Is South Africa’s anti-money laundering and counter terrorism financing regime effective?

May 1st, 2018
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By Nkateko Nkhwashu

The Financial Action Task Force’s (FATF) International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (FATF Recommendations) (www.fatf-gafi.org, accessed 9-4-2018) have been constantly evolving to keep up with anti-money laundering and counter terrorism financing (AML/CFT) threats, trends and typologies. This evolutionary process has also taken place with respect to how it carries out its mutual evaluation exercises through its various methodologies. Of much relevance for present purposes is the 2013 FATF Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems which, in part, introduced or sought to encourage member jurisdictions to try and ascertain the ‘effectiveness’ of their AML/CFT regimes. Key to note is that it also defines the concept of ‘effectiveness’ within the context of AML/CFT. This has led to debates and discussions on how ‘effectiveness’ is or can be determined in practice by FATF’s appointed assessor. These debates have been interesting in that even now with the current round of mutual evaluations the same challenges still manifest themselves.

The developments taking place at the FATF level have a direct impact on a global level. Thus, even the debates around ‘effectiveness’ are also carried forth on a domestic level. South Africa (SA), for instance, has recently amended the Financial Intelligence Centre Act 38 of 2001 (FICA) in order to take into account some of the new and mandatory requirements of the revised 2012 FATF Recommendations. This is sought to be achieved by the recently promulgated Financial Intelligence Centre Amendment Act 1 of 2017 (FIC Amendment Act). The Amendment Act has been a conversation piece for quite some time during its promulgation stages and, as a result, it has also been a subject of various articles and scholarly writings.

What has emerged from some of these articles is that there is clearly some understanding, as well as huge misunderstanding as to what the new provisions of the FIC Amendment Act represent or entail, especially when attempts are made to contextualise it within the ‘effectiveness’ discourse. For example, there are those who understand that the amendments ‘comply with the global standards set by [FATF]’ and this ‘aligns South African legislative AML framework with [that of] FATF’ (see W Jansen van Rensburg ‘Anti-money laundering is now focused on effectiveness: Does your system work?’ www.cliffedekkerhofmeyr.com, accessed 9-4-2018).

Some of these articles simply list all the new provisions of the FIC Amendment Act, while regarding the same as representing an effective AML/CFT regime. More often than not, this is being done without first giving a definition of the ‘effectiveness’ concept or what it entails or who determines it as such. As a result of the noted misunderstanding of the ‘effectiveness’ concept, particularly within the context of the FIC Amendment Act (as evidenced by certain published articles), the main objective of this article is to try to unpack it within the South African context. Prior to this, however, it is important to take note of the fact that the effectiveness of SA’s regime is yet to be determined since the new requirements have recently been incorporated into law (FIC Amendment Act). Presumably, such a determination is going to be made in 2019 during the country’ second mutual evaluation exercise. Relevant to this, I submit that it is doubtful whether SA is going to score well during this process, as the new provisions have only recently been brought into effect and have thus not yet been tested practically to check if the new provisions yield the desired outcomes.

The question then remains is what is ‘effectiveness’ or what does it entail?

Effectiveness defined

Prior to defining what an effective AML/CFT system or regime entails, it is prudent to take a step back and look at some of the developments within FATF, which preceded the 2013 methodology (which in part, looks at assessing effectiveness). Before the 2013 methodology came into being, the FATF’s mutual evaluation exercises and methodologies were largely pre-occupied in assessing countries’ technical compliance with its standards. In short, technical compliance is largely pre-occupied in ensuring that the ‘fundamental building blocks’ are in place, for example, legal, institutional frameworks and powers and procedures of competent authorities. It was more like checking whether the FATF requirements were in place or not, without probing to see whether the requirements work in practice or not. Arguably, it can be said that the previous methodology was more like a ‘tick-box’ exercise.

