Since the greylisting, there seems to be uncertainty
Since the announcement of the Financial Action Task Force (FATF) decision, to greylist South Africa, there has been a considerable amount of uncertainty of what this greylisting means for businesses and, in particular, accountable institutions.
DocFox hosted a webinar were Hawken McEwan, Director of Risk Compliance at DocFox, discussed what “greylisting” is, its effects, and how by addressing its deficiencies, together with law enforcement bodies, asset forfeiture units, the FIC and other entities, accountable institutions can also play an active role to get South Africa off the greylist.
Why has SA been greylisted?
There are lots of things at play, according to McEwan, but it’s important to perhaps fill in the context around who greylisted us.
“National governments have continually faced an insurmountable challenge to deal with the growing problem of financial related crime, such as money laundering and terrorist financing. As the financial system developed and international transactions became easier to conduct, the proceeds of crime too would easily disappear into the complexities of the global system. With this, it was clear that there needed to be a coordinated response. No country could fight money laundering on its own,” he said.
“In 1989, the G7 created the Financial Action Task Force (FATF), and their aim was/is to assist countries to stem the financial flows associated with crime through assessing the threats of illicit financial flows, of setting global standards for fighting them (colloquially called the FATF 40 Recommendations), and of assessing countries effectiveness to implementing the standards,” continued McEwan.
These threat to the global financial system, McEwan said, continue to evolve. “New threats emerge, such as cyberattacks against banks, as well as the use of virtual assets in criminal schemes. The FATF are responsible for assessing these ever-changing threats, updating the recommendations, providing guidance and continuing to assess countries compliance with them.”
“And it’s that assessment against the FATF recommendations that led to our grey list designation,” he emphasised.
It is important, according to McEwan, to reiterate that it is a designation. It is not a sanction. There are no legal restrictions around anyone doing business with South Africa, its entities, or individuals. “Rather, the country has, as a whole, been identified as having weaknesses in its controls around money laundering, terrorist financing and proliferation financing, compared to the standards that are generally accepted by the majority of the developed world. Those FATF 40 Recommendations… we were only compliant with three of the forty recommendations in the first round of assessments, and even with considerable work behind the scenes, at our final assessment in February this year, we were found to still be lacking in eight.”
The strategic deficiencies identified
A key thing to note is the way the FATF recommendations are weighted, is towards criminal justice and prosecutions, rather than front end customer and transaction interaction - so whilst the recent regulatory updates placing requirements on accountable institutions were key to addressing some risks and were live, they were still not fully implemented, McEwan stated.
“What the FATF wanted to see was effective justice prevailing. The implementation of the recommendations on the ground,” he added.
According to McEwan:
- SA had to improve risk-based supervision - especially of Designated Non-Financial Businesses (DNFBs) and demonstrate that all AML/CFT supervisors apply effective, proportionate, and effective sanctions for non-compliance;
- We had to ensure that competent authorities have timely access to accurate and up-to-date beneficial owner information on legal persons and arrangements, so it was clear who was behind transactions and activities;
- We have to demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and terrorist finance related activities; part of this is a need for SA to enhance its identification, seizure and confiscation of proceeds and instrumentalities of a wider range of predicate crimes;
- The FATF then turned to the Financial Intelligence Centre (FIC) to update its Terrorist Finance Risk Assessment to inform the implementation of a comprehensive national counter financing of terrorism strategy;
- The FIC must also ensure the effective implementation of Targeted Financial Sanctions (TFS) and demonstrating an effective mechanism to identify individuals and entities that meet the criteria for domestic designation; and
- Finally, comments around sharing information - asking the country to demonstrate a sustained increase in law enforcement agencies’ requests for financial intelligence from the FIC for its investigations; and a sustained increase in information sharing internationally.
"So, we had done a lot of work in terms of updating legislation… but the FATF want to see action and real, tangible and sustained results that have the ultimate outcome of seizing assets and successfully prosecuting those behind them,” continued McEwan.
The practical implications
The biggest implications, McEwan thinks, will be seen across two broad themes.
“Firstly, other countries will now see us as a higher risk and will seek to mitigate their exposure through either voting with their feet, or undertaking enhanced due diligence to get a level of comfort that whatever their engagement is with South Africa, it is legitimate and transparent. That will mean South African individuals and businesses will be jumping through hoops, answering more questions and providing more information. Although in real terms the level of risk didn’t change in February, it did put us on the global stage, so I think the extra cost in terms of compliance will come,” he said.
“Secondly, a lot of these challenges are systemic in nature around the entire law enforcement value chain – and to deliver those prosecutions we’ve been waiting for will require jumping considerable hurdles around legislation, capacity, resources, skills, due process and arguably impetus. Whilst we arguably have the legislation, we are still lacking in leveraging it to its full advantage to see results,” added McEwan.
“In fact, the Minister of Finance, Enoch Godongwana announced the allocation of R14 billon in the budget, to support the strengthening of SA’s defences against, and prosecution of, financial crime and said they must make sure that they can strengthen the security cluster and develop a programme of action in order to get out of this greylisting as quickly as possible,” he continued.
Accountable institutions’ responsibility
“A common thread we have seen running through the reasons behind greylisting is one of action, or lack thereof… the inability to demonstrate effectiveness and implementation on the ground. And a large part of this will come from accountable institutions - old and new. Accountable institutions play a vital role in the value chain of intelligence for the country. Secondly, there has been a clear statement from the Financial Sector Conduct Authority (FSCA), the South African Reserve Bank (SARB) and the FIC that the level of supervision around the Financial Intelligence Centre Act (FICA) will increase. They will expect to see full compliance with all requirements, from knowing your customer (KYC) and screening against sanctions lists, to reporting suspicions - and the consequences for non-compliance will become much more prevalent. This is all to provide a level of comfort that the requirements of the legislation are being put into action,” said McEwan.
McEwan said the true financial crime superheros are those on the front line who are involved with the clients, the assets and the transactions and who can use their skills, experience and knowledge to pick up on the often very subtle clues that something untoward may be going on.
He believes there is also a clear need for commitment from South African business to also do what is right, not what is easy. “It is simple. Be compliant. Be part of making a difference and help us move away from the greylisting designation cloud hanging over us,” he concluded.
Writer’s Thoughts
As McEwan said, a common thread running through the reasons behind greylisting is one of action, or lack thereof… the inability to demonstrate effectiveness and implementation on the ground. Other than accountable institutions, there is a clear need for South African business to also do what is right, because the FATF want to see action and real, tangible and sustained results. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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