Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) legislation is a vital cornerstone of the global financial system that safeguards security and combats financial crime. International and national finance is regulated and scrutinized by watchdogs and specialist financial crime units that are empowered by national legislation to catch and prosecute perpetrators of financial crime. However, as criminal techniques get more advanced, difficult questions are posed: how can countries improve their legislation, what role can the private sector play, and why is South Africa being punished for its shortcomings in its AML/CFT legislation? 

What Makes a Strong AML/CFT System? 

AML/CFT stands for Anti-Money Laundering and Countering the Financing of Terrorism. The term Anti-Money Laundering (AML) encompasses the vast array of laws, regulations and policies that are created and implemented to combat money laundering and other associated types of financial crime. 

Ultimately, these laws aim to make it impossible to make use of any revenues gained from criminal activities. This is done by implementing practices to establish the genuine source of all funds in order to identify any linkages to illicit activities.  

To achieve this, a strong AML/CFT system will involve a great degree of checks related to identity verification and data validation. These may include: 

• Know Your Customer (KYC) Protocols: A universal process of ensuring that an individual is really whom they claim to be. 

• Enhanced Due Diligence (EDD): Heightened investigative protocols that are used for high-risk transactions or individuals.  

• Politically Exposed Person (PEP) Checks: A check that establishes whether or not an individual is politically connected, due to the higher risk that these individuals represent. 

• Ongoing Monitoring: The practice of continuously monitoring transactions and financial flows to detect suspicious activity. 

One of the most challenging aspects of AML/CFT legislation is the need to identify Beneficial Ownership structures. When identifying beneficial ownership, one is establishing exactly which individual benefits from the privileges associated with ownership of a legal entity. A beneficial owner will enjoy many privileges associated with ownership even though the title to the property in question is under someone else’s name. Establishing the beneficial ownership of an entity can be challenging. 

Beneficial Ownership structures can be designed to be highly convoluted and complex – either legally or illegally so – for several reasons. It should be noted that beneficial ownership structures are legal, so long as they are explicitly declared. When beneficial ownership structures are illegally constructed, they are most often done so for money laundering and tax evasion. 

Today, the majority of AML/CFT legislation is based upon the Risk-Based Approach (RBA). The RBA is an approach to AML/CFT legislation that adjusts the intensity of legislation depending on the risk level of a country, industry, or specific business. In other words, the RBA is an approach to AML/CFT law-making and regulation that adjusts the intensity of regulation according to the levels of risk that are present in specific circumstances, thereby allowing for the creation of an efficient and cost-effective AML/CFT system. 

Most importantly, a country’s AML/CFT legislation must be paired with high-quality law enforcement that has the capacity to enforce, investigate and prosecute. A comprehensive set of laws is useless without adequate enforcement. 

In the most basic terms, a strong AML/CFT system is one that can identify the genuine source of all financial flows, detect those that are illicit, and prosecute individuals and entities that are in breach of the law.  

How Are National and International AML/CFT Laws Enforced? 

Ultimately, a country’s AML/CFT laws are under its own control, and it is the responsibility of every nation to regulate its own AML/CFT legislation. The extent to which a country wants to implement and enforce the aforementioned due diligence checks in its financial system remains its decision. 

However, because the world has become increasingly interconnected and financial flows are internationally interwoven in a complex web, all economies impact one another. Weaknesses in one country’s AML/CFT system can negatively impact AML/CFT law enforcement in another country. 

Within this globalized context, all countries are subject to international standards for AML/CFT legislation – standards that are enforced by governments and organizations, most notable of which is the Financial Action Task Force (FATF).

The FATF is the most influential global watchdog for AML/CFT legislation and is a leading intergovernmental organization founded to develop policies to combat money laundering. These policies are known as the FATF 40 Recommendations and are widely regarded as the global standard for anti-money laundering policy. 

Countries, therefore, cannot act however they wish without facing repercussions from other countries and global watchdogs. A pertinent example of this type of sanction is the FATF’s recent decision to greylist South Africa. 

Why South Africa Was Greylisted – A Weak and Undermined AML/CFT System  

South Africa was greylisted by the FATF on the 24th of February 2023. This decision came after a period of assessment by the FATF of South Africa’s AML/CFT system that concluded with the FATF stating that South Africa had serious shortfalls within its AML/CFT framework that needed to be urgently addressed. Ultimately, South Africa had failed to maintain an AML/CFT system that could sufficiently address the threat of economic crime to a degree that was in line with global standards. 

To read more about the impact of this decision by the FATF on South Africa’s economy, read our analysis here. 

It is critical to note that much of South Africa’s AML/CFT framework was badly undermined during the country’s period of State capture. Commenting on the FATF’s decision to greylist South Africa, the South African national treasury highlighted the work ahead to rebuild national institutions…

“Government recognises that addressing the action items will be in the interest of South Africa, and that doing so is consistent with our existing commitment to rebuild the institutions that were weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption.” – South African National Treasury. 

As the South African government works to re-establish the capacity of the state to effectively combat financial crime with a strong AML/CFT system and get itself removed from the FATF’s greylist, effective cooperation with private sector financial institutions will be important for success. 

What is the Role of Private Sector Businesses and Large Financial Institutions? 

Large financial institutions are generally expected to work with governments and international watchdogs to improve existing AML/CFT systems. For example, the Wolfsberg Group is an association of thirteen global banks dedicated to the development of frameworks and guidelines for the combatting of financial crime. 

Commenting on the work being done to get South Africa off the FATF’s greylist, South African President Cyril Ramaphosa highlighted the importance of cooperation between the government and private financial sector… 

“Partnerships between government and the financial sector have played a valuable role in efforts to address serious economic crimes. The South Africa Anti-Money Laundering Integrated Task Force was set up in 2019 as a partnership between the banking sector and government regulatory authorities.” – South African President Cyril Ramaphosa. 

Small and Medium Enterprises (SMEs), on the other hand, are generally only expected to comply with national AML/CFT legislation. In South Africa, this legislation is primarily governed by the Financial Intelligence Center Amendment Act (FICA). 

AML/CFT legislation safeguards our economy against devastating financial crime. Compliance with these laws helps to build a safer global system that boosts economic growth and drives greater prosperity by encouraging investment. 

Identity Verification, Data Validation and Risk Assessment Services for South Africa 

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