South Africa is making progress towards tightening lax Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) controls towards the end of exiting the Financial Action Task Force’s (FATF’s) greylist.
However, it seems unlikely that the government, banks, and other regulated entities will have done enough to get the country off the greylist by the time of the FATF’s January 2025 meeting, writes James Saunders, co-founder and chief technology officer at RelyComply.
Following the greylisting in February 2023, South Africa committed to working with FATF to overcome its shortfalls. Included in an eight-step process were requirements to strengthen legal enforcement utilising data from the Financial Intelligence Centre (FIC) and to introduce more effective measures to identify and implement sanctions.
On the upside, progress has been made towards meeting the FATF’s list of action points relating to targeted financial sanction regimes and legal provisions criminalising terrorist financing. However, South Africa still has a lot of work to do to show that it is prosecuting financial criminals seriously.
The combination of South Africa’s developed banking system, its status as a financial hub in sub-Saharan Africa, and the large informal economic sector has made it vulnerable to financial crime. Convicting financial criminals should be a high priority, but successful prosecutions are rare, hindered by low capacity and expertise.
NPA gaps are still a concern
The NPA recently established a standalone digital evidence unit composed of private sector experts to resolve FATF priority points before January 2025. This is an 11th-hour move that suggests that the AML compliance process is still considered a checkbox item rather than a moral and regulatory imperative.
This competence lies outside the direct control of lawmakers and regulators. It requires the National Prosecuting Authority (NPA) to invest in building its effectiveness. It seems that it’s not so much a lack of prosecutors that is to blame as inefficiency in prosecuting cases and the discretion to prosecute being left in the hands of a national director.
On the plus side, South Africa has made some changes that will help it to find its way off the greylist:
- In 2022, the government enacted the General Laws (Anti Money Laundering and Combating the Financing of Terrorism) Amendment Act 23, strengthening the focus on fighting fincrime through legislation, including beneficial ownership.
- The Prudential Authority, the regulator for South Africa’s financial sector, has adopted risk-based approaches to supervision: increasing inspections, building understanding, awareness and expertise with banks, and establishing foreign supervisors for AML/CFT in cross-border subsidiaries.
- The South African Revenue Service (SARS) has rebuilt the capacity lost during the state capture years and has invested in advanced technology to pursue tax evaders and other financial criminals.
Private-public cooperation is key.
Compliance, as the NPA’s intended plan sets out, relies on better cooperation and commitment from both the state and the private sector (without stepping on each other’s toes), a difficult mix of legislation and large-scale financial regulation experience from the respective parties, and the implementation of risk-based AML technology.
The private sector is already doing its part. Financial institutions are increasingly integrating more advanced, accurate RegTech tools for financial crime reporting and smoothing the efficiencies of their expert analysts. Even though take-up is stronger than ever, it is slower than needed to meet the January 2025 deadline.
If South Africa misses this milestone, we should redouble our efforts to meet the FAFT’s requirements. The country’s financial reputation is on the line. Foreign investment and capital inflows are affected, causing macroeconomic damage that is hard to reverse. It’s in our hands to avoid a downward spiral in which financial crime proliferates and the country’s growth and attractiveness to investors are permanently harmed.