South African banks get prepared for AML changes as Zuma signs new law

Published 11-May-2017 by Emmanuel Olaoye

Banks in South Africa should start to update their compliance programmes to take account of the changes to South Africa's money laundering law now that the president has signed them into law, a banking consultant said.

The Financial Intelligence Centre Amendment Act 2017 requires banks to establish the customer's identity through records, identify the person who has ultimate control of the funds in an account and understand the nature of a client's business relationships.

The bill suffered several delays before President Jacob Zuma signed it into law last week. It was at the centre of a controversy between the wealthy Gupta family (who are close allies of Zuma) on the one hand and advocates for tougher rules against politically exposed persons on the other.

In April 2016, four of South Africa's biggest banks closed the family's accounts without giving a reason. FirstRand Bank later disclosed it had taken the action because it was concerned about money laundering.

Identifying prominent public officials

One of the biggest challenges for compliance officers will be the identification of "foreign prominent public officials" and "domestic prominent influential persons" (PIPs), said Jan Augustyn, a Johannesburg-based anti-money laundering consultant.

For instance, if a bank is dealing with a prospective client that is a foreign prominent public official or a domestic prominent influential person, the law requires it to get approval from senior management before doing business with the client, and to take reasonable steps to establish the source of the client's funds. It must also monitor the business relationship with the client on a continuous basis.

"You're going to have to do greater due diligence when it comes to those persons. The challenge is to know whether a person is a prominent foreign public official or a domestic influential person," Augustyn said.

See: Thomson Reuters World-Check covers South African PIPs.

Risk-based approach

Another challenge will be following a risk-based approach when evaluating the suitability of new clients. A risk-based approach means a financial institution should identify its money laundering risks and then apply that knowledge when designing its compliance processes. If it identifies major risks in connection with a client, it will be expected to devise measures to mitigate them.

"We're going from a rules-based approach to a hybrid approach of risk and rules. What is required is a better understanding of the risk relating to your products and services and where the actual risk of money laundering lies," Augustyn said.

Implementation challenges for smaller institutions

Larger institutions will be able to use their vast resources to integrate the complex new FICA regulations with their compliance programmes, but smaller firms may face additional challenges when attempting to implement the changes.

"It will be more difficult for the smaller accountable institutions. They might have more difficulty understanding what a risk-based approach means and how to apply it … and how to write it up in a compliance programme," Augustyn said.

The financial industry is waiting for the Finance Ministry to issue an effective date, and the regulations that will support the law.

About the author: Emmanuel Olaoye is a former financial regulation correspondent for Thomson Reuters Regulatory Intelligence in Washington. D.C. He is now a contributing editor with an interest in African regulatory issues.

Thomson Reuters World-Check: Go beyond Know Your Customer – use World-Check data to screen for heightened risk individuals and entities globally – including South African PIPs – and to uncover hidden risks in business relationships and human networks.

Thomson Reuters Regulatory Intelligence: Anticipate and navigate global regulatory compliance confidently with the most comprehensive and trusted intelligence available.

Thomson Reuters Regulatory Change Management: Cutting edge technology providing enhanced mapping capabilities and complete taxonomy support from Thomson Reuters Regulatory Intelligence. Ensure relevant information is being sent to the right stakeholders to manage and help minimize compliance risk. 

Thomson Reuters SA KYC Service: Simplifies the collection and distribution of KYC information for juristic entities. Large corporations, hedge funds, asset managers, and others can use the South African KYC Service as an efficient, centralised solution to distribute KYC documents and information to multiple financial institutions through a secure and free-of-charge web-based portal. The foundation of the South African KYC Service is a policy that has been standardised across all participating financial institutions.