20211006-IMF-South_Africa_Detailed_Assessment_Report_on_Anti-Money_Laundering_and_Combating_the_Financing_of_Terrorism_248页_1mb

Detailed Assessment Report on AML/CFT in South Africa (2019)

Core Content

This report presents a detailed assessment of South Africa’s Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) framework as of the onsite visit in October–November 2019. It evaluates the country’s compliance with the Financial Action Task Force (FATF) 40 Recommendations and the effectiveness of its AML/CFT system, highlighting key findings, risks, and areas for improvement.

Main Domestic AML Threats

• Key predicate crimes include corruption, tax-related offenses, fraud, and drug trafficking.
• These crimes generate substantial proceeds, which are often laundered through the financial system.
• Cash is widely used in the economy and remains a high-risk channel for money laundering and terrorist financing, especially in cross-border contexts.
• Informal economy and cross-border remittances involving physical cash increase the risk of illicit financial flows.
• Legal persons and trusts are frequently misused for money laundering, and beneficial ownership (BO) transparency is insufficient.

Terrorist Financing (TF) Risks

• TF risks are underdeveloped and unevenly understood by authorities.
• South Africa is exposed to foreign terrorism and foreign terrorist fighters, as well as potential domestic terrorism.
• The National Counter Terrorism Strategy (NCTS) does not adequately integrate TF risks.
• Proactive TF investigations are limited, and the country has not effectively addressed TF risks in line with its exposure.
• The classification of politically motivated violence as terrorism is conservative, which may hinder TF investigations.

Key Findings and Observations

1. State Capture and Corruption

• A sustained period of state capture has led to substantial corruption and undermined key agencies.
• Government initiatives from 2018/19 have started to address this, including staff replacements and resource allocation to law enforcement and judicial bodies.

2. Financial Intelligence Centre (FIC)

• The FIC effectively produces operational financial intelligence used by LEAs to investigate predicate crimes and trace criminal assets.
• However, LEAs lack skills and resources to proactively investigate money laundering and terrorist financing.
• The FIC does not routinely receive reports on cash courier activities, and high-risk DNFBPs report infrequently.

3. Convictions and Prosecutions

• A reasonable number of ML convictions have been achieved, but they are mostly related to fraud.
• Fewer cases of third-party ML and foreign predicate offenses are prosecuted.
• ML cases related to "State capture" have not been sufficiently pursued.
• Terrorist financing convictions are limited, with only one conviction since the last Mutual Evaluation (ME).

4. Confiscation and Asset Recovery

• South Africa has made progress in confiscating criminal proceeds using civil forfeiture.
• However, asset recovery from "State capture" and cross-border movements remains challenging.
• Some recent cases indicate improvement, but systemic weaknesses persist.

5. Risk-Based Approach (RBA)

• RBA is inadequately implemented in many sectors, particularly DNFBPs and VASPs.
• Larger banks are more advanced in understanding and mitigating ML risks.
• Smaller FIs and DNFBPs focus on compliance rather than risk identification.
• BO requirements are only partially met, and market entry controls need significant improvement.

6. Supervision and Coordination

• Supervision is mainly focused on banks and ADLAs, but proper RBA is not applied to all sectors.
• Inspections in other sectors are infrequent and lack depth, focusing on basic controls rather than program soundness.
• The FIC acts as a key coordinator among supervisors and provides well-regarded guidance.
• Inter-departmental coordination is improving, but formality and limited stakeholder involvement slow down processes.
• PF-related supervision is in its initial stages.

7. International Cooperation

• South Africa provides constructive mutual legal assistance (MLA), but response times are slow.
• International cooperation in investigations is not a priority, despite the country’s regional financial hub status.
• Follow-up on requests and implementation of UNSCRs for TF need major improvement.

Main Recommendations

• Strengthen proactive identification and investigation of ML and TF networks and professional enablers.
• Improve BO transparency and beneficial ownership reporting.
• Enhance supervision and enforcement in high-risk sectors such as DPMS and CSPs.
• Implement risk-based supervision across all financial institutions and DNFBPs.
• Increase resources and staffing for LEAs and the NPA to support effective ML and TF investigations.
• Develop a coordinated and holistic AML/CFT policy informed by risk assessments.
• Improve international cooperation and timely follow-up on financial intelligence requests.
• Enhance understanding and classification of terrorist financing risks, including domestic threats.
• Strengthen compliance and reporting obligations for VASPs and other high-risk entities.

Conclusion

South Africa has a well-established legal framework for AML/CFT but faces challenges in implementation and enforcement. The system is effective in some areas, such as financial intelligence production and civil asset recovery, but falls short in addressing significant ML and TF risks, especially those linked to corruption, cross-border cash movement, and state capture. A more proactive and risk-based approach is needed to strengthen the country’s AML/CFT system and ensure alignment with its exposure and threat profile.