There have been several high-profile instances recently where big banks have chosen to exit relationships with so-called "politically exposed persons", due to their antimoney-laundering obligations. Money laundering is the process whereby criminals take the proceeds of crimes (such as fraud, theft or corruption) and try to reintroduce these into the financial system so they can use the money for ordinary, legitimate purposes. Antimoney-laundering obligations describe the measures put in place to try to detect and prevent this from happening.
In this article, we do not tackle any of the specific cases that have recently made headlines, but instead, analyse some of the broader issues that affect SA’s big banks, to try to understand why they are getting picky with politically exposed persons.
Below, we outline four factors that help explain the banks’ tough stance. Banks are central to the flow of money in SA and as such, are at a high risk of being used by criminals who wish to launder the proceeds of crime. Accordingly, banks are subject to stringent local regulation and enforcement relating to their antimoney-laundering obligations.
The primary legislation in this regard is the Financial Intelligence Centre Act of 2001 (Fica). While the Financial Intelligence Centre plays a central role, towards the end of 2016, the South African Reserve Bank meted out substantial fines against certain banks following a money-laundering probe.
Banks must weigh the pressure to comply with these regulatory requirements against the obvious prerogative to make profit. In this regard, compliance may prove to be exceedingly expensive if a particular client is deemed to be high-risk (and therefore, more resources are required to monitor such a client). A bank may ultimately reach a position where the amount it costs to comply in respect of a client exceeds the amount it stands to make from the business relationship.
Global Banking Community
It is important to keep in mind that South African banks do not operate in isolation, but form part of a global banking community subject to global laws and enforcement. As such, the big South African banks do not simply consider South African legislation, but also seek to comply with applicable global legislation. In certain instances, the global standards are higher than those imposed by Fica.
Furthermore, the assertive approach taken by global regulators (especially those of the US and Europe) creates a strong incentive for South African banks to comply. For example, in 2012, the US authorities believed that HSBC had failed to put in place proper antimoney-laundering measures (and thereby allowed itself to be used to launder drug money flowing out of Mexico). HSBC ultimately agreed to pay $1.92bn in fines.
When the big South African banks make decisions about customers, they probably bear this type of heavy enforcement action in mind and seek to avoid being on the receiving end.
Globally, it is recognised that politically exposed persons present a higher money-laundering risk than ordinary people. The reason for this is that, by virtue of the position and power in their hands, they may be tempted into some form of malfeasance.
While this does not suggest that all politically exposed persons actually engage in illegal conduct, there is recognition that the positions they occupy put them at greater risk and to mitigate that risk, global antimoney-laundering legislation generally creates more stringent requirements for dealing with politically exposed persons.
While Fica places strong obligations on banks, this legislation has fallen behind global benchmarks and needs to be brought up to speed (for the reasons discussed more fully below). The Financial Intelligence Centre Amendment Bill was passed by Parliament in May 2016. However, President Jacob Zuma has referred it back to the National Assembly, noting certain concerns. Despite this delay, the bill contains provisions that will significantly increase the onus on banks in respect of politically exposed persons. The bills refers to politically exposed persons as being foreign and domestic prominent public officials and it imposes the following three requirements in respect of such people:
• Senior management approval is required to start a relationship with a politically exposed person;
• Reasonable steps must be taken to establish the source of their wealth and funds; and
• Enhanced continuous due diligence must be conducted on the client.
These requirements are not yet law in SA, but they are in line with international standards and the big banks will undoubtedly be aware of this. In our view, the second requirement is the most significant and the following example illustrates how it could be applied.
A major bank has a personal account for an MP (who is a politically exposed person). Traditionally, the client has had a consistent transaction history including the deposit of his monthly salary into the account. Every year, information regarding the salaries of parliamentarians is published in government gazettes and the monthly deposits are in line with this publicly available information (which showed that, in 2016, an MP earned just over R1m a year). Under these circumstances, if the client were to make an abnormal deposit (for example, R2m in cash), the terms of the bill would require the bank to determine the source of the money.
There could be an innocent explanation, such as the client having sold a property with the purchase price paid into the account. However, if the client is unable to explain the source of the funds, further obligations would arise for the bank.
Noncompliant In Certain Areas
As alluded to above, Fica has fallen behind global benchmarks and certain of the proposed amendments in the bill are not entirely optional for SA. In this regard, SA joined the Financial Action Task Force in 2003. The task force is an international policy-making body that issues recommendations on measures that should be implemented by member nations to effectively combat money laundering and terror financing.
As part of its membership, SA was subject to an evaluation by the task force in 2009. In the assessment, SA was found to be noncompliant in certain areas. In particular, the South African legislation was found to be missing specific provisions to deal with politically exposed persons, as well as provisions to deal with the establishment of beneficial ownership.
In its 2009 report, the task force recommended that SA tackle these deficiencies. It has been eight years since these recommendations were made and SA is due for another assessment in 2019. In the interim, in 2012 the task force updated its recommendations and the next assessment will be subject to the higher standard set in these new recommendations.
Strictly speaking, SA could ignore the Financial Action Task Force recommendations or even leave the body. However, the consequences of either of these steps could be negative for the country’s financial system. SA’s refusal to comply would be viewed with a great degree of circumspection by the other task force member nations and SA could find itself being treated as a high-risk jurisdiction from a money-laundering perspective.
As such, SA’s access to global financial markets could become impeded and the incumbent costs for South African banks and companies could increase significantly.
The issue of closing the bank accounts of politically exposed persons will undoubtedly continue to attract attention in 2017. The above factors provide some context to the decisions being made by big banks. It is nevertheless encouraging that SA is not unique, but rather on the road to being in line with international antimoney-laundering norms.
• Powell is forensics director and James senior forensics manager at ENSafrica
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