The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It sets international standards with the aim of preventing these illegal activities and the subsequent harm they cause to society
The Dreaded “Grey List”
Countries that are under increased monitoring by the FATF are actively working with the organization to address strategic deficiencies in their financial policy and implementation framework to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve as swiftly as possible, the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring to ensure that this occurs. This monitoring list is often referred to as the dreaded “grey list”.
South Africa was included on the FATF’s increased monitoring list’ in February 2023 and is among several African States on the list including; Cameroon, The DRC, Kenya, Mozambique, Namibia, Nigeria, Senegal, South Sudan, Syria and Tanzania.
While some progress been made to improve the country’s financial systems, the FATF’s latest review in June 2024 indicated that only eight of the twenty-two items, identified by FAFT have been addressed or largely addressed, with the remaining items not addressed or only partially addressed.
The expectation is now that SA may only be removed from the list in 2025, once the required legislative changes have been completed. Other countries such as Jamaica and Turkey have recently been removed from the list, having met all requirements for proper controls.
These listings have adverse consequences for countries as a whole and in particular for foreign investors investors dealing with these regions. Paperwork required for international transactions is generally intensified and more onerous and can prevent important investments from flowing into these listed countries. This is not only detrimental to the country’s financial system’s reputation, but also intensifies the required due diligence processes. An important compliance requirement when investing is the declaration of the source of funds and proof thereof.
Understanding POSF
Proof of Source of Funds (POSF) is essential to ensure that the origins of funds are legitimate, so as to preventing the flow of illegal funds through the country’s financial system. By verifying the source of funds, financial institutions can mitigate the risk of money laundering, fraud and other financial crimes.
POSF is the documentation that demonstrates the legitimate origin of funds involved in a financial transaction. Money laundering is the process of disguising the illegal origins of funds to make them appear legitimate and POSF helps to trace the flow of money, making it difficult for criminals to launder their proceeds. Verification is a mandatory requirement under Anti-Money Laundering and Counter Terrorism Financing regulations in many jurisdictions, including South Africa. Failure to comply can result in severe penal
The Financial Action Task Force (FATF) has identified weaknesses in areas such as targeted financial sanctions, beneficial ownership transparency, and the investigation and prosecution of money laundering and terrorist financing offences. To address these shortcomings and avoid potential delisting, South Africa and other countries, are required to strengthen their due diligence practices, including verifying the source of funds.
Challenges in Implementation
While POSF verification is essential, obtaining sufficient documentation can be challenging in some cases. Financial institutions need to implement risk-based approaches and consider factors such as the client’s risk profile, transaction amount and geographical location. By prioritizing proof of source of funds and implementing robust due diligence processes, countries can effectively combat financial crime and improve their financial standing in the global investment arena.
