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It is not only slack governance that is keeping South Africa on the greylist. South African credit providers are also jeopardising the country’s chances to get off the greylist due to their sluggish uptake of financial intelligence centre regulations that could also cause severe penalties.

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog that sets international standards. It greylisted South Africa because the country did not comply with its standards and measures to combat illicit financial flows, terrorist funding and potential threats to the integrity of the global financial system.

It is compulsory for companies that provide credit to register as ‘accountable institutions’. In this case, credit providers include estate agents, casinos and crypto companies must gear up to become accountable institutions under last year’s amendments to the Financial Intelligence Centre Act (FICA).

The amendments took effect on 19 December 2022 as part of efforts by National Treasury to amend five separate pieces of legislation.

Frank Knight, CEO of Debtsource, warns that based on levels of compliance and awareness of the requirement in the Trade Credit market, exceptionally few companies are doing so and this will be noted by the FATF to South Africa’s detriment.

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Potential repercussions include financial penalties

Beyond the immediate necessity for compliance, the stakes are high for accountable institutions. The potential repercussions include not only financial penalties but also reputational damage and a tarnished business environment. As the international community watches, South Africa’s ability to shed the greylisting tag hinges on the conscientious adoption of Financial Intelligence Centre (FIC) regulations by its credit providers, he says.

“There is a scale of administrative sanctions starting with a caution that increases to a reprimand, then a directive to take remedial action, then a restriction or suspension of certain specified business activities and finally a financial penalty of up to R50 million for any legal person.”

Knight says the FIC’s directive requires that all credit providers, irrespective of the type of credit they extend, must register with the FIC.

“Despite concerted efforts by industry players, such as Debtsource, to educate and advise clients, a significant portion of credit providers, including major international entities, seem to be in the dark about their regulatory obligations. The looming deadline of 1 December adds pressure on credit providers to swiftly comply with the regulations to avoid severe penalties.”

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FATF requirements for credit providers

According to Knight credit providers must adhere to these seven imperatives for credit providers, especially if they are involved in incidental credit, which refers to accounts that are not in itself a credit agreement, such as a municipal or doctor’s account. These imperatives include:

•        Registering with the FIC by 1 December

•        Drafting a comprehensive risk management and compliance plan

•        Completing Risk and Compliance Returns (RCR)

•        Reporting cash transactions exceeding the threshold

•        Ensuring employee training on awareness of sanctions and beneficial ownership of businesses

•        Modifying credit policies to align with FIC regulations

•        Amending credit application forms to capture beneficial ownership details.

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Criminals use unsuspecting reputable companies to launder money

Knight says what is at stake here is for example a group of criminals, flush with illicit cash from heists, that faces the challenge to legitimise the cash without triggering alarms.

“They primarily target unsuspecting but reputable companies to buy legitimate goods or services using their untraceable cash, effectively ‘laundering’ the money and rendering it seemingly legitimate.”

The absence of stringent reporting requirements for transactions with entities outside the financial sector facilitates this and creates a blind spot that allows criminal proceeds to seep into the legitimate economy undetected, Knight says.

The FATF’s directives aim to address vulnerabilities in the financial system by expanding reporting obligations. Strengthening the reporting net, particularly in sectors prone to such manipulation, becomes paramount in curbing the proliferation of illicit funds within the economy.

As the intricate dance between criminals and unwitting businesses evolves, the urgency to fortify the financial system against money laundering becomes apparent, he says.

“The clock is ticking, not only for all accountable institutions and regulatory bodies to anticipate and thwart the evolving strategies of those seeking to exploit the financial system for illicit gains.”

Will South Africa rise to the challenge, fortifying its defences and staying a step ahead of those who seek to exploit its economic infrastructure?

“The answer may well determine the nation’s success in emerging from the shadows of the greylist,” Knight warns.