Picture: Gerd Altmann/Pixbabay – The FATF has warned of a possible greylisting of SA unless the country shows significant strides to combat financial terrorism and money laundering, says the writer.
By Ndzalama Mathebula
The warning from the Financial Action Task Force (FATF) poses a risk of greylisting South Africa, which can trigger the exclusion of the country from the global financial system.
This has sparked significant concern over the country’s economic well-being due to the possible repercussions presented by greylisting.
The FATF, a global watchdog set up by the G7 in 1989, has warned of a possible greylisting of South Africa unless the country shows significant strides to combat financial terrorism (FT) and money laundering (ML) by October 2022.
This decision by the watchdog draws from the FATF 2021 report on South Africa, which highlighted significant unsettling instances of money laundering and financial terrorism, which the government has not taken any effective measures to address to date.
A notable case of financial terrorism is that of individuals operating outside the country while using a South African financial system to finance the Islamic State of Iran, Syria (Isis), and Mozambique, according to reports from the US Treasury.
This monetary system is also being used to fund terrorism and weapon trade; through this financial system, Isis is snowballing its trail in Africa. Such financial terrorism is attributed to the robust nature of the country’s financial system.
Developing countries are more prone to money laundering and financial terrorism due to their lack of strict measures. However, more needs to be done to combat this.
Greylisting can have devastating consequences. In Pakistan’s experience, being greylisted caused a significant decline of $38 billion in the country’s gross domestic product between 2008 and 2019.
Noting how the greylisting impacted the economy of Pakistan, increased scepticism over the future of its economy, and declined foreign direct investment cannot be overlooked.
Possible consequences for the economy of South Africa include exclusion from the global financial system in a manner akin to sanctions, along with reputational damage, diminished international trade, reduced FDI inflow, capital outflows, higher bank transaction costs, declining business confidence, and downward pressure on the exchange rate. At this rate, the government would likely experience an early default ahead of its scheduled International Monetary Fund loan repayment.
The banking sector and the criminal justice system remain crucial in combating financial terrorism by adding the stringent banking measures necessary and enforcing the law by prosecuting offenders. Recently, artificial intelligence (AI) cybersecurity-led technologies have emerged as the utmost practical and feasible ways to ensure FATF compliance.
AI refers to a system of programmed systems capable of performing duties normally associated with the human brain, such as analysis and forecasting.
Cybersecurity algorithms in the banking systems have been highlighted as the focal point and first call due to their ability to increase the level of cyber resilience in the banking system to ensure safe and legal transactions, specifically foreign accounts.
Gravity modelling is the proposed model for advancing the banking sector’s existing cybersecurity systems, where the methodology is introduced and integrated into a bank’s cybersecurity activities.
The model will allow for the early detection of transactions in countries with a high risk of legalisation. Further steps to monitor the legitimacy of those funds will be enforced.
AI does not only help with the early identification of illicit money flows, but also helps with handling big data addressing all historical transitions, which can help flag ML or FT existing patterns.
Blockchain has also been proposed as a means of strengthening the cybersecurity of banks.
Drawing from its ability to secure decentralised recordings safely and validate every transition without requiring third-party authentication, the technology is a “must-have” for every financial and banking system.
Blockchain further enables the building of networks necessary to facilitate global payments through collaborative bank efforts. The banking sector is the most prominent target for ML and FT in South Africa. Thus, these measures should be at the top of the FATF compliance list of every bank.
Adopting technologies such as machine learning and digital identity has been instrumental in building more resilience in banking cybersecurity.
Machine learning can be used for improved detection of money laundering by individuals or corporates, and digital identity can be used to verify the identity of clients and their legitimacy.
At a government level, it has been advised that integrating cybersecurity measures into policy promulgations will enable an informational base to introduce managerial elements in the banking activities of the country. While benchmarking cybersecurity standards, banks need to adhere to safeguard ethical operations.
With the 18 months provided to ensure significant efforts towards anti-money laundering compliance, collaborative efforts between the government, financial institutions, the criminal justice system and the banking sector can help make substantial developments towards FATF compliance and circumvent the greylisting.
The significance of making these efforts lies in protecting the economy and development of South Africa.
Ndzalama Mathebula is from the University of Johannesburg, Department of Politics and International Relations. She writes in her personal capacity.