentially hide the source and destination of illicit funds.
Almost 97% of the corporate clients of large banks in SA are regarded as being part of complex or multilayered structures of ownership, while more than 95% of large bank clients were involved in transactions facilitated by large cash amounts. Both these factors are among a variety of issues seen as heightening the vulnerability of lenders towards falling victim to money laundering or terrorist financing.
Among the top 10 risks identified by large banks themselves were bribery and corruption, fraud, tax evasion, crypto assets, wildlife trafficking, cybercrime, and international syndicates and terrorist groups. However, at least one large SA bank not named in the PA report also mentioned state-owned entities and government tenders as being key risks.
Perhaps most concerning of all was the risk of SA banks falling victim to proliferation financing, the provision of funds or financial services for the production, acquisition, brokering or transport of nuclear, chemical or biological weapons.
The PA’s report specifically referred to the UN “Panel of Experts” reports, which previously highlighted SA after the hacked credentials from a local lender were used to make illegal ATM withdrawals by a criminal ringleader with links to North Korea. The UN panel reports also referenced the importation of electrical equipment from North Korea to SA in 2020, and the use of diplomats at the North Korean embassy in Pretoria for conducting prohibited activities in neighbouring countries.
While the PA report found that at least one bank had a confirmed client relationship with two diplomatic or consular staff from North Korea or Iran, it also revealed that only 19 out of the 34 banks it surveyed had even taken note of the UN reports.
No fewer than 28 of the 34 banks surveyed by the PA confirmed they maintained client relationships with North Korean or Iranian financial institutions.
Both North Korea and Iran are sanctioned by the UN, EU and the US.
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