South Africa has become well-known for the country’s high rates of corruption and infamous State Capture saga, both of which have undermined the country’s AML/CFT legislation and dirtied its economy. Understanding how the proximity to political power influences the risk of corruption – as well as grasping how businesses can mitigate this risk – are both key to the adoption of effective AML/CFT legislation that can facilitate the creation of a clean and legitimate economy for South Africa. 

South Africa’s High Rates of Corruption and Economic Crime 

Historically, South Africa has ranked as a country with one of the highest rates of economic crime in the world. Since 2009, the country’s incidence rate has been an average of 27 percentage points higher than the global average, while in 2020 the country was tied with China for the country with the highest reported incident rate of economic crime. 

Furthermore, South Africa is also renounced for its high levels of corruption. According to Transparency International, a score below 50 out of 100 indicates a significant corruption problem. South Africa scored 44. 

These findings are echoed by Corruption Watch, the South African non-profit organization dedicated to the fight against corruption. Commenting on Transparency International’s ratings of South Africa, Corruption Watch notes that…

“South Africa scored an embarrassing 44 in 2021 and a decade earlier it managed 43. This year’s score is the same as in 2020 and 2019. In 2018 and 2017 it scored 43 and before that, it managed 45 (2016), 44 (2015), 42 (2013)and 43 (2012).” – Corruption Watch, 2022.

In their annual report for 2022, Corruption Watch draws attention to the threat of corruption and money laundering that is posed by Politically Exposed Persons (PEPs). Of all the reports of corruption received by Corruption Watch, 67% related to corruption by public officials…

“The bulk of the reports (67%) relate to corruption or other forms of misconduct in the public sector – this includes the national government (28%), provincial government (8%), local government (24%), and state-owned entities (3%), among others.”

Clearly, proximity to political power in entails a high risk of corruption – confirmation of the logic that underpins the basis for AML/CFT legislation that requires enhanced due diligence to be carried out on individuals that are exposed to political power. Few case studies provide better evidence for this than South Africa’s State Capture saga. 

South Africa’s Legacy of State Capture and Institutionalized Corruption 

The pervasive rot of public sector corruption in South Africa is well documented. The extent to which State Capture undermined the judicial system and decayed the legitimacy of South Africa’s democracy through the disregard for law and morality is getting clearer as investigations shed light on the state of governance in South Africa. 

These issues were highlighted as serious concerns by the FATF in the organizations’ Mutual Evaluation Report of South Africa. As noted by the FATF…

“South Africa has suffered from a sustained period of “State capture”, which helped to generate substantial corruption proceeds and undermined key agencies with roles to combat such activity

The FATF’s MER report on South Africa clearly outlined a variety of severe issues that the country had nevertheless failed to address, one of which was the failure to pursue the prosecution of corruption and money laundering cases associated with State Capture…

“In particular, money laundering cases relating to “State Capture” have not been sufficiently pursued.”

Nevertheless, much damage has already been done with not enough effort made to recover from it. One year since the MER report was released, South Africa has still failed to address the FATF’s concerns and now faces the risk of being greylisted – a decision that has the potential to undermine economic growth by raising transaction costs as international financial institutions are forced to consider South Africa as a high-risk jurisdiction and implement the appropriate controls. 

How PEP Checks Can Help Mitigate the Risk of Corruption 

Broadly, the concept of a Politically Exposed Person (PEP) refers to individuals who currently hold or have held political power. Due to the interwoven nature of politics and private capital, governments and financial institutions worldwide agree that PEPs represent an increased money-laundering risk. This is because individuals who hold political power can abuse their power to engage in money laundering and other financial crimes like corruption, bribery, embezzlement and the financing of terrorism. 

To account for this risk, national regulators ensure that PEPs are subjected to Enhanced Due Diligence (EDD) procedures designed to scrutinize the connections between a PEP’s political power and their financial transactions. 

A PEP check is a tool for identity verification that will confirm whether or not an individual is politically exposed and are designed to help businesses assess the risk of individuals and, if they are identified as a PEP, take the necessary measures to mitigate risk and ensure continued regulatory compliance. 

Countries and regions with high rates of corruption represent a higher risk of money laundering because corrupt individuals will most often have to launder their illicit funds in order to “clean” it and have it legitimised for use and expenditure in the national economy.

How to Ensure Regulatory AML/CFT Compliance with PEP Checks and Enhanced Due Diligence 

South Africa has strict AML/CFT legislation designed to combat money laundering and the financing of terrorism – a task done by requiring accountable institutions to conduct identity verification and risk assessment practices that enable the identification of high-risk individuals, who can then be treated accordingly. 

It is essential for businesses to ensure the proper use of sanction checks and PEP checks; a failure to do so not only exposes a business to immensely heightened risk but also puts the business in jeopardy of being convicted of regulatory non-compliance. 

Failure to comply with these laws can lead to serious punishments being handed down by the national regulator – fines and even prison time for implicated entities and individuals are possible. 

Nevertheless, it may also be in a business’s best interests to mitigate risks with due diligence tools above and beyond what is required by law. By using tools for identity verification and data validation, businesses empower themselves to better assess and mitigate risk. In an economy where incidents of economic crime are high and falling victim to one often carries high economic and reputational costs, a business may be well advised to be proactive in assessing and mitigating risks. 

Enhanced Due Diligence Services and PEP Checks for South Africa 

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience how our suite of identity verification, data validation and risk assessment services can enhance business while providing a world-class customer experience, book a demonstration by contacting our team here.