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Regulatory News09 Mar 2023

AML Regulations in Africa: The Pressure for Compliance is on

Megan Keirstead

Product Marketing Manager

For decades, the world has been on a quest to curb the amount of illicit funds that flow through our financial systems. In 1989, a global watchdog called the Financial Action Task Force (FAFT) was established to set a global standard to prevent money laundering and terrorism financing. However, increasingly complex financial systems and varying levels of regulations across countries have made this task a challenge. The UN currently estimates that $800 billion to $2 trillion is laundered annually.

With some saying that we are losing the war against money laundering, many governments face pressure to tighten their AML regulations.

The State of AML Compliance in Africa

While Money Laundering and Terrorism Financing is a global issue, according to FAFT, Sub-Saharan Africa is a particularly risky region. The FAFT has a "grey list" of jurisdictions under increased monitoring due to strategic deficiencies in their anti-money laundering (AML) regimes, with one-third of the 23 countries on the list located in Sub-Saharan Africa. This highlights the urgent need for the region to enhance its AML compliance frameworks and operational capacities to counter financial crimes effectively. (Basel Institute)

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(Image from Basel Institute )

There can be many consequences for countries on the FAFT grey list, including:

  • Pressure from the international community: As stated in the list's official name, countries on the list are under increased monitoring. This means both the FAFT and the IMF will regularly assess the countries' policies and push for improvements.
  • International reputational risk: On an international scale, grey-listing can represent a loss of faith in the country's financial system. This increased scrutiny can lead to restrictions and even costs for local banks and businesses looking to transact cross-border.
  • Reduction in capital inflows: Perhaps, due to the reputational perception from abroad, capital inflows decline on average by 7.6% of GDP when a country is grey-listed.

Governments are highly aware of the consequences of poor perception of their AML efforts and work hard to improve their regulations. For instance, in 2022, South Africa updated its Financial Intelligence Centre Act (FICA) AML regulations to avoid being grey-listed, and Nigeria has also made recent updates to its AML regulations, setting the tone for other African countries to review and amend their AML compliance standards to meet global standards.

Lawmakers are getting serious about AML, and so should your business.

With many governments now turning their attention to AML and attempting to improve their standing on a global scale, regulations are becoming more strict and more frequently enforced. Businesses that do not comply with AML regulations risk being fined or reprimanded by their government’s AML enforcement agencies. In fact, 85% of Nigerian businesses described their organisation as being under significant pressure from the government and investors to improve regulatory safeguards to combat financial crime.

Even if the regulations in some jurisdictions aren’t officially changing just yet, companies that don’t follow an AML policy at a global standard can still be negatively impacted in other ways as well:

  • Reputational risks: Just as a country faces reputational risk when its AML policies don’t meet the global standard, companies without significant AML protection can also risk appearing unsecured to both fellow businesses and potential customers.
  • Challenges with cross-border expansion: As we saw with Flutterwave’s expansion into Kenya, even allegations of money laundering on a company's platform can quickly derail expansion efforts. Strong AML practices internally make doing business across boards much more efficient.
  • Limiting of investment opportunities: If a business seeks to raise funding, investors conducting due diligence will look into a firm's risk and compliance practices. This includes expecting their AML policies to be up to a globally acceptable standard. Cutting corners on AML reduces a business's ability to raise capital.

How to ensure your business is compliant with global AML standards?

AML laws vary by country. However, the international standard generally dictates that businesses must have two key things:

  1. They are required to develop and implement a written AML compliance policy.
  2. The policies must take risk-based procedures for conducting customer due diligence and ongoing monitoring to identify and report suspicious transactions. (Finra)

In practice, there are a number of procedures a company should follow to meet the requirements for customer due diligence:

Know Your Customer “KYC” - Identifying customers is a core requirement for customer due diligence. This would be fulfilled by verifying personal information against a reliable source like a government registry or verifying an official government document.

Business Verification "KYB" - This is the equivalent of KYC but rather than checking personal information, you will be checking a business's credentials. To conduct a full business verification, it's commonplace to verify the business information on an official registry and conduct a KYC check on each one of its ultimate beneficial owners (UBOs).

AML Check  - An AML check screens an individual against a number of sanctions, politically exposed persons (PEP) and adverse media lists. Rather than just knowing who a person is, AML checks take verification one step further into understanding the customer risk profile.

The most commonly required AML checks are sanctions checks and PEP checks.

  • Sanctions Checks: Sanctions are a measure taken by a nation or organisation (such as the UN) intended to force an agreement or compliance with an international standard. They are a punishment in the form of economic trade restrictions or limitations on diplomatic ties. They can be placed on both nations and individuals.

    Sanctions lists are lists of individuals or entities targeted by these restrictive measures. A sanctions check allows companies to verify if the individuals they are onboarding have any sanctions placed against them and what the sanctions are.

  • PEP Checks: The UNCAC defines PEPs as “individuals who are, or have been, entrusted with prominent public functions and their family members and close associates”. A PEP could be anyone from the head of state to high-ranking military officers to local mayors. PEPs are generally split into three risk levels depending on their political exposure level.

With Smile Identity’s AML Check, you can automate all of your AML compliance requirements on a single platform.

Smile Identity’s AML Check product screens an individual against thousands of lists in seconds through a REST API integration. We connect to major global and Africa-specific sanctions and PEP lists. Our exhaustive coverage includes:

  • Sanctions Lists:  We access over 1000 global sanction lists. Including OFAC, South African Financial Intelligence Center (FIC) list, Nigeria Economic and Financial Crimes Commission (EFCC) list, and many more,
  • Politically Exposed Persons (PEP) Lists:  We maintain a global PEP list of approximately 1.5 million PEPs and their associates across three levels.
  • Adverse Media Checks: Contains negative news from reputable news agencies. We have over 75,000 news sources, with a minimum of 2 news sources from every country in the world.

You can complete all your regulatory requirements on a single platform by combining AML Checks with our Business Verification Checks and various KYC checks.

Talk to one of Smile ID's experts about how we can help you navigate AML compliance.

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