Delist drive – South Africa’s anti-money laundering regime

 Money Laundering Bulletin, 6 September, 2023

  

South Africa needs to enhance the capacity of its its financial crime units, including the ‘Hawks,’ which targets organised crime, economic crime and corruption. (Paul Cochrane)

 

Unimpressed by the slow rate of improvement in South Africa’s anti-money laundering regime following its mutual evaluation in 2021, the Financial Action Task Force sought to force the pace in February this year [2023], putting the country under ‘increased monitoring’, so on the ‘grey list’. Paul Cochrane, in Pietermaritzburg, checks on the response across the months since.

South Africa, added to FATF’s grey list this February (2023) (1), is overhauling its AML regime to escape this negative assessment and better address financial crime and terrorist financing in the continent's largest economy. The country’s financial intelligence unit (FIU), the Financial Intelligence Centre (FIC), is confident about progress and “optimistic” it will be removed from the Financial Action Task Force (FATF) grey-list before its next mutual evaluation review, expected next year (2024).

Action list

The last mutual evaluation report (MER), in 2021, found South Africa compliant with three of FATF’s 40 recommendations, largely compliant with 17 recommendations, partially compliant with 15, and non-compliant with five recommendations, on targeted financial sanctions – terrorism & terrorist financing; politically exposed persons (PEPs); non-profit organisations (NPOs); new technologies; and reliance on third parties.

While FATF acknowledged progress in addressing shortcomings in its February (2023) note on the grey-listing, eight areas of strategic deficiency still required work; they included demonstrating a sustained increase in outbound mutual legal assistance requests; improving risk-based supervision of designated non-financial businesses and professions (DNFBPs); ensuring access to accurate and up-to-date beneficial ownership (BO) information; sustained increase in law enforcement agencies’ requests for AML/CTF financial intelligence; a sustained increase in investigations and prosecutions of serious and complex money laundering and terrorist financing (TF); enhancing identification, seizure and confiscation of criminal proceeds; and effective implementation of targeted financial sanctions.

“I am optimistic we will exit the grey list, and I believe that as a country we now understand what needs to be done,” said Xolisile Khanyile, FIC director (until 1 September 2023), and current chair of the Egmont Group, to MLB: “We are not doing this just to pass a FATF test, but to ensure we have systems that are effective, and a regime that is really working and is functional.”

The Prudential Authority (supervisor of financial institutions) as well as the Financial Surveillance and National Payment System departments of the South African Reserve Bank (SARB, the central bank) are responsible for overall AML/CFT and counter proliferation finance (CPF) supervision of banks, life insurers, mutual banks, co-operative banks, authorised dealers with limited authority, and clearing system participants. According to the SARB, “FATF has acknowledged the Prudential Authority has made the most progress in terms of the application of a risk-based approach to supervision.” (3)

Legislative groundwork

In the wake of the MER, and in a move to prevent being grey-listed, the South African cabinet, at the end of 2022, adopted a national strategy on AML/CFT, and passed the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022. (4) Five Acts were thereby changed – the Trust Property Control Act (1988), Nonprofit Organisations Act (1997), Financial Intelligence Centre Act (2001), Companies Act (2008), Financial Sector Regulation Act (2017) – primarily to introduce beneficial ownership recording and disclosure requirements. The mandate of the FIC was also expanded to enable more effective monitoring and detection: a State Forensic Capability (SFC) unit was created, to specialise in forensic accounting and financial analysis, and assist law enforcement in complex money laundering cases. It has also been given more comprehensive powers to impose fines, such as on DNFBPs for not filing risk and compliance returns to the FIC.

FIU – a broader remit

The FIC has been allocated “substantially more funding,” said Khanyile, to achieve its expanded role, which includes more sectors registering with the body, such as trust and company service providers, credit providers, estate agents, attorneys, trust advocates, high-value goods dealers, money and value transfer services providers and gambling entities.

The FIC has been allocated ZAR265.3 million (US$13.8 million) over the next three years. On the supervisory side, there are 42 new positions in the FIC, half to be appointed this year and the remainder in 2024, said Christopher Malan, executive manager of compliance and prevention at the FIC: “We have the funding and the recruitment programme, and largely on our way to get people in, but we are finding there’s a tightening in the market. We are not going to be poaching from our peers, so we have to find a way to bring people in,” from the private and public sector.

Talent and workload

Steven Powell, executive, forensics, at law firm ENSafrica, in Cape Town, also pointed out the shortfall in skills: “A problem I foresee is that we don’t have enough expertise in the country to fill all the gaps, such as forensic experts and forensic accountants,” he said.

A particular challenge for the FIC, set by a 2022 government order, is the expansion of obliged entities to include high-value dealers (HVDs), especially in precious metals in a country with generous endowments of gold and platinum. The rule says dealers are required to register with the FIC, develop a risk management and compliance programme (RMCP), implement customer identification and verification processes, and conduct customer due diligence, appoint a compliance officer, and regularly train employees on FIC compliance. The order also set a transaction reporting threshold of ZAR100,000 (US$5,380). (5)

“The number of accountable institutions has gone off the charts. It’s a challenge as smaller businesses don’t have the budget or people for a compliance programme, while the ZAR100,000 threshold is quite low,” said Powell.

Beneficial owners – obliged to register

Meanwhile, the Companies and Intellectual Property Commission has set up a beneficial ownership register, with companies having until 1 October (2023) to file BO information.

“It is quite a critical issue as, if you look at United Nations Convention Against Corruption (UNCAC), we are also found to not be compliant with the standards on beneficial ownership,” said Khanyile.

