“Not good enough” is how the Financial Intelligence Centre (FIC) characterises the response to its call in February for lawyers and estate agents to submit risk and compliance returns (RCRs) that will help SA escape its greylisting by the Financial Action Task Force (FATF).
Legal practitioners’ offices and estate agents have been identified as high-risk categories by the global body that monitors money laundering and terrorism financing.
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Read: Lawyers, estate agents could keep SA on grey list
The number of estate agents and legal practitioners registered with the FIC remains stubbornly low at 55% and 60% respectively.
At a media presentation in February, the FIC warned that of the country’s roughly 16 000 legal practitioner offices, only 52% had submitted risk and compliance reports. Just 42% of the 9 000 estate agents had submitted reports.
The expected compliance rate is 100%, or close to 100%, says the FIC.
Slight improvement, but not enough
While the latest figures are slightly improved from February, they are nowhere near enough to satisfy the FATF that SA is serious about removing itself from the grey list.
SA was placed on the grey list in February 2023 due to non-compliance with 20 of the reporting categories identified by the FATF. There have been improvements in 18 of these categories since then, but the FIC warns that the sluggish response from lawyers’ offices and estate agents could derail efforts to remove the greylisting label by 2025.
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“Practitioners in the legal profession and estate agent practitioners are considered high-risk for money laundering and terrorist financing abuse,” says Christopher Malan, executive manager for compliance and prevention at the FIC.
“The call made in February 2024, and which call we reaffirm today, is that these sectors must urgently ramp up their submission of RCRs to the FIC, which will be seen as their contribution to help exit South Africa from the FATF grey list.
“Through the completion and submission of RCRs, the identified sectors can show that they are aware of the risks their businesses face of being abused for money laundering and terrorist financing purposes,” says Malan.
“More importantly, the submission of the outstanding RCRs enables the FIC to risk profile each submitting individual DNFBP [designated non-financial businesses and professions] accountable institution, to determine the higher risk entities for risk-sensitive supervisory inspection purposes.”
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Malan says the paucity of returns from lawyers and estate agents – for the most part – means the FIC cannot develop a credible response when it submits its update report on 22 March 2024.
This reporting requirement is one of the key requirements for exiting greylisting. The FIC is obligated to identify entities that are at high risk for money laundering, terrorist financing and proliferation financing (used in manufacturing or distributing nuclear, chemical or biological weapons).
Looming deadlines and notices
The FIC has several looming deadlines to show SA is making good progress in addressing these risks, with a crucial deadline approaching in May 2024.
The RCR is key to this identification of high-risk entities. It is also an important tool for entities to improve their understanding of the risks they face of money laundering, terrorist financing and proliferation financing abuse.
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Failure to submit RCRs can lead to administrative penalties, and the FIC has so far issued 264 notices of intentional sanction, targeting mainly legal practitioners’ offices and estate agents.
These notices are for violation of Directive 6, issued by the FIC, for failure by accountable institutions to register with the regulatory body by 31 March.
Accountable institutions also include casinos, trust service providers and company service providers.
Later this month, another batch of notices will be heading out to delinquent companies for failure to honour Directive 7, issued by the FIC, dealing with the obligation of accountable institutions to submit RCRs by July 2023.
Risk assessments
Accountable institutions are required to perform risk assessments on their businesses to identify whether any money laundering or terrorist financing risks appear in their businesses, and to put together policies to prevent this.
They are also required to do due diligence on themselves to identify gaps in existing controls that could allow money laundering or terrorism financing to take place.
Another requirement is identifying the beneficial owners when dealing with customers, trusts or partnerships.
Politically exposed and prominent, influential persons are also under heightened regulatory scrutiny, according to law firm Cliffe Dekker Hofmeyr.
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Says Malan: “We would like South Africa to position to the FATF the RCR submission adherence with the best possible figures before we submit our next country report to the FATF Joint Group that reviews our greylisting progress on Friday, 22 March 2024.”
Should SA fail to meet its compliance requirements with the FATF, it risks further reputational damage than is already the case.
Greylisting carries with it the odour of financial lawlessness and, according to the International Monetary Fund (IMF), discourages capital inflows due to the higher cost of due diligence required while raising the cost of capital. An IMF study shows that greylisted countries experience an average decline in capital flows equivalent to 7.6% of GDP.
Listen to this Moneyweb@Midday podcast with Jeremy Maggs, where Stanlib’s Kevin Lings shares his reasons why he thinks government is over-ambitious with its greylisting deadlines (or read the transcript here):
You can also listen to this podcast on iono.fm here.
