Compliance: the practical implications of SA’s greylisting
By Di Haiden
The greylisting of South Africa is now very definitely in place, and it has had more of an impact than we would like to believe! It was already an onerous process dealing with anything cross-border related, but it has been made much more complicated and lengthier following the greylisting, and institutions have undertaken “more enhanced monitoring”.
How do we know? Because it affects our daily tasks, such as opening accounts, sending funds offshore for clients, what to invest in such as the compliance required when redeeming investments, and documentation required to prove wealth.
In some instances, one has to delve into records going back 40 to 50 (and even more) years to produce proof of all sorts of transactions, including death certificates of people who died many decades ago, provide the source of wealth, provide the source of funds, a well as provide details on individuals who are settlors of trusts, protectors and beneficiaries.
It is, therefore, imperative to understand what one is being asked for so that the salient information can be provided timeously. Defining some of the basics is a good start, bearing in mind that the client needs to provide the information. The list below is not all-inclusive, but attempts to cover the common requests from various administrators.
Definition 1 – Know your client (KYC)
As a financial adviser, one is subject to KYC legislation, which stands for know your client.
Globally, there has been an exponential increase in money laundering and terrorist financing activities, and the Covid-19 pandemic did not improve the situation.
The KYC legislation (the Financial Intelligence Centre Act of 2001) insists that financial institutions make their customer due diligence practices as robust as possible to ensure that they are not on the receiving end of any misdemeanours which have to be reported to the Financial Action Task Force (FATF) and their watchdogs on the ground, e.g., South Africa’s Financial Intelligence Centre (FIC). The challenge is to know and understand the clients and any changes in their circumstances, including residency, political exposure or links to political persons.
When one lives in a greylisted country, its residents’ status and circumstances change overnight. In many instances, the residents of greylisted countries are considered “high-risk” individuals for money laundering and terrorist financing. More questions are being asked than ever before, and offshore administrators have become even more vigilant.
Unfortunately, the impact on the client is that more questions and documentation are required for investing or cross-border transacting.
Definition 2 – the source of wealth (SOW) and the source of funds (SOF)
These two sources have come to the fore, and although they have always been around, they now have far more practical implications than before South Africa’s greylisting.
What is the difference?
SOF is the origin of the money per transaction, while SOW is the origin of all the money an individual has amassed during their lifetime.
SOF and SOW checks are an essential element of KYC measures and part of the AML recommendations laid out by the FATF.
SOF is the origin of the money used in a transaction. If a client makes a purchase, the information required includes:
– What account did their funds come from?
– Whose account is it coming from?
– What activity generated those funds in the first place?
Legitimate sources of funds include personal savings accounts, employment income, redemption/liquidation of investments, property sales, inheritances, gifts, legal settlements (including divorce settlements) and distributions from trusts. The fact that the source is legitimate does not mean these questions will not be asked.
SOW refers to the origin of all the money an individual has amassed during their lifetime. Essentially, it analyses the activities that have contributed to an individual’s total wealth. SOW examples include family inheritances, investments, business ownership, and income from employment.
SOF/SOW impact since the greylisting
The best way to illustrate this is by an example:
A South African resident has died (an elderly lady of 90). In terms of the will and distribution to her heirs, it was decided to redeem an offshore investment.
Before South Africa’s greylisting, the following was required: a death certificate, ID, a redemption form sent to the administrator, and estate late bank account details.
After South Africa’s greylisting, the following is required: a death certificate, ID, and redemption form.
It also requires estate late bank account details, the source of wealth (this meant tracing the – now-deceased – client’s original accumulation of capital), as well as the source of funds (this entails calling up archived records from storage from 2012 to prove the transactions of transfers into the fund).
It also needs copious number of emails to ascertain what would be appropriate and constant reminders that this client is now considered high-risk.
The point here is that unless you know your client (and their history) exceptionally well, it is often difficult to produce the required information for anti-money laundering as per FATF regulations. This leads to time being wasted and frustration for the client when funds are not released timeously. Unfortunately, the environment is such that administrators are unrelenting on what is required so that they are not in the firing line.
There are many more examples, such as fund managers not accepting direct South African investors unless it is done through a platform. Suffice it to say that the global environment is a lot more difficult to manage now that we are greylisted.
To assist in this laborious and time-consuming process, please do not throw away any documents (or delete any digital records) pertaining to financial transactions. It has been invaluable to have records readily available to answer the myriad queries being thrown at us.
Di Haiden is the CEO: Robert Cowen Investments, a subsidiary of Anchor.
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