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Case studies

Impact of Grey Listing South Africa – RAHN CASE STUDY ISSUE NO.20-2022

Financial Intelligence Centre Act and Financial Action Task Force Recommendations: A case study on the industry impact of South Africa’s Finance Laws.

Rahn Consolidated’s articles and case studies are aimed at socialising, climatising, creating awareness, and cautioning economic participants regarding economic crime schemes. The focus will be on anti-money laundering and the investigations around economic crime scheme risks, reporting, and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”.

In June 2021, the Financial Actions Task Force (FATF) highlighted deficiencies in South Africa’s AML/CFTPF regime. The report issued by the FATF, lists a set of “priority actions”. That government‘s required to take before October 2022.

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ISSUE NO.20-2022, focuses on South Africa’s requirement to report on the progress made in the FATF plenary in October 2022. If FATF deems the progress to be insufficient. It will be decided on whether South Africa should be placed on a “Grey list”.

The “Grey list” contains a list of jurisdictions. They are under increased monitoring and are required to address strategic deficiencies in their regimes. To counter money laundering, terrorist financing, and proliferation financing. From an industries perspective, when the FATF places a jurisdiction under increased monitoring. It means the country has committed to swiftly resolve the identified strategic deficiencies. Within agreed timeframes and is subject to increased monitoring.

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The Impact of Grey listing South Africa

Countries that would be placed on the grey list are subject to face economic sanctions from development funders like the European Union and the World Bank. Once there is enhanced monitoring of a country based on the Grey listing, the enhanced monitoring requirements could also impose a burden on global

financial counterparts, such as foreign banks or investors, who will be required to implement additional measures/controls when doing business with entities within Gray listed countries. Many global banks and investors have policies against engagements with Grey listed countries.

Policies Implementation in South Africa to curb AML/CTF&P

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The FATF recommended that South African authorities develop policies to address higher risks of money laundering and terrorist financing. It also suggested policymakers provide the Directorate for Priority Crime Investigation (the Hawks) with more staff, especially financial investigators, and forensic accountants.

Given this, the treasury and the Financial Intelligence Centre had already started reviewing South Africa’s anti-money laundering and counter-terrorist financing legislation. The amendments to the FIC Act have widened its scope by including more categories of institutions and businesses that must adhere to the duties of accountable institutions that are not only limited to reporting of suspicious transactions.

The below key amendments were made to the FIC Act :

The objectives of the Financial Intelligence Centre (“Centre”);

  • The functions of the Centre include the provision of forensic informatio. Empowering the Centre to request information held by other organs of state;
  • Providing for additional and ongoing due diligence measures. Amending the process followed when there are doubts about the veracity of information;
  • Aligning certain provisions and Schedules 3A and 3B. To appropriately refer to domestic and foreign “politically exposed persons”. As distinct from “politically influential persons”, who will deal with in a new Schedule 3C;
  • Certain provisions relating to resolutions of the Security Council of the United Nations. By amending the powers of access by authorised representatives to records of accountable institutions;
  • Enabling the Centre to renew a direction not to proceed with a transaction;
  • by providing for the safeguarding of information;
  • The provisions relating to the disclosure of information to the Centre and access to information by the Centre;
  • Empowering Minister to prescribe appropriate requirements relating to access to personal information. To ensure that adequate safeguards are in place. As required by section 6(1)(c) of the Protection of Personal Information Act, 2013;
  • Certain provisions relating to the risk management and compliance programme. By amending the offences provisions to empower the imposition of administrative sanctions;
  • The provision relating to the amendment by the Minister of Schedule 2; and
  • Schedules 2, 3A and 3B, and by inserting a new Schedule 3C.

Lessons from other Countries regarding the Grey List:

Botswana National Flag

Mauritius was taken off the Grey list after one year when meeting all requirements and continues to make great strides in improving its AML/CFTPF regime.

Botswana

Botswana was removed in October 2021 after meeting the FATF requirements. It took the country three years to succeed, during which time it was automatically included in the EU’s list of non-compliant countries.  

Pakistan National Flag

Pakistan has an economy roughly the same size as South Africa’s and has been estimated to have lost USD38bn (R600bn)* of economic activity from 2018 to 2019 as a result of being Grey-listed in 2018. In March this year, the FATF plenary kept the country on the grey list despite it having completed 26 of the 27 action items required by the FATF, which indicates that getting off the list is not a simple task.  

While South Africa is currently on the watch-list for the Grey List. It is all financial industries’ duties to ensure compliance.

The duties to which Accountable Institutions (Financial Industries) should adhere to. In order to avoid being grey-listed you should include the below:

  • To develop a Risk Management and Compliance Programme (RMCP);
  • Conduct Customer Due Diligence (CDD) and ensuring that all clients are identified, verified, screened and risk rated;
  • To develop a risk based framework that would allow the financial industries.
  • To curb risks relating to money laundering and terrorist and proliferation financing;
  • Develop a compliance framework and appoint a compliance officer;
  • Conduct training on AML/CTPF risks and controls;
  • Effectively keep records; and
  • Effectively submit regulatory reports to the FIC.

