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Research

Anti-Money Laundering and Counter-Terrorist Financing

Despite the regular updating of technologies and tightening of regulations to keep criminals at bay, criminals are finding increasingly clever ways to commit financial crimes such as money laundering and terrorist financing.

 

When money is obtained illegally and then transferred through a bank or any other legal institution without disclosing the origins of that money truthfully, it is money laundering. Terrorist financing, on the other hand, is the money that is used for financing terrorist actions. According to the International Monetary Fund (IMF) and World Bank, between USD 2.17 trillion and USD 3.61 trillion is laundered annually – between 3% and 5% of global GDP.

 

The beneficiaries of money laundering are thought to be diverse and exist all around the world. Successful laundering has a major effect on global society from a social, economic and financial standpoint. Money laundering enables further criminal activities, it affects tax revenue collection, enables anti-competitive business behaviours, and affects the integrity of the banking system. This is only a few of the reasons why anti-money laundering (AML) and counter-terrorist financing (CTF) regulations are extremely important. The Financial Action Task Force (FATF) is an inter-government policy-making body that sets standards and promotes the implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

 

From a South African perspective, the Prevention of Organised Crime Act (POCA), Promotion of Access to Information Act (PAIA) and Financial Intelligence Centre Act (FICA) currently support the goals and standards set by the FATF. Following the FATF’s last assessment of South Africa’s compliance to international FATF standards in 2009, it was found that local authorities had improved mechanisms to cooperate on combatting money laundering and the financing of terrorism; however, both the FATF and the Bank Supervision Department’s (BSD) 2016 annual report agree that there is still much that can be improved upon within South Africa’s AML and CTF regime. Issues such as beneficial ownership and measures to deal with politically exposed persons and corresponding banking have been highlighted as priorities.

 

The BSD 2016 annual report found that whilst no banks were guilty of explicitly facilitating transactions linked to AML and CTF, there existed several control gaps and non-compliance issues. The banks involved were fined R46.5 million in total during 2016 and China Construction Bank alone was fined R75 million in 2017 for non-compliance. The next FATF assessment is due to be completed in November 2019, where South Africa’s progress in the space of AML and CFT prevention will be audited and new recommendations made on how best to address the challenges facing the global financial system.

 

Changes to the FICA – which came into effect in 2003 – have been introduced under the Financial Intelligence Centre Amendments Act (FIC Amendments Act), which was published and signed by the Finance Minister of South Africa, Malusi Gigaba, in 2017. South Africa is, thus, starting the process of its implementation and thereby bringing the country in-line with current global standards as set out by FATF.

 

The FIC Amendments Act includes a risk-based approach to assessing and managing risks within organisations; beneficial ownership to improve transparency in the financial system; maintenance of relationships between institutions and prominent influential persons to be able to manage potential risks; and the establishment of a legal framework to apply and administer sanctions such as freezing of assets.

 

The amendments show a shift to a stronger strategy in combatting AML and CTF activities. Historically, risk has been managed by applying blanket risk controls to all banking customers. As the number of clients per institution grows, this task becomes more tedious and prone to errors. The amendments to the FIC Amendments Act encourage organisations to better understand their customers and apply controls based on an individual’s specific risk profile.

 

The Act’s risk-based approach also involves less requirements for low risk clients, which in turn results in the opportunity for banks to provide services to customers who previously could not open a bank account. Previously banks could only provide financial services to clients that had the required Know Your Customer (KYC) documentation. This regulation has now been revoked if the client is classified as a low-risk client.

 

Money laundering and terrorist financing will most likely never be totally eradicated, however, continued improvement in technologies and regulations to improve its prevention and enforcement will reduce the scale and severity of the threats. South Africa has made significant improvements in combatting money laundering and the financing of terrorism, but there were still some shortcomings, gaps and room for improvements. The successful implementation of South Africa’s FIC Amendments Act in full by the end of 2018 will go a long way to improving South Africa’s compliance to international FATF standards in 2019.