Last week, the Prudential Authority of the South African Reserve Bank published their 2021 report which indicated that South African (SA) banks are at high risk of being used for money laundering and the funding of terrorist activities. The report suggested that this was fuelled by a cash-driven economy and easy access to overseas lenders. This can result in criminals using generic methods to deposit large amounts of cash for example automated teller machines where funds can be deposited without having to reveal the source of the funds or producing details regarding the depositor. The report further stated that the country’s top five banks are exposed to the highest risk because they hold 89% of all assets in the banking sector due to their large pool of clients. According to the regulator, the larger banks provide an extensive range of high-volume, complex products and services as well as quick transacting to both local and international clients, which could attract a lot of clients.

The fundamental aspects of Know your Customer (KYC) The report also highlighted that in many instances, the banks did not have all the required information about their clients.  In fact, the report stated that one of the large banks admitted to having 8 388 clients with unverified or unknown citizenship. Another large bank disclosed that they have a total of 1 782 clients with unknown countries of incorporation. Also, with the expansion of digital onboarding in recent years, the source of funds/wealth from clients are largely anonymous.

The report further identified increasing levels of risk that are linked to foreign-owned banks with branches in South Africa. Although these banks offer fewer products and services compared to local banks, they might be exposed to a limited number of high-risk clients that are linked to cross-border transactions. Another troubling aspect of the report included the fact that the larger banks tend to have many influential, and high-net worth clients that are often associated with complicated banking behaviour. This involves clients with complex company structures that could obstruct the true beneficial ownership of funds, which increases the level of difficulty to flag possible money laundering and the funding of terrorist activities, and therefore present a higher level of risk, specific threats and vulnerabilities

According to an article on Businesstech.co.za, the regulator’s report mentioned specific threats and vulnerabilities across the SA-banking sector which include:

Threats
Fraud, bribery, and corruption.
Illegal investment scams (Ponzi/pyramid).
Environmental crimes.
Tax-related offences or crimes.
Illicit cross-border flows.
Criminals using money mules.
Drug trafficking and human trafficking;
and Cybercrime, including emerging technologies that may be used to commit crimes.

Vulnerabilities
An inability to identify domestic prominent influential persons (DPIPs).
The inability of banks to obtain beneficial ownership information.
The misuse of trade products and related services such as advanced payments.
The identification of cryptocurrencies and exchanges (as client types).
Non-face-to-face client onboarding and interactions.
Products that allow large volumes of cash deposits.
The lack of a single client view across a bank when a client has multiple business relationships or accounts with different business units within the same bank; and Data issues, including misalignment, inaccuracies, and integrity of data.

The Financial Action Task Force (FATF) has flagged South Africa as scoring poorly in all eleven of the FATF’s effective measures to combat money laundering and the financing of terrorism. As a result, SA has been notified of being at risk to be placed on the grey list of countries that do not comply with requirements. The South African Reserve Bank has issued subsequent warnings and indicated that being grey listed could have significant implications for the country’s financial system. According to the mentioned article, South Africa will be notified in February 2023 whether the FATF will place it on the grey list.

Expert assistance The SA regulator’s report calls on banks to implement comprehensive policies and controls that can rely on experienced and capable operational resources and to also have effective systems and processes in place; but this can be very time consuming and costly for banks. This is where the Lysis Group can make a real difference because since 2001, we have established ourselves as global leaders in the field of financial crime (FC) compliance. We deliver a unique and cost-effective combination of superior service offerings across the full spectrum of financial crime compliance including client onboarding, screening alert support, Know Your Customer (KYC) remediation, transaction monitoring remediation and our award-winning managed services.

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