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AML Sanctions Screening in the spotlight

South Africa is at great risk of being subject to increased monitoring (greylisted) by the Financial Action Task Force due to weaknesses in its ability to enforce anti-money laundering and terrorism-funding regulations, and to investigate and successfully prosecute financial crimes.

South Africa: AML in the spotlight

SA business must step up AML efforts in light of possible greylisting

In what could have huge financial implications at a time it can least be afforded, South Africa is at risk of being greylisted by the Financial Action Task Force (FATF) following an evaluation of the country’s Anti-Money Laundering (AML) ability last year.

This follows the FATF’s Plenary of October 2021, during which it was decided South Africa would be placed under a one-year observation period.

In light of this, say experts, South African companies need to seriously step up their AML screening procedures.

This need is also driven by the constantly tightening Financial Intelligence Centre (FIC) Act, which incorporates a risk-based approach to compliance elements such as customer due diligence into the regulatory framework.

A risk-based approach requires accountable institutions to understand their exposure to money laundering and terrorist financing risks.

FATF Conclusions on South Africa’s AML ability

The members of the FATF have collectively set international standards for measures that countries should implement to combat money laundering and terrorist financing.

After the above-mentioned Plenary, FATF concluded “South Africa has a solid legal framework to fight money laundering and terrorist financing, but has significant shortcomings implementing an effective system, including a failure to pursue serious cases.”

During the one-year observation period, which ends in about a month’s time, in October 2022, the FATF will closely monitor the progress of the measures South Africa was instructed to address following the determination a year ago.

“While authorities carry out some successful money laundering investigations, the proactive identification and investigation of laundering networks and professional enablers is not really occurring.”

FATF on South Africa’s AML ability

FATF’s directives for South Africa to avoid greylisting

The FATF gave South Africa certain directives, which, if followed sufficiently, will appease the task force and up the country’s standing.

“South Africa needs to pursue money laundering and terrorist financing in line with its risk profile, including so-called ‘State Capture’, the corruption practices involving businesses and politicians conspiring to influence South Africa’s decision-making process to advance their own interests.”

The FATF further gave government these instructions:

  • South Africa must make better use of financial intelligence.
  • South Africa needs to proactively work with international partners to detect and seize illicit cash flows.
  • South Africa must improve the availability of beneficial ownership information, improve the application of risk-based approach by businesses and supervisors and close gaps in sectoral coverage.

What will it mean if South Africa is greylisted?

Being put on the FATF’s grey list is highly detrimental to a country, especially on the economic front.

When put on the FATF grey list, a country:

  • Attracts close monitoring by the FATF
  • Has strict regulations imposed on them by the FATF
  • Faces lack of trade opportunities
  • Faces the possibility of a downgrade of ratings
  • Stands to experience a shrinking economy

The FATF’s grey-listed countries include Cambodia, Cayman Islands, Burkina Faso, Albania, Yemen, Pakistan and Syria.

South African businesses & AML: What can you do?

How can South African businesses avoid being adversely affected by the current money laundering and terrorist financing risk profile?

Fortunately, South African businesses have ample due diligence tools at their disposal to cover themselves on the money laundering and terrorism front.

Below are some guides around AML for seven different profiles: Digital Banks, the Crypto Industry, the Insurance Industry, Law Firms, the Real Estate Industry, Tax Consultants and Software Companies.

AML for Digital Banks

South Africa’s largest banks, which facilitate trillions of rands in international fund transfers, are at a high risk of being used for illicit financial activity.

South Africa’s banking regulator, the South African Reserve Bank (SARB), recently flagged the country’s banking sector as a being a concern, saying there was a high risk of money laundering and terrorist financing activity in the industry. The SARB cited the extensive use of cash and exposure to overseas lenders as the reason for this.

Digital banks must ensure they deliver services with the appropriate AML/Combating the Financing of Terrorism (CFT) regulatory frameworks in place. Under FATF guidelines, these firms need to adopt a risk-based approach, which includes:

  • Customer due diligence
  • Monitoring measures
  • Screening and monitoring for PEPs

FIND OUT MORE

AML for the Crypto Industry

The crypto industry is required by law to carry out sanctions and AML screenings.

The Office of Foreign Asset Control (OFAC) has made it clear that the crypto industry must, as a top priority, ensure cryptocurrency is not used to evade sanctions.

OFAC is committed to using its authority to counter the use of digital assets for illegal activities. In line with this, the body has expressed that any US person, who engages in crypto transactions, is responsible for confirming that their exchanges do not violate sanctions.

