Financial Crime World

Anti-Money Laundering Regulations in South Africa: A Shift from Rules-Based to Risk-Based Approach

=====================================================

Challenges Under the Previous Rules-Based Approach

The previous rules-based approach to anti-money laundering (AML) and combating the financing of terrorism (CFT) posed several challenges, including:

Sourcing Documentation from Clients

  • Verifying residence proof and income sources for low-income individuals and those living in informal settlements was difficult.

Generalized Risk Classifications

  • Risk classifications were generalized, not leaving room for individualized risk profiling.

Introduction of the Risk-Based Approach by the Financial Intelligence Centre Amendment Act, 2017

The Financial Intelligence Centre Amendment Act, 2017 introduced a new risk-based approach to AML/CFT regulations. This approach is based on three basic principles:

The Three Principles

  1. Know who you are dealing with: FSPs must know the identity of their clients and conduct customer due diligence measures.
  2. Record keeping: FSPs must keep records of transactions in the financial system.
  3. Suspicious activity reporting: Suspicious activity must be reported to investigating authorities.

Key Features of the Risk-Based Approach

The risk-based approach includes several key features, including:

Know Your Customer (KYC) and Customer Due Diligence (CDD) Requirements

  • KYC refers to knowledge about a client.
  • CDD requires institutions to verify the identity of potential customers, nature and purpose of business relationships, and ultimate beneficial owners (UBOs).

Domestic Prominent Influential Persons and Foreign Prominent Public Officials

  • These individuals are subject to additional scrutiny under the risk-based approach.

Beneficial Ownership Requirements

  • FSPs must identify and verify the beneficial ownership of clients.

Freezing of Property and Transactions in Terms of Financial Sanctions Emanating from United Nations Security Council Resolutions

  • FSPs must comply with financial sanctions imposed by the United Nations Security Council.

Abolishment of the Counter Money Laundering Advisory Council

The risk-based approach has also led to the abolition of the Counter Money Laundering Advisory Council, which was replaced with non-statutory consultation forums for stakeholder consultations and information sharing.