How to reduce money laundering in 2020
The 2020 review of South Africa’s anti-money laundering standards could have wide repercussions for the way its banks conduct vetting procedures, including adverse media screening.
Banks are concerned about the results of the review given the country’s poor record on financial crime since the last such evaluation 10 years ago.
South Africa has strengthened its anti-money laundering (AML) regulations but is still losing between $10 billion and $25 billion a year in illicit financial flows.
This means bankers have to up their game in AML compliance and the technology that can help them get there.
Low investigation rate
Inter-governmental regulatory body the Financial Action Task Force (FATF) is currently reviewing South Africa’s compliance with AML rules and will report its findings in 2020.
The report will assess South Africa’s technical compliance with the FATF 40+9 recommendations – the international standards on money laundering – and, crucially, its effectiveness in implementing compliance measures.
The last time FATF assessed South Africa, in 2009, it found the country wanting in several areas. The task force said corruption was a problem and recommended the country review its systems for combating money laundering and terrorist financing (TF) annually. It also said South Africa should improve the way it keeps statistics.
The 2009 review noted the low rate of money laundering investigations and convictions recorded by South African police.
For the current evaluation, South Africa is reporting to the FATF on its progress in addressing these deficiencies, including through its changes to the 2003 Financial Intelligence Centre Act (FICA) made in 2017.
Risk-based approach
When FICA came into force in 2003, it brought South Africa in line with similar financial crime legislation in other countries.
It created a legal framework for the effective identification and verification of client identities; record keeping; reporting processes; staff training; and other compliance requirements.
However, the act needed updating, and in 2017 FICAA moved South Africa to a risk-based, as opposed to rules-based, approach – with important implications on the way banks conduct customer due diligence on transactions.
FICAA obliges institutions to gather enough information to mitigate the potential risks they could impose on the business. They now need a documented onboarding process as part of a risk management and compliance programme.
FICA states that banks must know their customers and may not conduct business with anonymous people or organisations.
Institutions therefore need to establish and verify a client’s identity and complete due diligence to ensure they know their client.
Prescriptive methods, such as asking for ID or a utility bill, are no longer necessary. Instead, institutions can choose how to verify identities. But their approach must assess money laundering and terrorist financing risks for every transaction and customer.
Adverse media screening
Draft guidance on FICAA from the Financial Intelligence Centre (FIC) says appraising ML and TF client risks could include assessing characteristics such as information about income sources, the nature of business activity, products and services offered, and whether the client operates solely within the country.
Another crucial characteristic is whether there is any adverse information about the client available from public or commercial sources. This guidance therefore requires institutions to implement a programme for discovering any adverse information.
Adverse media screening is incredibly valuable for financial institutions and regulated corporations, but it is getting harder.
With 1,518,207,412 websites in the world (as of January 2019), not only is finding the data that matters more challenging, but the complexity of that data is growing.
Investigators and analysts need ways to not only locate relevant data quickly, but structure, log and track it.
Banks, too, need to use the latest technology to better track adverse media in an automated and structured way.
Relying on manual Google searches is simply not a practical solution, and they should look to use platforms that use AI or machine learning to locate relevant data as well as give them an audit trail to satisfy the regulator.
Best-of-breed platforms can also be fine-tuned to match a bank’s risk policy.
Can the banks fight back?
Financial institutions across the world must balance AML regulations with their commercial need to attract and onboard customers in the smoothest, fastest and most attractive way possible.
However, banks in South Africa also face some more specific challenges.
For example, the race is on to ‘bank the unbanked’ – especially people with no fixed abode – via mobile banking apps in South Africa.
But onboarding customers who have no address raises obvious challenges in terms of meeting AML regulations such as KYC and ID verification.
The fact that Hawala banking – an informal system of value transfer that relies on a network of brokers – is popular in Africa also presents many challenges in tracing money and identifying clients.
But South African banks are not waiting for regulatory action to be imposed upon them. They are taking a proactive stance to improving defences against financial crime in their country.
In particular, banks have joined with public-private partners to create the South African Banking Risk Information Centre (Sabric) – ‘Africa’s trusted financial crime information centre’.
Sabric’s mission is to contribute to the reduction of financial crime through shared responsibility with clients and partners and to make it a collective priority.
Its website provides warnings and information to help people avoid a huge range of financial crimes.
With such a positive attitude, banking in South Africa should continue to become less risky and more compliant, provided investment is made into better technology and compliance processes.
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