In February 2013 the FATF adopted a complementary approach regarding its new methodology. The new methodology assessed both technical compliance and the effectiveness of an AML/CFT system. It succinctly defined ‘effectiveness’ as ‘[t]he extent to which the defined outcomes are achieved’, thus it is outcomes-based as ‘[i]t does not involve checking whether specific requirements are met, or that all elements of a given recommendation are in place’. ‘Instead, it requires a judgment as to whether, or to what extent defined outcomes are being achieved, i.e. whether the key objectives of an AML/CFT system, in line with the FATF standards, are being effectively met in practice.’

On proper interpretation of the 2013 methodology, especially as it relates to how the concept of ‘effectiveness’ is defined, one can justifiably come to a conclusion that, although very informative and relevant within the AML/CFT space, some of the recent articles barely addressed the concept of ‘effectiveness’ as they fail to take into account or check whether ‘desired outcomes’ are met. What is usually addressed in actual fact is the ‘technical compliance-bit’ of the 2013 methodology as these articles merely lists all the new features of the FIC Amendment Act. Just to reiterate, the ‘effectiveness’ of SA’s financial regulatory framework is yet to be tested practically. This will take place in 2019 when SA undergoes it mutual evaluation exercise.

As already referred to in this article, assessing effectiveness is not a simple task to undertake practically. It is even harder to do under the mandatory risk based regulatory framework, which was ushered in by the revised 2012 FATF Recommendations. This new framework entailed a demonstrable assessment, understanding and documentation of AML/CFT risks faced by a particular country or individual financial institution. Even FATF trained assessors have found it very difficult. Risk-based decisions, herein, have to be documented and substantiated by whoever is being assessed at a particular point in time.

As already stated even scholars and academia have written on this concept. Some of them (scholars) interrogate this concept as against some of the work, which has already been undertaken by FATF. Professor Louis de Koker, for instance, argues that the reason it is sometimes difficult to unpack this concept within the 2013 methodology is because there are divergent views on what constitutes ‘defined outcomes’ of an AML/CFT system (Louis de Koker South African Money Laundering and Terrorist Financing Law (Durban: LexisNexis 2016). Some of the pertinent questions asked in this regard is whether an effective system is one which is pre-occupied with ensuring that ‘dirty-money’ does not enter the formal financial system where it can be monitored and as a result those responsible are punished, or is it one which allows such to enter the system and thus can be easily detected and acted on. Regardless of which argument is carried, the debate is likely to continue for quite some time, as there are lots of factors to consider when trying to ascertain effectiveness. Lastly, an effective system or regime should be viewed in totality as opposed to separate individual components, for example, the mere filing of suspicious transaction reports, etcetera. In an effective system or regime, suspicious transaction reports filed should translate into results, for example, prosecutions, forfeitures and convictions.

Conclusion

In a nutshell, an effective system or regime means more than having the right tools or requirements in place. It goes further, as the adequacy of the implementation of those tools have to be assessed. Furthermore, the extent to which defined outcomes are achieved is central to a robust AML/CFT system. Finally, it is all good and well to have all the technicalities in place, but as long as they are not achieving any practical outcomes (results), then such a system cannot be said to be effective as yet. The developments within the SA’s AML/CFT regime is a step in the right direction, but more still needs to be done before we can start claiming to have an effective system in place. The promulgation of the FIC Amendment Act, as well as the now initiated processes on the amendments to the schedules of the Act are but some of the steps, which are going to take us where we need to be. Lastly, we need also to be mindful of the fact that all the gaps, which were noted in the 2009 mutual evaluation exercise, have not all been addressed by the current amendments to the Act. There is still much ground to cover in this regard.

Nkateko Nkhwashu LLB (University of Venda) LLM (UJ) Cert in Legislative Drafting (UP) Cert in Compliance Management (UJ) Cert in Money Laundering Controls (UJ) Cert in Policy Development (Pro Active College) is an advocate at Empowerment Dynamics Consulting in Centurion.

Mr Nkhwashu writes in his personal capacity.

 This article was first published in De Rebus in 2018 (May) DR 26.

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