But the creation of a BO register brings its own challenges: “The proof will be in the pudding: once we collect the information, are we able to sanction people that are not giving the correct beneficial ownership transparency information on companies and trustees?” asked the FIC director.

Pieter Smit, executive manager legal and policy at the FIC, who has also been serving as its interim director since 1 September 2023, noted that setting up beneficial ownership registries has taken other countries years, while South Africa will have to do so within 24 months – although he is hopeful of success: “There is confidence that we can achieve the timelines for the FATF review,” he said.

Lawyers now under arms-length supervisor

To improve supervision, the legal profession’s AML/CFT regulation has moved from being under the country’s Legal Practice Council (LPC) to the FIC. “The legal fraternity has seen this change already, with the FIC having started inspections, and checking to make sure law firms have RMCPs and compliance officers in place. This is a good thing,” said Powell.

He added that other positive developments were underway, such as enhancing the capacity of the South African Police Services' Directorate for Priority Crime Investigations (DCPI), known as the ‘Hawks,’ which targets organised crime, economic crime and corruption. More generally, on SA AML/CFT, while there is increased private sector participation, and support from the national President Cyril Ramaphosa, “the jury is still out as to when we will see the fruits of the improvement,” Powell noted.

Michael Marchant, head of investigations at Open Secrets, a Cape Town-based non-profit investigating economic crime linked to human rights violations, said the biggest question is the capacity of government bodies to tackle serious crimes in the wake of the hollowing out of investigative organisations over the past two decades, particularly under the presidency of Jacob Zuma (2009 to 2018).

In 2008, for instance, the Directorate of Special Operations, commonly known as the Scorpions, a specialised unit of the National Prosecuting Authority (NPA), was dissolved. High profile cases related to state capture – where private interests benefitted from government contracts and corruption worth an estimated ZAR1.5 trillion (US$101 billion) during Zuma’s second term (2024-18), as estimated by investigative news outlet Daily Maverick) – have languished in courts, as a result, claimed Marchant. (6)

Prosecutor redux

Marchant is hopeful that a formalised NPA unit, the Investigative Directorate Against Corruption, proposed this year in the National Prosecuting Authority Amendment Bill, will be enacted, and speed up major corruption cases (7). “It will allow for a slew of new resources, similar to what the Scorpions was before it was disbanded. If that kind of unit can go around attracting the proper skilled individuals in the field, and there’s a better resourced FIC, then we can really start to see progress and successful prosecutions. However, the Investigative Directorate will have to be fully independent and shielded from political interference,” said Marchant.

Target switch

Khanyile said the focus must shift towards tackling complex crime including third party money laundering, trade-based money laundering and broader money laundering cases. “The work around money laundering investigations in complex organised crime cases and high-risk predicate offences is probably the longest timeline we have to work with. We are starting from a place where capacity needs to be built and then deliver the results we are looking for,” she said. “We need digital transformation and training people on how to do financial investigation, and how to prosecute complex cases. We must ensure the whole value chain is well oiled to deal with these cases and that there is law enforcement collaboration to own these cases so that there can be successful investigations and asset removal.”

Terrorist financing – little to show

South Africa was criticised in the latest MER for its weak record on terrorist financing prosecutions, with FATF noting that only one person had been tried on such charges since its last MER, in 2009.

Smit said there have been non-financing terrorism convictions, adding that cases are “currently underway”. A South Africa Anti-Money Laundering Integrated Task Force (SAMLIT) report on terrorist financing has recently been finalised, but is not being circulated “as it is quite sensitive,” he said. SAMLIT, an expert working group, which includes private sector members, has also released a report on financial flows associated with the illegal wildlife trade. (8)

Offshore and inbound

Cross border AML/CFT is another concern for FATF, which wants to see the FIC improve information sharing with law enforcement in the country and externally. Smit said South Africa is seeking greater international cooperation, particularly in state capture cases as in its request for extradition of the Gupta brothers – closely linked to Zuma - from the United Arab Emirates (UAE) to face trial for money laundering, among other offences.

“We are actively following up to make sure requests do not lie on a desk in another jurisdiction. The UAE is not the only one, there are quite a few other jurisdictions,” said Smit. There is also renewed focus on the country being “a haven to launder proceeds of crime generated elsewhere,” he said. “Understanding South Africa as a destination country is also receiving more attention.”

NOTES

1 - https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-february-2023.html 

2 - https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/Mutual-Evaluation-Report-South-Africa.pdf.coredownload.pdf 

3 - https://www.resbank.co.za/content/dam/sarb/publications/media-releases/2023/fatf-feb-2023/The%20SARB%20reaffirms%20its%20commitment%20to%20fight%20AML.CFT.CPF%20following%20the%20FATF%20announcement.pdf 

4 - https://www.treasury.gov.za/legislation/bills/2022/[B18-2022]%20General%20Laws%20(Anti-Money%20Laundering).pdf 

5 - https://static.pmg.org.za/Annexure_A_2022_03_09_Consolidated_Amendments_to_Schedules_for_approva.pdf 

6 - https://www.dailymaverick.co.za/article/2019-03-01-state-capture-wipes-out-third-of-sas-r4-9-trillion-gdp-never-mind-lost-trust-confidence-opportunity/  

7 - https://www.justice.gov.za/legislation/bills/202308-NPA-Bill.pdf 

8 - https://www.fic.gov.za/Documents/SAMLIT_IWT%20Report_November2021.pdf