Dirty Money in domestic Economies and some of the Consequences
Financial services is one of the priority sectors on African Continental Free Trade Area (AfCFTA) Trade in Services agenda. The financial services sector plays a critical role in national economies and performs important functions, such as facilitating transactions, mobilizing savings, monitoring firms, and mitigating risk.
Opening the financial sector to foreign participation and competition expands the availability of financial services to local consumers, bring down the cost of these services, and improves performance in this sector. Financial services include insurance and insurance-related services, banking and other financial services (e.g. deposit-taking; lending; payments; asset management, pension fund management; settlement and clearing services for financial assets and negotiable instruments; provision and transfer of financial information, and financial data processing).
This is a sector where new technologies quickly find application and where regulatory governance is of particular importance. There are also risks. One of the dangers to watch out for is money laundering. Money laundering is the illegal process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money laundering process is intended to make dirty money look clean.
Money laundering is a serious financial crime. It also has negative consequences for the national economy because it damages financial sector institutions that are critical for economic growth. Money laundering practices, once established in a particular economy, will promote crime and corruption. In South Africa it has been linked to “state capture” activities.
Most financial companies have anti-money-laundering (AML) policies in place to detect and prevent this activity. Government agencies and regulators have to ensure that these systems are properly implemented and that controls are adhered to.
There have been recent media reports about lapses in this regard in South Africa. They are causing serious international concerns. This points to another dimension in respect of regulatory governance for financial services; there are international institutions tracking money flows and monitoring domestic control measures in respect of money laundering. Certain governments (such as in the United States) will monitor banks, including those based in foreign jurisdictions, for corruption and money laundering scandals and will often impose large fines when serious violations have been perpetrated.
The Financial Action Task Force (FATF) is an intergovernmental organisation founded by the Group of Seven (G7) in 1989 to combat money laundering. After 9/11, a mandate to prevent terrorism financing was added to its scope. It develops policies and carries out peer reviews of member countries’ abilities to combat money laundering. It has recently issued a report on South Africa. This document contains information of a rather serious nature and South Africa has been given 18 months to improve its capacity to track and prosecute money laundering and terrorist financing or face “greylisting” by the FATF.
Greylisting by the FATF would raise South Africa’s risk profile, place a question mark over its financial regulatory bodies and attach a higher risk premium to corresponding relationships between South African banks and international financial institutions.
A local newspaper has reported that the FATF’s latest Mutual Evaluation Report of SA was accepted by Cabinet in September, which has endorsed its recommendations and has directed the Treasury to lead an inter-departmental process to remedy the shortcomings. The Treasury said the FATF report ‘identified significant weaknesses in parts of the country’s anti-money laundering, counter-financing of terrorism and counter-proliferation financing system’.
Counter-proliferation financing refers to the financing of nuclear and chemical warfare activities. The Treasury said government is fully committed to implementing the recommendations and strengthening the entire system for investigating financial crimes.
A serious criticism of South Africa’s governance in this regard is that while the big banks do have the necessary regulation in place, the country as a whole does not follow a risk assessment approach and is therefore unaware of many of the risks to which it is exposed. The weaknesses identified by the report reflect the state’s general weakness in investigation of financial crimes. Senior officials have promised that an inter-departmental team will look at these allegations and at approaches to improve matters.
As emerging markets open up their economies and financial sectors, they are becoming increasingly attractive targets for money laundering activities. This applies to African economies too. If these countries also engage in arrangements for promoting trade in financial services through mechanisms such as the AfCFTA Protocol on Trade in Services, the danger of money laundering will grow. The benefits to be had from liberalizing the financial services sector could be undermined. The implications are clear; with the AfCFTA initiative will come serious governance demands; within the AfCFTA State Parties and through regional arrangements with the necessary powers, means and support by State Parties. National and regional mechanisms should form part of the strategy to liberalize trade in sectors such as financial services in a manner that will be safe, will not harm national economies, and will comply with international standards.
 More than Sanctions: Criminally Prosecute Big Banks for Money Laundering — The International Affairs Review (iar-gwu.org)
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