What is Money Laundering? 

Money laundering – the “cleaning” of criminal revenue to disguise its illegal source and facilitate its use in legitimate, everyday activities – has become a major concern for the vitality of our global financial system. Because laundered money funds terrorism, anti-money laundering (AML) legislation is typically grouped with Countering the Financing of Terrorism (CFT) legislation.

A 2020 report by Deloitte estimated that money laundering makes up 2-5% of the global GDP (as much as $2 trillion). Pieter Alberts, senior operations manager at the Financial Intelligence Centre, said that South Africa is losing between $10-billion and $25 billion annually in illicit financial flows.

The rapid adoption of online payments and wallet technologies means that banks and financial institutions have had to fast-track and enhance their KYC and transaction monitoring processes, as well as constantly evolve their AML systems. With this in mind, what are the challenges facing AML/CFT efforts in Africa, and what is the state of Anti-Money Laundering (AML) practices in South Africa specifically?

AML Regulations in South Africa

South Africa’s primary anti-money laundering law is the Financial Intelligence Centre Act, 38 of 2001 (commonly known as FICA). Together with FICA, the Prevention of Organized Crime Act (POCA) and the Prevention and Combatting of Corrupt Activities Act (PRECCA) form the bedrock of South Africa’s AML legislation.

FICA requires businesses that are identified as Accountable Institutions (AIs) to comply with a wide range of regulatory requirements that cover due diligence, record-keeping, reporting of information to the Financial Intelligence Centre and internal compliance governance.

Because South Africa operates a Risk-Based Approach (RBA) to money laundering regulation, it is the responsibility of the AI to identify risks and take the necessary steps to mitigate those risks. Once the AI has finalized its risk management strategy, it will be presented to the Financial Intelligence Center (FIC) for approval.

AML Compliance and Financial Risk Management

Because South Africa applies a risk-based approach, and because every business must create its own risk management strategies, exact compliance requirements will vary. This will depend on the AI’s categorization (e.g., asset manager or FOREX), as well as how securely an AI wishes to mitigate risk above and beyond what the FIC requires.

Sanction checks are some of the most common AML risk management and compliance solutions, as well as Know Your Client (KYC) protocols that require the identification and verification of individual identities.

ThisIsMe offers a wide range of world-class KYC, enhanced due diligence and remote-onboarding solutions. To experience our full suite of services and see how we can help your business ensure its regulatory compliance, book a demonstration by contacting our team here.

Politically Exposed Person Checks and Sanction Checks

Corruption has seriously undermined national AML/CFT agencies. In their report on South Africa’s AML/CFT measures, the FATF noted how much the State Capture saga had done to the country’s anti-money laundering agencies. Pervasive corruption alienates policymakers, undermines prosecution, and stifles efforts to create and enact new AML/CFT legislation. If sufficient AML laws do get passed, underfunded and ill-trained police forces are often unable to enforce them. Nevertheless, there is immense value in laws that place additional scrutiny on Politically Exposed Persons.

South Africa broadly defines a Politically Exposed Person (PEP) as any individual who is, or has in the past, been entrusted with prominent public functions in a particular country. Due to the interwoven nature of politics and private capital, PEPs are seen to pose a greater threat of corruption and represent an increased money-laundering risk.

To account for this heightened risk, PEPs are subjected to enhanced due diligence and KYC procedures that are designed to scrutinize the connections between a PEP’s political power and their financial transactions. The goal is to make it as hard as possible for PEPs to abuse their power and be corrupt.

How the Financial Action Task Force (FATF) Influences AML Policy in SA

The Financial Action Task Force 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.

South Africa has been an FATF member since 2003. Recently, in October 2021, the FATF released its Mutual Evaluation Report. The report evaluated South Africa’s AML/CFT practices, analyzed South Africa’s compliance with the FATF 40 Recommendations, criticized shortcomings and inconstancies, and provided valuable recommendations on how the country’s current systems can be strengthened.

In addition to being an FATF member, South Africa is part of the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) – a regional body of the FATF that supports countries in the region to implement the global AML/CFT standards. Although global bodies like the FATF provide great authority, regional bodies like the ESAAMLG are greatly valuable in their ability to help countries share resources and expertise in a bid to overcome mutual problems.

For example, many developing nations share the challenge of regulating large, informal, cash-based economies, which can easily conceal illicit transactions and harbours money laundering. South Africa is no different. The cash-based nature of these economies also makes it difficult to implement and enforce globally accepted AML policies. However, the rapid development of accessible digital banking services presents an opportunity to help secure and regulate these economies to protect against money laundering.

Anti-Money Laundering Compliance for Businesses

Although the fight against financial crime is generally spearheaded by government agencies and regulators, the private sector also has a vital role to play in combating financial crime. Compliance with laws and regulations, coupled with proper risk management and enhanced due diligence procedures, holds the key to an economy in which transactional trust is the norm, not the privileged exception.

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. We offer a wide range of FICA-compliant KYC services that encompass politically exposed person checks, account verification services, and company sanction and credit checks. To experience our full suite of due diligence solutions and see how we can help your business meet its AML/CFT regulatory obligations, book a demonstration by contacting our team here.