In October the Financial Action Task Force (FATF) released its mutual evaluation report on South Africa, following an assessment of the country’s anti-money laundering, counter financing of terrorism and counter financing of proliferation of weapons of mass destruction (AML/CFT/CPF) systems.
The mutual evaluation was conducted by a team led by the International Monetary Fund and including officials from the Eastern and Southern Africa Anti-Money Laundering Group and FATF member countries. The team assessed compliance with FATF’s 40 recommendations on combating money laundering, terrorist financing, and proliferation financing.
“Mutual evaluations are peer reviews that are used to assess countries’ level of compliance … and identify steps necessary for them to increase their effectiveness,” National Treasury said in a statement. “The findings of mutual evaluations are geared to assist member countries in strengthening their financial system, thereby enhancing the integrity of their financial system.”
The report found that, while South Africa has a solid legal framework to fight money laundering and terrorist and proliferation financing, it has “significant shortcomings implementing an effective system, including a failure to pursue serious cases, especially those linked to so-called ‘state capture’.”
The country, said National Treasury, is expected to take remedial steps within 18 months to address deficiencies identified in the report.
SA must raise its game
As a G20 country, South Africa is a regional financial hub for sub-Saharan Africa and as a result is exposed to the laundering of domestic crime proceeds and foreign crime proceeds from the region. It is also exposed to terrorism financing risks associated with foreign terrorism, foreign terrorist fighters, and potential domestic terrorism.
South Africa needs to pursue money laundering (ML) and terrorist financing (TF) in line with its risk profile, including the state capture matters – as authorities have struggled to recover assets from state capture and proceeds that moved to other countries.
However, it has yet to develop coordinated and holistic national AML/CFT policies informed by these ML/TF risks, though some existing policies or measures mitigate some aspects of the risks identified. The FATF noted that significant ML risks remain largely unaddressed in terms of beneficial owners of legal persons and trusts, cross-border movement of cash, and criminal justice efforts are not yet directed towards effectively combating higher risks such as ML related to corruption, narcotics, and tax offenses.
The results suggest that South Africa is doing better with ML issues than with those relating to TF.
Most ML convictions relate to fraud cases, the report noted, while fewer investigations and successful prosecutions relate to other high-risk crimes. On the other hand, since the last mutual evaluation in 2009, South Africa has convicted one person for TF and was prosecuting one case as of the onsite inspection. This ‘success’ rate, says FATF, is highly inconsistent with the country’s significant TF risks.
Lack of understanding of the associated key issues also comes into play. While the main domestic ML crime threats are consistently understood by key authorities, not so well-developed is the understanding of their relative scale, ML vulnerabilities, and the threats from foreign predicates. Furthermore, understanding of TF risks is underdeveloped and uneven.
“Some ML risks are being mitigated but some significant risks remain to be addressed,” the FATF report said. “TF risks are not being adequately addressed.”
The widespread use of cash in South Africa has been identified as a high risk for ML and TF, including movement across borders. “Detecting and recovering cash proceeds of crime remains challenging and efforts to detect and confiscate falsely or undeclared cross-border movement of currency needs substantial improvement.”
As the report notes, there are recent initiatives that have started to address the situation, including replacing key staff and increasing resources at the previously weakened law enforcement and judicial agencies. But more must be done, and quickly.
Financial intelligence underused
South Africa must make better use of financial intelligence. “The Financial Intelligence Centre effectively produces operational financial intelligence that law enforcement agencies use to help investigate predicate crimes and trace criminal assets, but the [agencies] lack the skills and resources to proactively investigate ML or TF.”
Importantly, South Africa must improve the availability of beneficial ownership information. Enforcement agencies, particularly, struggle to obtain accurate and up-to-date beneficial ownership information on companies and trusts – a situation that hampers investigation of ML and TF.
The country must proactively work with international partners to detect and seize illicit cash flows. It does provide constructive mutual legal assistance which has helped to resolve some criminal cases in other countries, but it is sometimes slow. Another identified inconsistency with South Africa’s risk profile is its failure to prioritise and seek international co-operation in investigations, while following up on requests made also needs major improvement.
South Africa previously underwent a FATF mutual evaluation in 2009. That exercise concluded that the country was compliant with nine recommendations; largely compliant with 13; partially compliant with 19; and non-compliant with seven.
This time around the country was compliant with three recommendations; largely compliant with 17; partially compliant with 15; and non-compliant with five.