Given the stringent monitoring on South Africa’s controls around monitoring. It is always key to ensure compliance duties are adhered to.

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Case studies

FATF Recommendations – RAHN CASE STUDY ISSUE NO.19-2022

How Anti-Money Laundering (AML) and Counter Terrorist and Proliferation Financing (CTPF) laws have greatly affected banking

Rahn Consolidated’s articles and case studies are aimed at socialising, climatising, creating awareness. Cautioning economic participants regarding economic crime schemes and Proliferation Financing. The focus will be on anti-money laundering. The investigations around economic crime scheme risks, reporting, and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”.

Proliferation Financing

Issue No.19 focuses on aspects contained in the Financial Action Task Force (FATF) Mutual Evaluation Recommendations and Immediate Outcomes (IOs). Which affect all Financial Institutions. We have seen how Anti-Money Laundering (AML) and Counter Terrorist and Proliferation Financing (CTPF) laws have greatly affected banking, insurance, and financial institutions. There are certainly greater risks of non-compliance at this stage. It is vital to get your business compliant as soon as possible to avoid potential regulatory fines.

In this issue, we will focus on cases affecting Proliferation Financing as part of Immediate Outcome 4 (IO4). South African Accountable Institutions must know which countries are regarded as high-risk . When it comes to Proliferation Financing and start embedding controls to ensure that they curb these risks.

Financial Action Task Force Recommendations: A case study on industry impact of Immediate Outcome 4: Preventative Measures on Proliferation Financing (Broader Africa)

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Mutual Evaluation Report (MER) Immediate Outcome 4 (IO4): Preventative Measures

The FATF MER Immediate Outcomes apply to the following financial institutions:

  • Large banks from a material and risk perspective;
  • The securities sector (Financial Service Providers and Collective Investment Schemes managers) mostly from a material perspective;
  • High-risk sectors: estate agents, attorneys, and casinos.
  • Several Financial Institutions are not subject to all the AML/CFT obligations which impact the effectiveness of preventive measures. The legislation has however been evolving to ensure that all Financial Institutions have the same robust controls to curb AML/CFT.

One of the outcomes, emanating from the FATF MER, is that since April 2019 South Africa has implemented Targeted Financial Sanctions (TFS) for Proliferation Financing well, most of the time without delay, but some major improvements are needed, as the private sector’s understanding is uneven, and supervision of Proliferation

Financing related obligations is new. For this reason, the next upcoming desktop reviews by the FIC (followed by Onsite Inspections) will be on the effective embedment of Proliferation Financing measures which should go hand in hand with your currently embedded processes and capabilities on Terrorist Financing

and Sanctions. Rahn Consolidated can assist in the embedment of all these capabilities and in ensuring that there is a single view across all these respective areas. Having said that, in understanding Proliferation Financing, one needs to expand on what it is and how to curb it in your business.

“Proliferation is defined by the Financial Action Task Force (FATF) as the illegal manufacture, acquisition development, export, trans-shipment, brokering, transport, transfer, stockpiling, or use of nuclear, chemical, or biological weapons and their means of delivery and related materials.”

Prohibitions against Financial Institutions

Below are financial prohibitions against which Financial Institutions should be guarding (in this example North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), is the focus point):

Controls on financial institutions   Financial institutions are prohibited from maintaining relationships, including correspondent banking relationships, with DPRK financial institutions  
Controls on vessels and aircraft  Leasing or chartering vessels, aircraft, or crew services to/from DPRK is prohibited  
Prohibitions on financial support  Includes granting of export credits, guarantees, or insurance  

From a FATF perspective, the below recommendations relate to proliferation financing:

  • Recommendation 1: Requires countries to identify, assess, and understand their Proliferation Financing risks, take commensurate action to mitigate these risks, and require Financial Institutions to do the same.
  • Recommendation 2: Requires effective national cooperation and coordination mechanisms to combat Proliferation Financing.
  • Recommendation 7: Requires implementation of United Nations Security Council Resolution Terrorist Financing Sanctions on Proliferation Financing (i.e., asset freezes).

Proliferation Financing Case Study

Although there are not many proliferation case studies in South Africa, the most prominent case in Africa, which showed why North Korea is set at high risk when it comes to proliferation financing, emanates from the Democratic Republic of Congo (DRC).

Background

  • Congo Aconde was registered as a company by two North Koreans (Pak Hwa Song and Hwang KilSu) in 2018 in the DRC;
  • They facilitated construction projects for the DRC Government in three provinces from 2018 to late 2019;
  • They further engaged in activities that appear to violate UN, EU, and US sanctions which include but are not limited to:
  • Opening bank accounts at Afriland First Bank for their company;
  • Undertook construction projects in the DRC by erecting statues, a type of construction activity explicitly forbidden by the UN sanctions.
  • The Congolese government funds reportedly served to pay for the statues.

