South African banks face growing risks as anti-money laundering deadline approaches

Banks in South Africa are likely to Face difficulties, as well as higher costs, in doing business across borders and attracting foreign investment if the country does not meet international anti-money laundering criteria.

The South African government is drafting amendment bills intended to prove to global financial bodies that it can tackle money laundering, after the Financial Action Task Force, an intergovernmental body tasked with combating crime financial sector, flagged the country’s money laundering and terrorism risk failures and placed it in a one-year observation period ending in October.

The South Africa Reserve Bank, or SARB, for its part, has asked banks to review their operations and is holding monthly sessions to help them fix the shortcomings, a central bank spokesman said. The was a “high” probability that South Africa would be included in the FATF so-called gray list of countries subject to heightened scrutiny, the regulator said in a May financial stability report.

The FATF declined to comment on South Africa’s case because it is pending.

Higher fees for banks

The potential inclusion of South Africa in the gray list would lead to increased transaction, administrative and funding costs for the country’s banks, while restrictions on cross-border transactions could impact imports and exports and ultimately gross domestic product, a said the SARB in the May report.

A spokesman for Standard Bank Group Ltd., the country’s biggest lender, said South African businesses, including banks such as Standard Bank, “would generally become a ‘harder sell’ to potential international customers. , investors and correspondent banks”.

“We would face a lot more questions about whether it would be reputational and legal to trade with us, and some investors would be likely to walk away,” he said.

When a country is added to the FATF gray list, capital inflows decrease by an average of 7.6% and foreign direct investment by 3.0%, according to a IMF 2021 report.

Such a change”would seriously damage the reputation of the South African financial system, hamper investment and international financial transactions in the country” and could lead to further downgrading of its credit rating, a spokesperson for Nedbank Group Ltd said.

Banks’ ability to transact cross-border would be limited, potentially leading to higher compliance and due diligence costs for Nedbank customers, the spokesperson said.

South African banks are already bearing high costs. Standard Bank’s cost-to-income ratio was 61.69% at the end of 2021, the second highest among major banks in the Middle East and Africa. Nedbank’s ratio was the third highest and Absa Group Ltd’s ratio. was the fourth highest.

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“For a business in a greylisted country, everything slows down, becomes more expensive and more uncertain,” the Standard Bank spokesperson said, highlighting how colleagues based in some greylisted countries have endured hardship. considerable.

“They face a lot more red tape – higher compliance costs, more audit requirements and longer delays – in what should be simple matters like obtaining letters of credit, clearing foreign payments and even just building relationships with potential foreign input suppliers and buyers of their products.”

The rand would fall sharply and growth would “stop”, in turn driving up inflation, unemployment and poverty, the spokesperson said.

South Africa loses up to $25 billion in illicit financial flows a year, according to reports citing data from the state agency Financial Intelligence Center, which declined to confirm whether it had made the estimate.

Banks react

Standard Bank, FirstRand Ltd.AbsaNedbank and Capitec Bank Holdings Ltd. holds 89% of deposits in the sector. They are vulnerable to inadvertent financial crime due to their large number of customers of unknown nationality, their links to other countries and their “very high” exposure to cash deposits, with criminals using ATMs to deposit cash anonymously, the SARB said in a July banking industry risk. evaluation report. Standard Bank, FirstRand, Absa and Nedbank each have between 4,400 and 8,700 ATMs, according to data from S&P Global Market Intelligence.

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Standard Bank has undertaken a company-wide risk assessment and strengthened internal controls where deemed necessary, and is satisfied that it meets FATF standards, the spokesman said. bank. It is updating its financial crime detection tools to take advantage of artificial intelligence and has hired additional analysts over the past two years to identify suspicious activity. The spokesperson declined to quantify the cost of these measures.

Absa said Market Intelligence that it already has complies with international standards and regulations in the fight against financial crime, as required for access to global financial markets.

Nedbank’s risk management and compliance program meets international standards, its spokesperson said.

“This is a very complex, high-volume environment, and while we, and other banks, may occasionally make administrative errors that require correction and attract regulatory scrutiny and therefore risk of sanctions, we are confident that our risk management and controls to combat money laundering and terrorist financing are robust,” the spokesperson said.

FirstRand and Capitec did not respond to requests for comment.

“South Africa has an existing infrastructure around anti-money laundering and customer beneficial ownership reporting, but could banks improve this capacity? Yes, they could,” said said Daniel Masvosvere, senior equity analyst at Ashburton Investments in Cape Town, in an interview with Market Insights. A significant increase in banks operating expenses for their compliance departments are unlikely, however, as investments are underway there, he said.

Banks are not the only players in the chain; the regulatory and legislative framework also needs to be stronger, Masvosvere said.

Foreign banks

Foreign lenders such as Citigroup Inc., HSBC Holdings PLC and Standard Chartered PLC operate in South Africa, offering high-risk products such as trade finance.

“Banks can seek to reduce the risk associated with these products by implementing rigorous controls and customer due diligence processes, ensuring that effective ongoing due diligence and transaction monitoring are carried out and that they clearly understand their customers, the expected transactional activity as well as the nature of the activity and the purpose of the commercial relationship”, added the SARB spokesperson.

Foreign banks are unlikely to leave South Africa immediately if the country joins the FATF gray list, said Thato Mashigo, portfolio manager at Sanlam Private Wealth of Johannesburg.

“Is the government ratifying the required policy changes, are regulators moving quickly to enforce violations, and are banks improving their internal policies? If these questions are answered positively, then foreign banks will stay,” did he declare.

The FATF removed Mauritius from its gray list last October, 20 months after the island nation was added, after implementing various reforms requested by the agency.

“If South Africa is able to react so quickly, then the gray list will be temporary and therefore not too onerous financially,” Mashigo said.

South Africa is non-compliant with five FATF Recommendations and fully compliant with only threeaccording to UK financial crime technology platform and consultancy Themis.