Since its new beginning with its first democratically-elected government in 1994, South Africa has emerged a growing economic force. From 2002 to 2012, the nation’s economy grew by roughly 3.6 percent annually, with per capita income seeing 2.2 percent annual growth. South Africa’s financial sector is well-developed, having 30 banks with nearly 4,000 branches, two mutual banks, and several branches of foreign banks. Traditionally dependent upon exports of commodities and natural resources, the country is increasingly seeking to develop new business opportunities that are less vulnerable to global market price fluctuations.
As a member in good standing of both the Financial Action Task Force (FATF) and of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), the Republic of South Africa takes it financial regulatory responsibilities seriously. Over the past two years, the South African Reserve Bank (SARB) has imposed fines totaling over $10 million to six different major banks. The financial institutions in question were found to be non-compliant with regulations governing know your customer (KYC) requirements, proper record-keeping, and reporting suspicious and unusual transactions.
While it is not believed that any of the banks that were fined deliberately defied South African regulators, the disciplinary actions taken demonstrate the importance of KYC compliance for any business providing financial services in the country.
South Africa’s Financial Regulatory Structure
As the country’s central bank, the SARB also has the role of managing the national money and banking system, which includes bank regulation and supervision. It achieves this by monitoring the activities of financial institutions operating in South Africa to ensure that they adhere to applicable laws and regulations, including the Banks Act and the Mutual Banks Act.
South Africa’s financial intelligence unit, the Financial Intelligence Centre (FIC), was established under the Financial Intelligence Centre Act in February 2002 and began receiving reports on suspicious and unusual transactions in February 2003. Like other financial intelligence units in other jurisdictions, the FIC is charged with establishing and maintaining an effective policy and compliance framework as well as providing high-quality, timely financial intelligence to help South African authorities fight against crime, money laundering, and terrorist financing.
Compliance Measures for South African Financial Services
Foreign banks doing business in South Africa are accountable for regulatory obligations under the existing regime. Let’s look at the requirements for anti-money laundering (AML), countering the financing of terrorism (CFT), and KYC.
When a financial institution from outside South Africa seeks to open a local branch in the country, it must first register with the FIC within 90 days of opening for business. The business must also appoint a money laundering reporting officer (MLRO) who will ensure compliance with the FICA and with internal AML/CFT policies and procedures by branch staff and the branch itself. All transactions and payments must be monitored, and any cash transactions above a pre-determined threshold or suspicious transactions must be reported to the FIC within two days.
Like many other FATF member countries, customer due diligence checking is required as part of the standard KYC process. Also, enhanced due diligence procedures are mandatory in South Africa for both foreign and domestic politically exposed persons (PEPs), which describes anyone who has been entrusted with a prominent public function or anyone who is closely related to such an individual.
The list of businesses covered by AML/CFT and KYC regulations in South Africa is quite extensive. In addition to financial services providers such as banks and credit institutions and money service businesses like foreign exchanges and travelers check issuers, the list also includes real estate agents, gambling institutions, attorneys, used car dealers, and gold dealers.
The Cost of Non-compliance
Failing to follow the strict rules set in place have serious repercussions. As evidenced by the heavy fines mentioned in the introduction of this article, South Africa means business. Financial penalties can be very stiff, ranging anywhere from $700,000 to $7 million, and individuals found in violation could face prison time between five and 15 years.
In order to remain compliant, financial institutions doing business in South Africa need the right tools to stay on top of their obligations. Manual verification of customers and transactions is both time consuming and extremely costly to business and are not always reliable due to the potential for human error. Financial institutions have access to modern technology and consumer data from both traditional and alternative sources. These technological advances are helping financial service providers and institutions meet rigorous regulatory requirements without negatively impacting the customer experience.
“There are tremendous opportunities in South Africa as the country’s central bank has begun granting more licenses to foreign banks,” said Jon Jones, President of Trulioo. “Financial institutions can streamline their due diligence process with online identity verification, and improve operational efficiency and customer onboarding.”
The regulatory environment is complex and evolving. Financial service providers are devoting more resources to governance, risk and compliance issues. How can businesses protect their bottom line in this changing legislative environment?