Warning over terror financing in South Africa

A recent risk assessment by the Financial Intelligence Centre (FIC) shows that although progress has been made to counter it, South Africa is still considered to be a hub for financial flows between terror suspects and groups.

This assessment shows that the country still has its ways to go if it hopes to be removed from the Financial Action Task Force’s (FATF’s) grey list.

“Despite South Africa not currently being regarded as a primary target for attack, the country is implicated in the financing of terrorist activity that takes place beyond its borders, which contradicts… international obligations and presents a high reputational risk,” said the FIC.

The FIC defines terror financing as the process of acquiring, transferring, storing, and/or using funds and assets to support individuals, organisations, operations, or activities associated with terrorism globally, through formal and informal economic channels.

According to the report, the activities of the Islamic State (IS) and its affiliates have “become one of the deadliest global terror groups.” The FIC says that South Africa’s current terror financing threat predominantly emanates from the IS, its affiliates, its supporters, and its ideology.

“South Africa is considered to be a hub or transit point for financial flows between terror suspects and terror groups in the region,” said the FIC.

“Terror finance generated in other countries in the region is transiting through South Africa from where it is redirected by IS sympathisers (nationals and foreign nationals) through informal and cash based channels back to originating countries,” it added.

The group said that South Africa faces numerous vulnerabilities that terrorists exploit for financing, including:

• Misuse of documentation and refugee/asylum systems;
• Heavy reliance on cash and informal banking;
• Potential misuse of remittances to high-risk jurisdictions;
• Risks for non-profit organizations handling international funds;
• Vulnerability of financial institutions to terrorist financing via alternative providers and crypto assets;
• Risks from the expanding fintech sector and crypto assets;
• Exploitation of crowdfunding for rapid fund transfers;
• Proceeds from crimes like robbery and kidnapping;
• and weaknesses in ownership transparency and due diligence, necessitating legislative reforms.

Additionally, a recent assessment highlighted five main terrorist financing threats and inherent vulnerabilities within the non-profit sector.

Peter Fabricius from the Institute for Security Studies (ISS) wrote that “it’s clear that countering terrorism financing remains a key deficiency for South Africa –  in 2021, FATF gave the country one of its lowest scores for countering terrorist financing.

South Africa’s shortcomings in its anti-money laundering and counter financing of terrorism are some of the key reasons for being placed on the FATF grey list in February 2023.

“Damage to law enforcement agencies inflicted by state capture has hampered South Africa’s ability to show progress,” said Fabricius.

“South Africa’s struggle to get off the grey list could partly be attributed to the government’s ideological resistance to acting against terrorism on its own soil – which some officials see as a Western obsession not justified by any real threat,” said Fabricius

However, since the grey listing, various government entities have been actively engaged in addressing these woes, ticking off numerous boxes required to get the country off.

These include reforms within the police, the Hawks, National Prosecuting Authority, Special Investigating Unit, State Security Agency, Reserve Bank, Financial Sector Conduct Authority, and SARS.

Last year, President Cyril Ramaphosa signed the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act into law.

National Treasury has described this as a crucial step to strengthening the fight against corruption, fraud and terrorism.

However, the publication of the South African National Terrorism Financing Risk Assessment by the FIC has shown that more needs to be done to get off the grey list by 2025.

After a recent assessment, the FATF decided that South Africa will remain on the grey list (not solely linked to terror financing risks).

Chief economist at the Efficient group, Dawie Roodt, explained that much of this is to do with the country’s perception of being a hub for terror financing, as well as views that it does not act efficiently enough against financial irregularities.

National Treasury said that whilst South Africa is on track to address all the outstanding Action Items to exit grey listing, it remains a tough challenge to address all 14 of the remaining Action Items (originally there were 22) by February 2025 to exit grey listing by June 2025.

Many of the 14 outstanding items are due in the last two reporting cycles because South Africa has to demonstrate that the improvements made are sustained over successive reporting periods.

National Treasury “notes that whilst South Africa is on track to address all the outstanding Action Items, it remains a tough challenge to address all 14 of the remaining Action Items by February 2025.”

“All relevant agencies and authorities will need to continue to demonstrate significant improvements, and also that such improvements are being sustained and are effective,” it added.

The FATF said that South Africa needs to continue to work on implementing its action plan approved by the financial watchdog to address its remaining strategic deficiencies and sustain its implementations.

FATF highlights some of the key things that need to be addressed, including:

• Increase outbound requests for effective money laundering and terrorist financing investigations and asset confiscations;
• Ensure supervisors enforce proportional sanctions for non-compliance;
• Provide timely access to accurate beneficial ownership information and sanction breaches;
• Increase investigations and prosecutions of money laundering and terrorist financing;
• Improve identification, seizure, and confiscation of proceeds from various crimes;
• Implement targeted financial sanctions and effectively designate domestic individuals and entities.

Read: The big hurdle South Africa must jump to get off the grey list