SA has been given 18 months to improve its capacity to track and prosecute money laundering and terrorist financing or face “greylisting” by the Financial Action Task Force (FATF), the international body that develops and monitors policy to combat financial flows of organised crime and terrorism.
Greylisting by the FATF would raise SA’s risk profile, place a question mark over its financial regulatory bodies and attach a higher risk premium to corresponding relationships between SA banks and international financial institutions. The high regard for SA’s financial regulation has for many years been a buffer against further credit ratings downgrades.
The FATF’s latest “Mutual Evaluation Report of SA” was accepted by the cabinet in September, which endorsed its recommendations and has directed the Treasury to lead an interdepartmental process to remedy the shortcomings.
The Treasury said the FATF report had “identified significant weaknesses in parts of the country’s anti-money laundering, counter financing of terrorism and counter-proliferation financing system. SA is expected to take remedial steps within 18 months to address deficiencies identified”. Counter-proliferation financing refers to the financing of nuclear and chemical warfare activities.
The Treasury said the government was “fully committed to implementing the recommendations and strengthening the entire system for investigating financial crimes”.
The overarching critique of SA is that while the big banks do have the necessary regulation in place, the country as a whole does not follow a risk assessment approach and is therefore unaware of many of the risks to which it is exposed.
While SA scored poorly in most areas, it was particularly weak in monitoring possible terrorism financing activities, exposing itself to be used as a transit point or base for terrorism activities in other countries.
There were serious deficiencies in monitoring non-financial institutions such as lawyers, estate agents and casinos. The government lacks the ability to monitor the cash economy, which is large by international standards, and involves many cross-border transfers.
The report highlights SA’s weaknesses in identifying “political exposed people” whose participation must be flagged in financial transactions. After resisting legislative amendments passed by parliament in 2015, which introduced the concept of politically exposed people into the Financial Intelligence Centre Act, the administration of then president Jacob Zuma was forced to relent and implement the act in 2017.
At the time, SA’s reluctance to put it into practice brought it close to greylisting by the FATF.
A major shortcoming in the SA system is that it is often legally not permissible for agencies that monitor and investigate financial crimes to share information. For instance, while the Financial Intelligence Centre monitors suspicious transactions, the records are confidential and cannot be shared, even, for instance, with the Treasury. The report flags that SA rarely uses available international co-operation to pursue the perpetrators of financial crimes in SA.
Treasury deputy director-general Ismail Momoniat said the weaknesses identified by the report reflect the state’s general weakness in investigation of financial crimes. “The interdepartmental team led by the director-general of the Treasury will look at the approach to financial crimes,” he said.
“The interdepartmental team led by the director-general of the Treasury will look at the approach to financial crimes. There is no doubt, as the report notes, that state capture destroyed the state’s ability to deal with financial crimes,” said Momoniat.
The consequences of not addressing the problems the FATF has drawn attention to would be severe, adverse economic consequences for trade and transactions with other countries, he said.
“Countries with weak anti-money laundering and counter-terrorism financing systems risk losing critical correspondent banking relationships with overseas banks. Overseas regulators in US, the UK and the EU may restrict their domestic banks from transacting with South African banks, including imposing penalties and fines for breaching such restrictions,” he said.
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