National Treasury is hopeful SA will be removed from the dreaded Financial Action Task Force (FATF) grey list by early 2025, and a recent follow-up report by the international body seems to support that view.
Not so fast, says credit management company Debtsource. CEO Frank Knight says a timeous exit for SA from the grey list could be in jeopardy because SA companies have been slow to register as ‘accountable institutions’ as required under new amendments to the Financial Intelligence Centre (FIC) Act.
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Read:
More changes to deal with money laundering risks in SA [Dec 2022]
‘Tweaks’ to the FIC Act [Feb 2023]
Additional reporting requirements kick in [May 2023]
These amendments expanded the definition of credit providers and included high-value goods dealers (dealing in goods valued at more than R100 000) and crypto asset service providers as ‘accountable institutions’ that must register and submit regular reports to the FIC.
Also included under this expanded definition are estate agents and casinos, where the risk of criminal and terrorist activity is deemed to be high.
With this expanded definition comes new reporting obligations, such as the need for risk management and compliance programmes.
These reports can be costly and time-consuming, and no doubt explain why companies are slow to register or are ignoring the amendments, hoping sloppy enforcement will render them nullities.
A consistent theme in the FATF findings was not so much that SA lacked adequate anti-money laundering and combatting of terrorism (AML/CFT) measures, but that these were weakly enforced.
Another theme was the need to identify beneficial owners of companies and trusts, flushing the ‘warm bodies’ pulling the financial strings out of the shadows and into the sunlight.
Read: SA to get beneficial ownership database to fight financial crime [Mar 2023]
For local companies, greylisting carries the stench of poor financial hygiene, even if by association.
Many private sector companies are well regarded by their overseas counterparts, but the greylisting label applied to SA as a whole increases reputational risk and imposes higher standards of due diligence when dealing with foreign businesses and banks. Krutham (formerly Intellidex) estimated this could cost the economy 1% of GDP a year in an optimistic scenario and 2-3% in a more pessimistic one.
Great improvement, but one major issue
The latest FATF report shows improvements in 18 of the 20 deficiencies previously identified by the international monitoring body. SA is now deemed fully or largely compliant with 35 of the 40 FATF recommendations initially identified in 2021. This leaves five areas of deficiency to be addressed.
One of the steps taken was to form an inter-departmental committee on anti-money laundering and combatting terrorism financing. SA will need to show that efforts to curb money laundering and terrorism financing are sustainable before the greylisting label is removed. That may be easier said than done.
Based on levels of compliance and awareness of the requirement in the trade credit market, very few companies are registering as accountable institutions, “and this will be noted by FATF to our detriment,” says Knight.
The stakes are high for these accountable institutions. The potential repercussions include not only financial penalties but also reputational damage and a tarnished business environment.
“There is a scale of administrative sanctions starting with a caution, and rising to a reprimand, directive to take remedial action, a restriction or suspension of certain specified business activities, and finally a financial penalty of up to R50 million for any legal person,” adds Knight.
According to law firm Cliffe Dekker Hofmeyr, these new accountable institutions will have to register with the FIC, perform risk assessments on their businesses to identify whether any money laundering or terrorist financing risks appear in their businesses, and put together an AML/CTF policy.
Read: Three more state entities to get access to confidential taxpayer information
Existing accountable institutions need to perform due diligence on themselves to identify gaps and create controls to close any potential for money laundering and terrorism financing.
Another requirement is the obligation to identify the beneficial owners when dealing with customers, trusts or partnerships. Politically exposed and prominent, influential persons are also under heightened regulatory scrutiny.
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Difficulty lies in regular reporting requirements
Though the FIC has made it easy for domestic entities to register as accountable institutions, the difficulty lies in the regular reporting requirements that come along with the classification, says Darren Hanekom, MD of Hanekom Attorneys.
“Additionally, the resources and skills required for maintaining and monitoring a compliant database are becoming increasingly unaffordable, especially for SMMEs in the market.
“As such, leniency and discretion should be encouraged for those who are in material compliance or have taken reasonable steps towards becoming compliant.
“That being said, given South Africa’s grey-listed status, we anticipate heavy public sanctions for those who have shown a complete disregard for baseline levels of verifications and reporting.”
Read:
Sloppy trust administration days are coming to an end [Mar 2023]
Serious concerns around trust reporting [May 2023]
Reporting requirements for trusts and PBOs now final [Jul 2023]
Major compliance risks pile higher costs on trusts [Sept 2023]
The FIC mandates that all credit providers, irrespective of the type of credit they extend, must register with the FIC, though many – including international entities – appear to be in the dark about their regulatory obligations. Those that fail to register by 1 December 2024 will likely incur stiff penalties.
Seven imperatives
Knight outlines seven imperatives for credit providers, particularly those involved in incidental credit (as in the case of overdue accounts):
- Registering with the FIC by 1 December;
- Drafting a comprehensive risk management and compliance plan;
- Completing risk and compliance returns;
- Reporting cash transactions exceeding the threshold;
- Ensuring employee training on awareness of sanctions and beneficial ownership of businesses;
- Modifying credit policies to align with FIC regulations; and
- Amending credit application forms to capture beneficial ownership details.
The absence of stringent reporting standards for entities outside the financial sector creates a blind spot for criminals attempting to launder cash, adds Knight.
Criminals are prone to engage with unsuspecting but reputable companies to purchase legitimate goods or services using untraceable cash, thereby laundering the money and making it seem legitimate.
SA is determined to remove itself from the grey list, and it would be a mistake to ignore these new reporting obligations on the assumption that an overburdened bureaucracy will let non-compliance slide.
Nothing galvanises bureaucratic pride like international oversight of the kind provided by the FATF, but whether all this happens by early 2025 remains an open question.
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