South Africa’s implementation of the Financial Action Task Force’s Recommendations relating to targeted financial sanctions is being condemned for moving too slow. Larger institutions are taking sanctions compliance into their own hands, but smaller firms remain vulnerable to financial crime risks.

In its latest Mutual Evaluation Report of South Africa, published late in 2021, the Financial Action Task Force (FATF) raises concerns over the country’s defenses against money laundering and terrorist financing. The FATF warns that regulatory failings leave smaller institutions particularly vulnerable to the consequences of financial crime. Failure to comply with FATF Recommendations exposes firms and other businesses to financial risk, regulatory penalties and reputational damage.

The FATF assesses that overall, South Africa had a ‘low level of effectiveness’ for preventing terrorism financing and a ‘moderate level of effectiveness’ for preventing proliferation of weapons of mass destruction. A major concern is the FATF’s finding that South Africa is ‘non-compliant’ with its Recommendation 6 around implementing targeted financial sanctions regimes to comply with UN Security Council resolutions relating to the prevention of terrorism and terrorist financing. The non-compliant rating has only been given to nine of the 119 countries assessed by the FATF.

The FATF believes that most of the failings in South Africa’s targeted sanctions regime are due to ‘inadequacies in the regulatory framework. It calls out South Africa’s delays in translating UN Security Council Resolutions into national law via the FIC Act and the Protection of Constitutional Democracy Against Terrorist and Related Activities Act. No resolutions adopted by the UN Security Council since July 2017 have been implemented in South Africa and no assets had been frozen at the time the FATF Evaluation was carried out in 2021. Proposed changes to the FIC Act are currently under consultation as regulators face pressure to tighten South Africa’s compliance regime before the FATF follows up on in early 2023.

The FATF notes that larger financial institutions are taking matters into their own hands and implementing robust sanctions measures to work around regulatory delays. Larger institutions are exposed to a higher level of money laundering and terrorist financing risk, but they also have the benefit of well-established AML/CFT systems to leverage in their sanctions strategy. Smaller financial institutions in South Africa need more support around sanctions screening, and typically, as the FATF notes, have ‘limited understanding of their obligations around sanctions, mostly because of a lack of communication’. The Financial Intelligence Centre (FIC) has issued guidance on the implementation of the sanctions regime in South Africa but smaller financial institutions and other non-financial businesses are still behind in establishing a sanctions program designed to reduce their exposure to money laundering and terrorism financing risks.

Sanctions compliance is a complex and continuously evolving area because sanctions lists are issued by multiple global authorities and requirements frequently change to reflect today’s volatile geopolitical landscape. Organizations with an effective sanctions strategy proactively screen existing and new customers and transactions against multiple sanctions lists at the front-end of an interaction and across the relationship lifecycle. This process can be time consuming and introduce friction into the customer experience. The good news is there are affordable tech-based solutions to help automate sanctions screening and streamline compliance workflows.

Best practices in sanctions screening are built around several key elements:

  • A risk-based approach: A risked-based approach to screening identifies high-risk customers and transactions and escalates due diligence accordingly. This approach allows for more efficient and effective screening that does not interrupt the experience of legitimate customers.
  • High quality data: Sanctions lists are regularly updated so reliance on static data brings considerable risk. Comprehensive databases, such as LexisNexis® WorldCompliance Data™, connect businesses to near real time coverage of sanctions lists issued by the main global sanctioning bodies and curated by sanctions compliance experts.
  • Innovative technology: Customer screening technology solutions are proving effective in helping institutions and other organizations minimize risk by rapidly screening large volumes of transactions. Scalable solutions such as LexisNexis® Bridger Insight® XG leverage best-in-class matching technology to help greatly reduce false positive alert levels and the need for manual work.
  • Screening beyond sanctioned entities and individuals: Risk is not limited to individuals and businesses that appear on a sanctions list; anyone that has a relationship with sanctioned individuals and entities could also present a risk. Effective risk management also includes screening direct third-parties, family members and associates, the beneficial owners of sanctioned entities and the extended supply chain.
  • Ongoing monitoring: Proactively screening customers and transactions on a regular basis to assess risk in case circumstances have changed is also an important part of an effective compliance strategy.