FIC non-compliance

Sluggish uptake of FIC regulations by credit providers could see severe penalties incurred

A timeous exit for South Africa from greylisting by the Financial Action Task Force (FATF) – the global money laundering and terrorist financing watchdog which sets international standards – is in serious jeopardy. This is due to the tardiness of South African companies to compulsorily register as ‘accountable institutions’.

Large numbers of businesses – credit providers that include estate agents, casinos and crypto – are having to gear themselves up to become accountable institutions under last year’s amendments to the Financial Intelligence Centre Act (FICA). The amendments took effect on 19 December 2022 as part of efforts by the Treasury to amend five separate pieces of legislation.

Based on levels of compliance and awareness of the requirement in the Trade Credit market, exceptionally few companies are doing so – and this will be noted by FATF to our detriment, says Frank Knight, CEO of Debtsource.

Beyond the immediate necessity of compliance, the stakes are high for accountable institutions. The potential repercussions include not only financial penalties but also reputational damage and a tarnished business environment. As the international community watches, South Africa’s ability to shed the greylisting tag hinges on the conscientious adoption of FIC regulations by its credit providers.

“There is a scale of administrative sanctions starting with a caution, and rising to a reprimand, directive to take remedial action, a restriction or suspension of certain specified business activities, and finally a financial penalty of up to R50 million for any legal person,” cautions Knight.

“The Financial Intelligence Centre’s directive mandates that all credit providers, irrespective of the type of credit they extend, must register with the FIC. Despite concerted efforts by industry players like Debtsource to educate and advise clients, a significant portion of credit providers, including major international entities, seem to be in the dark about their regulatory obligations.”

To provide clarity amid the complexity, Knight outlines seven imperatives for credit providers, particularly those involved in incidental credit. These imperatives include:

  • Registering with the FIC
  • Drafting a risk management and compliance plan
  • Completing Risk and Compliance Returns (RCR)
  • Reporting cash transactions exceeding the threshold
  • Ensuring employee training on awareness of sanctions and beneficial ownership of businesses
  • Modifying credit policies to align with FIC regulations
  • Amending credit application forms to capture beneficial ownership details

“At stake is the risk of following: a group of criminals flush with illicit cash from heists faces the challenge to legitimise their cash without triggering alarms. They look primarily to unsuspecting but reputable companies to purchase legitimate goods or services from using their untraceable cash, effectively ‘laundering’ the money and rendering it seemingly legitimate. This is facilitated by the absence of stringent reporting requirements for transactions with entities outside the financial sector creating a blind spot which allows criminal proceeds to seep into the legitimate economy undetected,” says Knight.

The FATF’s directives aim at addressing vulnerabilities in the financial system by expansion of reporting obligations. Strengthening the reporting net, particularly in sectors prone to such manipulation, becomes paramount in curbing the proliferation of illicit funds within the economy.

As the intricate dance between criminals and unwitting businesses evolves, the urgency to fortify the financial system against money laundering becomes apparent. The clock is ticking, not only for all accountable institutions and for regulatory bodies to anticipate and thwart the evolving strategies of those seeking to exploit the financial system for illicit gains.

“Will South Africa rise to the challenge, fortifying its defences and staying a step ahead of those who seek to exploit its economic infrastructure? The answer may well determine the nation’s success in emerging from the shadows of the grey list,” warns Knight.