South Africa risks FATF sanction as legacy of state capture endures

Central bank finds thousands of bank clients have missing citizenship and incorporation data
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South Africa’s financial system is at high risk of being exploited by criminals, its banking regulator reported on July 26. The assessment comes as the country faces being greylisted by the Financial Action Task Force (FATF), after the global watchdog identified deficiencies in its approach to combatting financial crime. 

Ismail Momoniat, acting director-general of the National Treasury, spoke to Central Banking about co-ordinating the response between authorities, in preparation for another FATF assessment this October. 

Momoniat chairs the interdepartmental committee working on FATF’s recommendations. “We’re doing everything it takes to prevent the greylisting,” he says. 

But business leaders are worried. Busisiwe Mavuso, chief executive of Business Leadership South Africa, expressed concern about the impact of being greylisted on the economy. Given South Africa’s “well-earned reputation for corruption”, being “known as a money-laundering destination”, would “raise the cost of international finance and trading”. 

The South African Reserve Bank (Sarb) put greylisting as a new risk in its financial stability report, published in May. Although a step short of blacklisting, greylisting implies enhanced monitoring by the FATF.

The Sarb’s Prudential Authority (PA) found the nation’s top five banks – Absa Group, FirstRand Group, Investec, NedBank Group and Standard Bank – account for 89% of total assets. They are most at risk of money laundering, and terrorist and proliferation financing, according to its July 26 assessment

One of the top five has “8,388 clients with unknown citizenship”. A large bank also “indicated a total of 1,782 clients with the country of incorporation unknown”. 

The sector is targeted by criminals who can deposit cash in ATMs, without revealing the source of the funds or details about the depositors. It is also exposed to abuse by foreign and domestic politicians and officials, the PA warned. 

Measures relating to politically exposed persons are among four of 40 technical compliance ratings where FATF found South Africa lacking. FATF also rated South Africa’s legal persons and arrangements measures low, in addition to two of 11 effectiveness ratings. 

Since 2018, officials have been working to reverse state capture that worsened under Jacob Zuma. The former president, once an anti-apartheid figure jailed with Nelson Mandela for his political activism, was convicted of corruption last year. 

“In a sense, the mutual evaluation happened at a bad time because there had just been a change in president,” Momoniat notes. Current president Cyril Ramaphosa came to power in 2018 – although the FATF report was published in 2021, the assessment took place in 2019 and 2020, the Treasury official says. Its publication was delayed by the Covid-19 pandemic.

Laws are being enacted before the end of the year that should address shortcomings in the regulatory framework, Momoniat adds. The difficulty will come in showing how the police and prosecuting authorities co-ordinate to achieve the outcomes they want. 

Duane Aslett is senior lecturer in forensic accounting at North West University in South Africa. Speaking to Central Banking, he says a lot needs to be done in a short amount of time for the country to avoid being greylisted. The process requires co-operation by various entities – an area in which South Africa “historically does not have a good track record”. 

Aslett points to the findings of the Khampepe Commission on the lack of co-operation between former ‘Scorpions’ and the South African Police Service. The Scorpions was the name of the Directorate for Special Operations, South Africa’s investigative unit, since replaced by the Hawks. As South Africa has been found wanting on many of the FATF recommendations, “it is not a quick-fix situation”, he says. 

Momoniat says that law enforcement and prosecuting authorities lack awareness of what is happening in the financial sector. The challenge comes in integrating to tackle “very sophisticated crimes”. 

“In the event that we do not avoid [greylisting], it will require a lot of effort to be removed from the list,” Aslett stresses.

However, if South Africa does not meet all of FATF’s requirements, “normally countries have an enhanced follow-up process to try and meet with all the other weaknesses or deficiencies that they’ve identified”, Momoniat says. “It is still our hope that when we go to the plenary in February next year, we will have demonstrated sufficient progress and commitment to try and meet all the standards.”

The Sarb’s PA worked with law enforcement agencies, the Financial Intelligence Centre (FIC), the Financial Surveillance Department of SARB and other central banks to complete its July report. 

The Sarb did not respond to a request for comment. 

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