The regulator has already taken steps to act against providers that fail to screen their customers against sanctions and watch lists – and it expects to have more involvement as the industry evolves.

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AML for the Insurance Industry

Insurance companies are at risk of falling victim to money laundering criminals because they can:

  • Structure transactions
  • Enforce appropriate reports, and
  • Force employees to collaborate to create the appearance of legitimacy

Insurance companies are bound by several AML regulations, including:

  1. Know Your Customer (KYC)
  2. Sanctions screenings
  3. Transaction monitoring
  4. Appropriate supervision

FIND OUT MORE

AML for Law Firms

Even though law firms are not financial institutions, lawyers are still vulnerable to being used for money laundering activities. Perpetrators may look to hire legal services to make their illicit financial, corporate, or real estate transactions look legitimate.

Here is a typical scenario:

Criminals use the professional status of lawyers to enhance the legitimacy of real estate transactions or hire them to create shell companies to funnel money through.

By concealing the connection between perpetrators and the proceeds from their crimes, money laundering is enabled.

Simply put, a lawyer can unknowingly be involved in money laundering activities when they are used to deposit, transfer, or withdraw funds.

But there are certain best practices that are proven to minimise these risks.

FIND OUT MORE

AML for the Real Estate Industry

You may be wondering why real estate agents have to comply with anti-money laundering regulations. They’re not a bank, right?

In fact, real estate transactions are one of the most common methods that criminals use to launder money and move around illicit funds.

Here’s why the real estate industry is a prime AML target:

Since real estate transactions tend to involve large sums of money, it is tempting for money launderers to attempt to conceal a significant amount of illegal funds at one time.

It can also be simple for criminals to conceal the identity of the owner of the property being purchased or sold.

The fact that property markets tend to appreciate makes this even more appealing.

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AML for Tax Consultants

The work done by tax consultants often includes complex planning and advice, as well as structuring businesses in a tax-efficient manner. As a result, tax consultants are a target for criminals, who may exploit them to facilitate money laundering and tax evasion.

Here are a few red flags that may indicate there is a breach in AML compliance:

  • Refusal to disclose owners or beneficiaries
  • Overly complex international structures
  • Proceeds from illegal activities

FIND OUT MORE

AML for Software Companies

While sanctions impose restrictions on commerce with specific individuals, entities and states, export controls impose limitations on the distribution of products and services, including software and applications.

Software Transfers Must Comply with Sanctions.

Due to the global nature of information technology, software, websites, and applications are globally distributed – often with just a few clicks.

Globalisation can have unwanted legal consequences for an organisation if its software is distributed to a foreign government or individuals sanctioned by the United States government (for US sanctions).

FIND OUT MORE

Conclusion: Businesses need to implement thorough AML screening processes

For businesses to actively prevent financial loss and reputational damage, it’s crucial that comprehensive due diligence processes are carried out.

pbVerify’s due diligence product suite includes AML (anti-money laundering) sanctions screening, PEP (PIP) data, Adverse Media and Crime data – all customisable depending on your specific industry, and unique business needs.

Would you like to find out how to ensure your business steers clear of money laundering and terrorist funding activities? Contact us directly via Tel: +27 (0)10 823 5194 / Email: [email protected] or complete our website contact form here: https://www.datanamix.com/contact/.

REFERENCES

  1. pbVerify – pbVerify’s AML Sanction Screening Suite: All your due diligence needs covered
  2. fic.gov.za – Financial Intelligence Centre Amendment Act
  3. da.org.za – Reserve Bank Governor confirms greylisting is massive risk for SA economy
  4. Knowyourcountry.com – Country Reports South Africa
  5. Mail & Guardian – What the FICA? South Africa’s possible greylisting in black and white
  6. FATF – South Africa’s measures to combat money laundering and terrorist financing (Mutual Evaluation Report)
  7. South African Treasury – Treasury on South Africa’s anti-money laundering mutual evaluation report released by the Financial Action Task Force
  8. FATF – FATF Recommendations
  9. https://www.moneyweb.co.za/news/companies-and-deals/why-the-reserve-bank-fined-nedbank-r35m/
  10. News24 – SA banks at high risk of money laundering & terrorist financing, regulator warns

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Disclaimer: The information in this BLOG is provided for general informational purposes only and is the opinion of the author only. No information contained in this blog should be construed as legal advice from pbVerify or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this blog should act or refrain from acting on the basis of any information included in, or accessible through, this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.