Anti-Money Laundering and Combating the Financing of Terrorism in South Africa’s Banking Sector: A Focus on Customer Due Diligence Practices in the Fintech Era

Introduction

The banking sector in South Africa has faced increasing challenges in preventing money laundering and terrorist financing, particularly with the rise of fintech innovation. This research paper explores the current state of Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) practices in the country’s banking sector, with a focus on customer due diligence in the fintech era.

AML/CFT Regulatory Enforcement

Regulatory authorities have taken various enforcement actions to deter non-compliance with AML/CFT regulations. These measures include:

• Imposing fines and penalties on banks that fail to meet regulatory requirements
• Conducting regular inspections and audits to ensure compliance
• Requiring banks to implement robust risk management systems and policies

Research Methodology

This study employed a qualitative approach, utilizing case studies and expert interviews to gather data from the financial services sector in South Africa. The researcher collected both primary and secondary data to provide a comprehensive understanding of customer due diligence practices.

Empirical Results and Discussion

The findings are presented under two main research objectives:

RO1: Individual Customer Identification and Verification Practices

• Secondary Data Analysis

  • Banks prohibit anonymous accounts, verifying customer information using third-party sources
  • Biometrics are used during the onboarding process

• Primary Data Confirmation

  • Third-party vendors are utilized for verification purposes
  • Integration with government databases (DHA and CIPC) is used to verify customer information

RO2: Nature and Purpose Business Relationship Practices of Customer Due Diligence

• Secondary Data Analysis

  • Banks accept information at face value, requiring source-of-wealth information for Politically Exposed Persons (PEPs)
  • Risk scoring models are incorporated to allocate risk classes to customers

• Primary Data Confirmation

  • A risk-based approach is used for customer due diligence
  • Technological solutions are integrated into the process
  • Customer consent requirements are met under the Protection of Personal Information Act (POPI) Act

Conclusion

This research highlights the importance of AML/CFT regulatory compliance in the fintech era, where digital innovation and increased transactions require robust due diligence practices to prevent money laundering and terrorist financing. By understanding current customer due diligence practices in South Africa’s banking sector, stakeholders can develop effective strategies to enhance compliance and mitigate financial risks.