Grey list: Regulators target trusts and NGOs in compliance drive

As efforts to get off the ‘naughty’ list ramp up ahead of deadline.

Entities such as public benefit organisations (PBOs) and non-governmental organisations (NGOs) have never been considered high-risk terrorist financing or money laundering organisations. 

However, these organisations and trusts are increasingly being targeted by regulators and government agencies trying to get South Africa off the grey list. The country must still address substantial issues identified by the global financial watchdog, the Financial Action Task Force (FATF), by February next year.

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Read: FIC says SA could exit the grey list within months

Happy Shihau, head of compliance at Investec Corporate and Institutional Banking, says the quantities and the flow of funds from donors and entities in these targeted organisations require closer scrutiny.

Pain points

The pain points remain the ‘know-your-customer’ and beneficial ownership register requirements. The requirements are quite onerous – from having to supply valid identification documents to almost asking for a blood sample to make sure you are who you say you are, she says. 

“Ultimately the requirement is to know who is coming into your business and who you are providing financial services to. We need to understand the flow of funds, and we need to verify where the funds are flowing to.”

Read: Why source of funds is so important

Shihau says one of the big changes is around beneficial ownership – finding a warm body behind certain opaque structures and entities. It takes a lot of effort from the private sector and the regulators around the data and intelligence they can extract.

Phia van der Spuy, founder of Trusteeze, says a recent inter-regional peer exchange recognised the lack of maturity in beneficial ownership transparency reforms for trusts compared to legal entities such as companies.

Read: Greylisting spotlights beneficial ownership of companies and financial institutions

“Currently, only about 66 000 trustees of inter vivos trusts have submitted their beneficial ownership registers. This represents a compliance rate of about 10% … This percentage excludes testamentary trust compliance.”

Important deadline

The Department of Justice and Constitutional Development issued a statement in September driving compliance to improve SA’s chance of exiting the grey list in 2025.

“It set a deadline for filing the beneficial ownership registers with the offices of the master of the high court by 15 November 2024.

“Few trustees and trust practitioners are aware of this deadline,” Van der Spuy warns.  

Listen: What happens if you miss the CIPC’s beneficial ownership submission deadline? [Oct 2023]

Another pain point for trusts is the obligation to keep a record of their interactions with ‘accountable institutions’. Although many believe  the list of accountable institutions, forming part of the Financial Intelligence Centre (FIC) Act, only includes a small number of banks and similar institutions, this list has been expanded extensively.

Another shortcoming is the lack of oversight, monitoring and supervision of fiat (government-issued money that has little intrinsic value and isn’t backed by commodities) and virtual currencies, says Shihau.

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Listen/read: The role of crypto assets in greylisting [Nov 2022]

“I think we are a little bit behind in terms of legislating fiat and cryptocurrencies. As a country, we have been very reactive in that space. We need to tackle these deficiencies to be able to exit the grey list in the three-year period we have been provided,” she adds. 

Practical solutions

Van der Spuy says many trusts are dormant. “Since they do not hold any money laundering or terror financing risks they should be excluded when the compliance rate is calculated to demonstrate actual risk.”

She proposes that the master’s offices cooperate with professional bodies to identify trusts that were deregistered over the years, which are included in the 650 000 trusts registered with the master.

She also suggests that trustees should physically deregister trusts that were never activated. The master may consider a mechanism to fast-track deregistrations.

There is a drive to deregister such trusts, given the potential fines or imprisonment upon conviction of an offence.

The South African Revenue Service (Sars) has also targeted trust registration. Trustees often ignore the fact that each trust must register as a taxpayer with Sars. The revenue authority intends to introduce penalties for late or non-submission of trust tax returns from April 2025.

“It will, therefore, be in the interest of trustees to rather deregister these dormant or inactive trusts with the master as soon as possible,” Van der Spuy advises.

Time waits for no one 

Investec notes that countries like Mauritius, Iceland and Serbia were able to implement necessary reforms quickly and were removed from the grey list within one to two years. “It is likely that South Africa will follow a similar trajectory.”

However, countries with particularly serious deficiencies or slow progress in rectifying them have remained on the grey list for several years. These include Yemen (since 2010), Syria (since 2013), and the Democratic Republic of the Congo (since 2010).

“Remaining on the grey list may affect our reputation as a global financial and business centre. It is therefore in the country’s interest that we be removed from the grey list as soon as possible,” says Van der Spuy. 

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