SA’s banks fertile ground for criminals, terror financing

One of South Africa’s five largest banks doesn’t know the citizenship status of over 8 000 of its customers, putting it at a high risk of being utilised for terrorism funding and money laundering, according to a report by the SA Reserve Bank’s Prudential Authority (PA).

The country’s five large banks – ABSA, Standard Bank, Rand Merchant Bank, Nedbank and Investec hold 89% of the total assets for the banking sector and offer a wide range of complex, high-volume products and services and fast banking transactions.

The PA surveyed 34 banks operating in the country – from the big five, to medium to small-sized locally controlled banks, foreign banks and mutual banks – to assess crime risks in the country’s banking sector.

According to the report released this week, customers that presented an increased risk to the sector included those rated “very high” risk, such as popular and influential persons and foreign prominent public officials, local and foreign customers, and new clientele.

“Four banks banked the most high-risk clients, of which three were large banks and one was a smaller locally controlled South African bank. About 60% of all high-risk clients were located within the locally controlled banks and about 40% within the large banks.

“The banking sector risk assessment focused mainly on the inherent risk. The overall inherent money laundering/terrorism financing risk within the banking sector in South Africa is assessed to be high,” read the report.

South Africa has a banking footprint and customers in neighbouring countries such as Mozambique, Nigeria, Malawi and Kenya. The former is constantly on high alert from terrorist insurgency that started to increase in 2019.

The report asserts that the presence of banking operations in these countries and their proximity to South Africa posed a high risk of being used as a channel to hide terrorist activities.

The country’s banking sector reported 43 terrorist financing activity reports (TFARs) and nine terrorist financing transaction reports (TFTRs) to the Financial Intelligence Center in terms of the FICA (Financial Intelligence Act) between 1 October 2018 and 31 December 2021.

All nine terrorist financing reports were reported by the big banks.

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Non-profit organisations red flagged

The report also flagged banked non-profit organisations such as social clubs, foundations, body corporates, drug rehabilitation centres, and even orphanages as medium to high risk.

Extremist right wing organisations, characterised by marginalisation, lack of opportunities and grievances with government, were also noted as being registered as NPOs, with their representatives traveling to other countries such as the USA and Canada to lobby for support and raise funds.

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Banked NPOs in the country totalled 94 436, and the big banks have over 58 000 of them as clients. The majority of these NPOs at the top banks were unregistered and there was seemingly no oversight on the NPO clientele.

The rest were banked by medium to small locally controlled banks, branches of foreign banks in the country, and mutual banks.

“The impact of such a high volume of NPOs being banked, especially the number of unregistered NPOs, leads one to question the due diligence measures employed by such entities and the necessity for stronger legal frameworks to address unregistered NPOs.

“NPOs have traditionally always been viewed as being susceptible to abuse for money laundering and terror financing. It is thus important to ensure that the activities of NPOs are well understood, including their size, activities, destinations involved, and potential funders and beneficiaries,” the report stated.

One of the biggest banks had 94.3% of the NPOs as customers.

Furthermore, banks reported the movement of physical cash, electronic money transfers, and virtual assets such as bitcoin, as activities likely used to finance terrorism between 2018 and 2020.

Criminals take advantage of the many banking products through the extensive use of cash at automated teller machines (ATMs) to deposit cash, with the source of funds and details of depositors largely unknown.

“The large banks are exposed to all high-risk client types. One of the large banks indicated a total of 8 388 clients with unknown citizenship, which poses a high risk within the sector. A large bank indicated a total of 1 782 clients with the country of incorporation unknown.”

“Large banks are widely exposed to a high level of inherent money laundering/terrorism financing risk. This is as a result of their high numbers of clients, substantial exposure to foreign country risk, use of non-face-to-face delivery channels which increases anonymity, very high exposure to cash, and the propensity for the illicit flow of funds.”

Abnormal cash transactions

Section 28 of the FICA requires financial institutions to report cash transactions above the value of R24 999.99 within two business days.

For banks that fail to report transactions, the FIC has processes where the financial watchdog is allowed to engage it on any reporting failures.

“The FIC-issued Directive 03/2014 also provided information on banks that notified the FIC in terms of this directive. Missing information, such as the client’s identity number or passport, and incorrect or non-completion of the required information were the most common causes of these rejections.”

During the Covid-19 lockdown period in 2020/2021, the FIC reported that most cash transactions were of individuals depositing the cash above the threshold into their accounts, and entities withdrawing cash above the prescribed threshold.

Various unusual cash transactions during that period were identified and referred for further analysis and potential referral to law enforcement.

Some of the main suspicious banking activities identified were:

• Potential corruption linked to tenders
• Large cash transactions used by influential political persons (local and domestic)
• Individuals using their personal accounts for business purposes (potential tax evasion)
• Businesses prohibited from trading under Covid-19 lockdown regulations were still moving money
• NPO transactions identified as potential terror financing activities
• Indications of money mules used to move cash out of the country, in particular to Middle Eastern countries, where the source of funds could not be determined

The report found that the use of cash in the banking sector presented money laundering and terrorism financing risks, as many banks offer products used to obtain cash, and the audit trail is diminished once the proceeds of crime are converted into cash and withdrawn.

“Mule accounts are also created to enable the proceeds of crime to be withdrawn as cash and create a second layer of anonymity between the criminal and these proceeds.”

Mule bank accounts are established using mostly stolen identities.

The report further pointed out that the popular cash sending methods that do not require the recipient to have a bank account but only a cellphone, were becoming problematic.

One of the large banks that offers the service saw payments totalling billions of Rands being transferred and withdrawn as cash.

“The anonymity with this product is also a potential avenue for criminal abuse,” the report stated.

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