Key bill and SA banks’ global repute on hold in Zuma in-tray

SOUTH Africa is at risk of being put on a watch list by the Financial Action Task Force if the president continues to delay signing the Financial Intelligence Centre Amendment Bill into law.

A country’s failure to implement the reforms proposed by the task force could have a significant impact on its position in the global economy, making international trade more expensive due to the stricter application of rules against money laundering and terrorism financing. This can have the effect of making it impossible to do business with the country at all.

Lawson Naidoo, the executive secretary of the Council for the Advancement of the South African Constitution, said: “We’ll be monitored by international banks and there’s a real danger that South African banks will lose their correspondence banking status with banks in other parts of the world, particularly where they have a stringent regulatory framework.”

The amended legislation includes guidance on measures relating to risk management, with a special focus on enhanced due diligence when institutions deal with politically exposed persons.

The council filed an application in the Constitutional Court this month asking it to rule that the president either has to sign the bill into law or, “if he has reservations about its constitutionality, refer it back to the National Assembly outlining those concerns”, said Naidoo.

The task force, an intergovernmental body established to prevent the international movement of money involved in criminality of financing terrorism, requires member countries to maintain a satisfactory level of compliance with its recommendations.

The task force declined to comment on South Africa specifically this week, but its communications management adviser, Alexandra WijmengaDaniel, confirmed that it might consider suspending the membership of countries that “consistently fail to address serious deficiencies identified” by it.

Naidoo said the task force AT RISK: Constitutional watchdog Lawson Naidoo had been “putting pressure on South Africa to make sure that these measures are put in place”.

Countries with weak safeguards against money laundering and terrorism financing are a threat to the financial system. A reluctance to co-operate with the task force to remedy those weaknesses results in the country being monitored by the International Co-operation Review Group, a branch of the Financial Action Task Force.

The review group “identifies potentially higher-risk countries and works with them to address these weaknesses”, said Wijmenga-Daniel.

It also issues public warnings about the specific risks emanating from the country, to help protect the global financial system. This puts pressure on countries to implement the necessary reforms.

Among the key differences between money laundering and terror financing was that the former was processed through the formal financial system while the latter moved through other channels.

“The preference, originally, BRUNT: Pan African Capital president Stephen Cashin in terror financing was the informal financial system. However, the speed and the effectiveness of the formal system makes it really attractive for terrorists to use,” said Tersia Rossouw, a partner in KPMG’s risk consulting and forensic department.

What makes terror financing more difficult to track, apart from sanctions screening, is that terror groups deal with smaller amounts than those engaged in money-laundering activities.

Money launderers create complex webs of transactions to hide the money, whereas terror financing is usually straightforward.

With South Africa being the only African country that is a member of the task force, losing international banking relationships would have repercussions not only for it but for banks across the continent.

Angola, Liberia and Guinea offer examples of the devastating impact the inability to trade internationally has on a country’s banking system and economy.

Angola has only one correspondent bank, Deutsche Bank, and only it can clear US dollars in the country.

Standard Chartered has limited the number of services it provides to Angola to a handful of clients.

These include the central bank and the Sonangol Group, a US company that manages Angola’s oil and gas reserves.

To get access to foreign currency, Angolan banks have to go through South African or Portuguese banks, making it more expensive to process transactions.

According to a report compiled by the IMF, 36 out of 75 correspondent banking relationships have been terminated by global banks in Liberia.

In Guinea, about 20 central bank accounts held with seven foreign banks have been closed since 2009.

While South Africa is far from being in such a dire position, there has been a decline in the number of international correspondents doing business in the country. Between 2013 and 2015, the number of foreign counterparties in South Africa declined by 10.1%, falling from 2 163 to 1 965.

Stephen Cashin, president of Pan African Capital, said the impact of global de-risking measures had resulted in commercial banks in emerging and frontier markets being negatively affected by policies promoted by US and European regulators.

Cashin said that despite many commercial banks’ attempts to adhere to strict international financial standards, they were still very much dependent on central banks for establishing an

There’s a real danger that South African banks will lose their correspondence banking status Global institutions have cut ties with entire regions due to perceived weaknesses

institutionally robust banking system.

“In many cases central banks have failed to provide such an environment.

“Global institutions have cut ties with the local commercial banks active in these environments and with entire regions due to the perceived weaknesses of these banking environments. Commercial banks have borne the brunt of these challenges,” said Cashin. Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za