Historical aspects of customer due diligence and related anti-money laundering measures in South Africa
| DOI | https://doi.org/10.1108/JMLC-01-2023-0016 |
| Published date | 14 April 2023 |
| Date | 14 April 2023 |
| Pages | 138-154 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Howard Chitimira,Sharon Munedzi |
Historical aspects of customer due
diligence and related anti-money
laundering measures in
South Africa
Howard Chitimira and Sharon Munedzi
Faculty of Law, North West University, Potchefstroom, South Africa
Abstract
Purpose –This paper explores the historical aspects of customer due diligence and related anti-money
laundering measures in South Africa.Customer due diligence measures are usually employed to ensure that
financial institutionsknow their customers well by assessing them againstthe possible risks they might pose
such as fraud,money laundering, Ponzi schemes and terroristfinancing. Accordingly, customer due diligence
measures enable banks and other financial institutions to assess their customers before they conclude any
transactions with them. Customer due diligence measures that are utilised in South Africa include
identification and verification of customer identity, keeping records of transactions concluded between
customers and financial institutions, ongoing monitoring of customer account activities, reporting unusual
and suspicious transactions and risk assessmentprogrammes. The Financial Intelligence Centre Act 38 of
2001 (FICA) as amended by theFinancial Intelligence Centre Amendment Act 1 of 2017 (AmendmentAct) is
the primary statute that providesfor the adoption and use of customer due diligence measures to detect and
combat money laundering in South Africa. Prior to the enactment of the FICA, several other statutes were
enacted in a bidto prohibit money laundering in South Africa.Against this background, the article providesa
historical overviewanalysis of these statutes to, inter alia, explore their adequacyand examine whether they
consistently complied with the Financial Action Task Force Recommendations on the regulation of money
laundering.
Design/methodology/approach –The paper provides an overview analysis of the historical
aspects of the regulation and use of customer due diligence to combat money laundering in South
Africa. In this regard, a qualitative research method as well as the doctrinal research method are
used.
Findings –It is hoped that policymakers and other relevant persons will adopt the recommendations
providedin the paper to enhance the curbing of money laundering in South Africa.
Research limitations/implications –The paper doesnot provide empirical research.
Practical implications –The paper is useful to all policymakers,lawyers, law students and regulatory
bodies, especially,in South Africa.
© Howard Chitimira and Sharon Munedzi. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translate and create derivative works of this article (for both commercial and
non-commercial purposes), subject to full attribution to the original publication and authors. The full
terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
“This article was supported in part by the National Research Foundation of South Africa (NRF),
Grant Number: 141933. Consequently, the authors wish to thank the NRF for its support. The article
was influenced in part by S. Munedzi’s Master of Laws (LLM) dissertation, The Reliance on Customer
Due Diligence to Enhance the Combating of Money Laundering under the Financial Intelligence Centre
Amendment Act 1 of 2017 (North-West University) 2018, pp. 18-30.”In this regard, Ms Munedzi
wishes to acknowledge the expert input of Prof HT Chitimira.
JMLC
26,7
138
Journalof Money Laundering
Control
Vol.26 No. 7, 2023
pp. 138-154
EmeraldPublishing Limited
1368-5201
DOI 10.1108/JMLC-01-2023-0016
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
Social implications –The paper advocatesfor the use of customer due diligence measuresto curb money
launderingin the South African financial markets and financial institutions.
Originality/value –The paper is original research on the South African anti-money laundering regime
and the use of customerdue diligence measures to curb money laundering in South Africa.
Keywords Customer due diligence, Identification, Verification, Money laundering, Measures
Paper type Research paper
1. Introductory remarks
Customer due diligence measures were introduced into the South African anti-money laundering
(AML) regulatory framework by the enactment of the Financial Intelligence Centre Act (FICA)
[1]. Prior to the amendment of the FICA, customer due diligence was merely referred to as
customer identification and verification process in South Africa (Havenga et al., 2007). On the
other hand, the concept of customer identification and verification is referred to as the know-
your-customer policy in the United Kingdom (UK) (Ahlosani, 2016)[2]. This shows that
customer due diligence measures are somewhat interpreted differently in South Africa and the
UK. Attempts to regulate and combat money laundering in South Africa have been carried out
from as early as 1992 (De Koker, 2006). For instance, the Drugs and Drugs Trafficking Act [3]
which was repealed by the Proceeds of Crime Act [4] in 1996 [5] prohibited money laundering in
relation drug trafficking offences. The Proceeds of Crime Act 1996 did not have robust money
laundering provisions, and it was later repealed by the Prevention of Organised Crime Act 121
of 1998 (POCA) as amended. The provisions of the Proceeds of Crime Act 1996 were flawed,
while the provisions of the Drugs Act were more focused on money laundering crimes
emanating from the proceeds of drug offences only [6]. Therefore, prior to 1998, there were no
adequate statutory provisions that expressly prohibited money laundering activities in South
Africa [7]. This approach was not good enough to curb money laundering in South Africa. As a
result, there was a need for the policymakers to enact adequate AML laws and/or introduce
related measures in South Africa (De Koker, 2004). Eventually, the FICA was enacted, and it
amended the POCA. The FICA was also amended by the Protection of Constitutional
Democracy Against Terrorist and Related Activities 33 of 2004 (“POCDATARA”,ss2–24),
which mainly deals with terrorist financing activities. International bodies such as the Financial
Action Task Force (FATF) also played a pivotal role in the introduction of AML laws and
customer due diligence measures in South Africa [8]. For instance, the FATF Recommendations
influenced the enactment of the AML laws that are used in South Africa (FATF, 2001).
Currently, money laundering is mainly outlawed in the POCA [9]andtheFICA[10]. The FICA
provides for the use of customer due diligence measures by banks and other financial
institutions to combat money laundering in South Africa [11]. The FICA has auxiliary measures
to aid the effective implementation of its provisions [12], such as Money Laundering Control
Regulations (Regulations of GN, 2002).
Money laundering is a global crime, and South Africa is not the only country that prohibits
this crime [13]. South African policymakers complied with some international AML
recommendations of the FATF to use customer due diligence measures under the FICA [14].
Customer due diligence consists of four internationally recognised elements [15],namely,
customer identification [16], record keeping [17], recognition and reporting of suspicious
transactions [18] and training [19]. Customer due diligence and other administrative measures
were introduced to supplement the prohibition of money laundering that is contained in the
POCA [20]. The administrative measures such as customer identification and verification are
meant to enable financial institutions to know their customers (De Koker and Henning,1998a,
1998b) in accordance with the FICA (South African Law Commission Discussion Paper 64, 1996).
Anti-money
laundering
measures
139
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