n June 2021, the Financial Action Task Force (FATF) Plenary adopted the Mutual Evaluation Report (MER) for South Africa, marking a significant moment in the country’s ongoing efforts to enhance its anti-money laundering (AML) and counter-terrorist financing (CFT) frameworks. South Africa was placed under enhanced follow-up due to its technical compliance results, receiving non-compliant (NC) ratings for five FATF Recommendations and partially compliant (PC) ratings for fifteen. The latest developments, including the second enhanced follow-up report (FUR) adopted in October 2023, reflect South Africa’s commitment to addressing these deficiencies.

Understanding the FATF Framework

The FATF is an intergovernmental organization that sets international standards aimed at preventing money laundering and terrorist financing. It evaluates countries based on their compliance with a set of recommendations, which are designed to combat these financial crimes effectively. The FATF’s recommendations cover various aspects, including risk assessment, legal frameworks, and the effectiveness of measures implemented by countries. For more information, visit the FATF official website.

The Importance of the MER

The MER serves as a comprehensive assessment of a country’s AML/CFT systems, evaluating both technical compliance and effectiveness. For South Africa, the MER highlighted several deficiencies that needed to be addressed to enhance its compliance status. The goal is to ensure that by the end of three years from the adoption of the MER, countries have rectified most, if not all, technical compliance deficiencies.

South Africa’s Ratings and Follow-Up Reports

As of the latest FUR in 2024, South Africa has made notable progress in addressing the deficiencies identified in the MER. The ratings for Recommendations 2, 6, and 15 have improved from PC to Largely Compliant (LC). However, the country still faces challenges in achieving compliance for Recommendations 8 and 32, which remain rated as partially compliant.

Progress in Technical Compliance

Recommendation 2: National AML/CFT Policies

The assessment of South Africa’s progress under Recommendation 2 revealed a mixed picture. While the country has developed national AML/CFT policies informed by identified risks, there are still areas requiring improvement. The Inter-Department Committee (IDC) established in 2018 has played a crucial role in coordinating AML/CFT policies among various stakeholders, including the Financial Intelligence Centre (FIC) and law enforcement agencies (LEAs).

Key Developments

1. National Strategy (2023-2026): Informed by the National Risk Assessment (NRA), South Africa has developed a national strategy to set priorities for competent authorities. This strategy aims to ensure that risks identified are continuously assessed and used to inform policy and strategy. More details can be found in the National Risk Assessment report.
2. Coordination Mechanisms: The IDC has expanded its composition to include various stakeholders, ensuring better cooperation and coordination among relevant authorities. This has enhanced the exchange of information at the operational level.
3. Counter-Proliferation Financing: The establishment of the Counter-Proliferation Functioning Committee (CPFC) in May 2023 has improved coordination on counter-proliferation financing activities. However, the involvement of all financial sector supervisory bodies remains limited.

Recommendation 6: Targeted Financial Sanctions

Under Recommendation 6, South Africa has made significant strides in establishing a domestic process for identifying targets for financial sanctions. The revision of the Targeted Financial Sanctions Operational Framework (TFS-OF) has clarified roles and procedures for designating individuals and entities under various UN Security Council Resolutions (UNSCRs).

Key Developments

1. TFS-OF Enhancements: The revised TFS-OF now explicitly references UNSCR 1988 and outlines the mechanisms for identifying designation targets. The Counter Terrorism Functional Committee (CTFC) has been designated as the authority responsible for coordinating assessment and decision-making processes.
2. Legal Framework: The Financial Intelligence Centre Act (FIC Act) has been amended to ensure that freezing orders can be issued without delay, aligning with the requirements of UNSCRs. This has improved South Africa’s ability to respond swiftly to threats.
3. Reporting Obligations: The FIC has issued guidance to financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) regarding their obligations under the TFS framework, ensuring compliance with international standards.

Recommendation 8: Non-Profit Organizations (NPOs)

Recommendation 8 focuses on the risks associated with non-profit organizations, which can be exploited for terrorist financing. South Africa’s progress in this area has been gradual, with the issuance of a TF Risk Assessment for the NPO sector in April 2024.

Key Developments

1. Identification of High-Risk NPOs: The NPO-TF Risk Assessment identified five types of NPOs at risk of terrorist financing abuse. However, a significant portion of NPOs remains unregistered, complicating efforts to monitor and mitigate risks.
2. Outreach and Training: The Department of Social Development (DSD) has initiated outreach programs to educate the donor community about TF risks. Engagement with NPOs is ongoing, with plans to establish a national NPO hub to coordinate efforts.
3. Regulatory Framework: Although the NPO Act has been amended to impose registration and reporting obligations on certain NPOs, many remain outside this framework, limiting the effectiveness of monitoring efforts. For further insights, refer to the South African NPO Act.

Recommendation 15: New Technologies

The FATF’s Recommendation 15 addresses the risks posed by new technologies, including virtual assets (VAs) and virtual asset service providers (VASPs). South Africa has recognized the importance of regulating this sector and has made progress in integrating VAs into its AML/CFT framework.

Key Developments

1. Regulatory Clarity: The FIC Act has been amended to include VAs and VASPs as accountable institutions, subjecting them to the same AML/CFT obligations as traditional financial institutions.
2. Risk Assessments: South Africa has conducted risk assessments related to VAs and VASPs, identifying vulnerabilities and establishing supervisory measures to address these risks.
3. Public Compliance Communications: The FIC has issued guidance to CASPs, outlining their compliance obligations and risk indicators to enhance their understanding of the AML/CFT landscape. More information can be found in the FIC’s Public Compliance Communications.

Recommendation 32: Cash Couriers

Recommendation 32 focuses on the measures in place to combat the illicit movement of cash across borders. South Africa has made some progress in enhancing its systems for monitoring cash couriers, but significant gaps remain.

Key Developments

1. Electronic Declaration System: South Africa has enhanced its electronic traveler declaration system to capture information about cash declared or seized at ports of entry. This system is expected to be fully operational by August 2024.
2. Inter-Agency Coordination: The establishment of inter-agency Port Management Committees has improved coordination among relevant authorities, leading to more effective monitoring and enforcement actions.
3. Regulatory Framework: Draft regulations are being developed to address the gaps in the framework concerning incoming bearer negotiable instruments (BNIs) payable in foreign currency. For updates, visit the South African Revenue Service (SARS).

Conclusion

Overall, South Africa has demonstrated a commitment to improving its AML/CFT framework, as evidenced by the progress made in addressing technical compliance deficiencies identified in its MER. While the country has achieved upgrades in several areas, challenges remain, particularly concerning the NPO sector and cash courier regulations. Continued efforts will be essential to ensure that South Africa meets international standards and effectively combats money laundering and terrorist financing.

Source: FATF –> Full report and more