Act of falsification: this is where conducting Customer Due Diligence is prominent

  • The Congolese provided the North Koreans with passports during the company formation process;
  • The passports indicated they are “Ministry of Foreign Affairs” employees;
  • They were in the DRC for official government business;
  • The Nationality was therefore recorded as ‘Korea’ or ‘Korean’;
  • Congo Aconde, therefore, listed a residential address on incorporation records.

Acts of Proliferation Financing:

  • There were US Dollar bank accounts opened at Afriland First Bank in the name of Congo Aconde, that maintained a corresponding relationship with other Banks, which lead to the opportunity to conduct US Dollar transactions without restriction;
  • The Bank indicated the account of Congo Aconde received $407,800 in deposits and approximately $408,145 in withdrawals. It was further indicated that these transactions were in cash and not electronic transfers, which shows the importance of establishing Cash Transaction Reporting capabilities embedded in the business.
  • And finally, the Bank indicated no incoming or outgoing international transfers which then, in turn, meant that the MLRO did not submit an International Fund Transfer Report. This implies domestic funding through Congolese funds or bulk cash transfers.

As part of AML/CTPF capabilities Rahn Consolidated provides, it assists organisations to build systems to conduct client identification and verification and further screen individuals and institutions against among other sanctions, terrorist, and proliferation lists.

Ref: The Sentry

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Case studies

Anti-Money Laundering – RAHN CASE STUDY ISSUE NO.18-2022

Anti-Money Laundering/Counter-Terrorist and Proliferation Financing (AML/CTPF) impact on multifaceted business

A study on Ithala’s impact on AML/CTPF

Rahn Consolidated (Pty) Ltd’s (“Rahn Consolidated”) articles and case studies are aimed at socialising. Climatising, creating awareness and cautioning economic participants regarding economic crime schemes. The focus will inter alia be on anti-money laundering and the investigations around economic crime schemes. Risks, reporting and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”. For the purpose of ensuring all readers are kept in the loop, Rahn Consolidated will make use of both terms. Rahn Consolidated is at the forefront of deterring Financial Crime through compliance. They will focus primarily on compliance regarding Financial Crime. They will ensure fines by way of administrative sanctions that fines are mitigated as much as possible.

anti-money laundering

Item 16 of Schedule 1 of the Financial Intelligence Centre (FIC) Act. Identifies Ithala Development Finance Corporation Limited as an Accountable Institution (AI).

The Corporation’s core strategic objectives are to mobilise financial resources, provide financial and supportive services, to assist with planning, execution, financing and monitoring of the implementation of development projects and programs. Their objectives include assisting and encouraging the development of human resources and social, economic, financial and physical infrastructure. They also seek to encourage and facilitate private sector investment and the

participation of private sector and community organisations in development projects and programs. It is in their best interest to ensure that they are contributing to economic growth and development and act as the government’s agent for performing any development-related tasks and responsibilities that the government considers may be more efficiently or effectively performed by a corporate entity. From a Financial Action Task Force perspective, Public Financial Institutions

operating in South Africa, though not material in terms of size, are relevant due to their customer numbers and the access to the financial infrastructure they provide. These include Ithala SOC Limited, the banking and insurance subsidiary of Ithala Development Finance Corporation Limited, owned by the province of KwaZulu-Natal, whose customers are mostly government employees of the province. Both entities operate under an exemption to provide banking services without a license.

anti-money laundering

FATF MER Recommendations

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As an AI, Ithala Development Finance Corporation is not limited to only reporting obligations but should at a minimum comply with the following:

  • Register business as an AI with the FIC in order to ensure regulatory reporting through go-AML;
  • Develop a Risk Management and Compliance Programme (RMCP);
  • Conduct Customer Due Diligence (CDD);
  • Develop a compliance framework and appoint a compliance officer;
  • Conduct training on Anti-Money Laundering / CTPF risks and controls;
  • Effectively keep records; and
  • Effectively submit regulatory reports to the FIC.

FIC’s Website http://www.fic.gov.za

ML/TPF Risks Notes (Ithala Development Finance Corporation)

Deposit-taking financial institutions

The South African banking sector is dominated by five large banks, which collectively held 90.5% of the total banking sector assets as of 31 March 2019 (31 March 2018: 90.2%).

Local branches of international banks accounted for 5.6% of banking sector assets at the end of March 2019 (March 2018: 5.9%), while other banks represented 3.8% at the end of March 2019 (March 2018: 3.9%). Note: Banking sector data includes Ithala SOC Limited, conducting banking business in terms of an exemption from the provisions of the Banks Act.

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Ithala SOC Limited must register as per the license issued. The business of Ithala SOC is based on principles of branch business and most activities conducted in the financial industry. All offices or branches should be in a position to provide advice and administrative services to their clients. It is therefore not required that each individual branch registers on its own.

anti-money laundering

Ref: PCC05B