By: James Saunders
Criminals conducting Illicit Financial Flows (IFFs)—money transferred from illegal sources, by nefarious means, and for ill intentions—have developed sophisticated ways to bypass the financial system. Financial institutions are now finding it far more complex to separate legitimate customers from those on sanctions lists or affiliating with terrorist or organised crime syndicates.
In response, global watchdogs demand more onerous Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) measures to combat IFFs in a borderless world. The consequences of getting it wrong are severe for institutions and nations alike, as evidenced by South Africa’s addition to the Financial Action Task Force (FATF) greylist in 2023.
South Africa’s IFF difficulties
South Africa struggles with IFFs because of specific attributes that make it particularly attractive to financial criminals. On the one hand, it is a regional economic hub with a sophisticated financial system deeply integrated into the world economy. On the other hand, a sizeable, cash-based informal economy opens opportunities to launder money efficiently.
South Africa is working hard to get scrubbed from the greylist by building task forces, imposing proactive risk-approach supervision, and writing legislation. However, its deficiencies in prosecuting money laundering and corruption cases seem likely to be a barrier to removal soon.
The National Prosecuting Authority (NPA) is only part of the problem. Governmental bodies, regulators, and every company in the financial ecosystem have a role in strengthening AML and CTF compliance. The private sector is far from blameless, as some recent cases show.
● The South African Revenue Service (Sars) criticised Sasfin Bank for shipping around R3 billion in proceeds from illegal tobacco sales out of the country.
● VBS Mutual Bank’s chairperson, Tshifhiwa Matodzi, was convicted of an R2 billion embezzlement case that saw the rural-focused mutual bank turned into a “breathtakingly elaborate and cynical pyramid scheme.”
● South Africa’s Bank of Baroda branch was implicated in R4.5 billion suspicious transactions between key Gupta-owned and shell companies.
How do these cases have a global impact?
The discovery of these cases marks progress in prosecuting IFFs, but it also highlights years of deficiency. This has harmed investor confidence and capital inflows. The rand depreciated immediately following the announcement that the FATF had added South Africa to the greylist.
It’s also important to consider the impact on South Africa’s global standing. The Bank of Baroda investigation involved a range of foreign nationals, entities, and sector-specific networks. This led, in turn, to increased regulatory scrutiny from international bodies such as the OECD report about South Africa’s compliance failures.
As the World Bank Group has identified, IFFs divert resources from national development efforts. This results in less funding for domestic commerce, infrastructure, and innovation and less chance for cross-border cooperation, which is needed to ensure financial health worldwide.
Changing the dialogue around AML
South African financial institutions must strengthen their AML systems in this environment to prevent future IFF cases. Mitigating financial criminals' actions demands digital risk-based practices under the supervision of expert compliance teams throughout the entire AML process.
This encompasses everything from onboarding customers to monitoring their behaviours and payments with consistent, ongoing checks. Know Your Customer (KYC) checks are the starting point and involve verifying that people are who they say they are and identifying high-risk clients for enhanced due diligence. The use of modern RegTech solutions to identify the source or cause of IFFs is imperative.
More broadly, institutions must adopt a more proactive approach to managing risk, drive a compliance-led culture with AML front-of-mind, and work in partnership with the rest of the ecosystem. Compliance success can only be won through collaboration with regulatory bodies and technological solutions, taking a collective approach against crimes growing in threat level and sophistication.
* Saunders is a co-founder and CTO at Anti-Money Laundering (AML) software provider RelyComply.
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