C2: Add HKers articles, 0x2e Nov.22

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+layout: post
+title : SIFMANet Pretoria Report
+author: Olivia Allison
+date  : 2024-11-01 12:00:00 +0800
+image : https://i.imgur.com/xaTAvVl.jpeg
+#image_caption: ""
+description: "European Sanctions and Illicit Finance Monitoring and Analysis Network: Pretoria Report"
+excerpt_separator: <excerpt/>
+---
+
+_This report details the roundtable discussions in Pretoria to share views on South African policy relating to the sanctions on Russia and Belarus, as well as other issues of financial integrity._
+
+<excerpt/>
+
+In mid-September 2024, the Centre for Finance and Security (CFS) at RUSI, with the support of the South African Institute of International Affairs (SAIIA), hosted a roundtable in Pretoria. The roundtable provided a forum for private and public sector participants, including banks and government departments (as detailed below), to share views on South African policy relating to the sanctions levied by G7 states on Russia and Belarus, as well as other issues of financial integrity. Identities of participants are confidential.
+
+This roundtable was accompanied by a series of additional meetings in Johannesburg and Cape Town with representatives from the financial services industry, academics, policy analysts and government stakeholders, covering expertise in foreign policy, financial services regulation, and sanctions and compliance. These included, among others, the South African Department of International Relations and Cooperation (DIRCO), the South African Reserve Bank (SARB), the State Security Agency (SSA) and the Financial Intelligence Centre (FIC). This event is part of the in-country engagements conducted by the CFS-led Sanctions and the Illicit Finance Monitoring and Analysis Network (SIFMANet), supported by the National Endowment for Democracy.
+
+Participants in the discussions fell into two general categories, which steered the conversations in the following ways:
+
+1. Academics and policy analysts: South Africa has limited direct trade with Russia, but for many reasons the political relationship is stronger than the figures imply. As a result, many representatives of the academic and policy research communities have travelled to Russia since 2022 to attend trade fairs and other economic and political events. These participants tended to focus on local policymaking sovereignty and political matters, rather than assessing South Africa’s position on Russia sanctions.
+
+2. Financial services: Many participants in the meetings worked in compliance and legal functions in banks, or in supervisory and regulatory roles relating to the sector. In contrast to the academics and policy analysts, these participants expressed considerable concern about the need to balance international regulators’ and banking partners’ expectations against South Africa’s policy of neutrality, non-alignment and multilateralism.
+
+As a result, the discussions covered a wide range of topics, but generally were concerned thematically with how South Africa can create its own independent diplomatic and political path while also benefiting from cooperation with competing great powers.
+
+
+### Non-alignment and the Material Consequences of Sanctions
+
+Participants’ initial reactions to engagement regarding sanctions focused on South Africa’s policies of multilateralism and neutrality. The government’s policy is to enforce only UN sanctions, rejecting what it sees as unilaterally applied restrictive measures on Russia and Belarus. As one government representative put it: “We value our relations with our partners whether it’s where the sun rises or where the sun sets.”
+
+Participants frequently referred to the theoretical dimensions of the fallout of this stance, and a sense of being stuck in the middle between fighting factions. A failure to apply sanctions would worsen relationships with the G7, while applying them would cause political (if not trading) difficulties with Russia. “Being forced to choose sides between Russia and the West – this is not something we should be asked to do”, one academic participant noted. Several participants described the situation as similar to Cold War-era divisions. As a result, some noted that government decisions are rooted at times not in a policy’s merit, but its perceived geopolitical alignment.
+
+At the same time, private sector participants noted that South Africa’s historically close ties to Russia had led some leaders to make statements that undermined its neutral position. According to one participant, “sometimes what comes out of politicians’ mouths is not non-alignment, and that does affect perceptions of the country”.
+
+The conversation then focused on sanctions’ effects in South Africa, with participants highlighting numerous developmental dilemmas that South African policymakers face. For example, government representatives cited the need for economic growth and new jobs for a growing and ambitious population, with one saying, “we would like to see a safer Africa in a better world that is peaceful”.
+
+Academic participants noted the developmental impact of the sanctions, highlighting the timing immediately following the Covid-19 pandemic. They noted the inflationary pressures and resulting interest rate increases, which one participant observed “led to a significant effect on the masses, particularly on the poor indebted”. Another academic agreed, highlighting the sanctions’ impact on the “debt crisis in the African continent”.
+
+Another issue discussed was energy, with one policy analyst noting that South Africa is likely to face a gas crisis after 2026. Gazprom, they said, was one solution to this issue. Other participants saw opportunities for building stronger intra-African supply chains, rather than relying on imports from other continents. Fertiliser and energy were cited as areas where this had been discussed.
+
+Participants also assessed the importance of engaging with G7 countries on these material and developmental impacts of sanctions. In addition to emphasising the country’s overall policy of multilateralism, it may be important to identify the problematic consequences of sanctions in South Africa and seek potential diplomatic solutions that would ease these effects.
+
+
+### Using Other Financial Crime Compliance Tools to Address Sanctions Risks
+
+Participants from the banking sector said they lacked detailed guidance from the government to support them with their concerns about international regulators’ and business partners’ sanctions compliance expectations. The conversations took on greater urgency because of the greylisting of South Africa by the Financial Action Task Force (FATF) in February 2023, as a result of which South Africa began work on a 22-point mutually agreed Action Plan to address the deficiencies identified by FATF. Private sector participants worried that the country’s financial crime reputation would be further hampered if secondary sanctions were placed on a South African bank, and/or if correspondent banks – those global banks that connect South African banks to the international financial system – were no longer willing to process transactions with the country’s financial institutions as a result of perceived sanctions circumvention risks.
+
+Representatives from South Africa’s supervisory and regulatory bodies agreed that, because the stated policy was one of neutrality, they were unable to provide detailed guidance for complying with G7 sanctions. However, many of these representatives also emphasised the importance of ensuring other financial crime controls were robust in order to mitigate some aspects of sanctions risks and concerns. They felt that some of South Africa’s improvements to meet the FATF Action Plan agenda – particularly around identifying beneficial ownership – would also improve banks’ ability to manage sanctions risk. To that end, South Africa updated its beneficial ownership regime in 2023. SARB has recently imposed administrative penalties on some banks and insurance companies for failures in relation to beneficial owner identification and other financial crime deficiencies, measures that should lead to great focus on these issues across the regulated sector.
+
+Terrorism financing (TF) and proliferation finance (PF) were also highlighted as areas of concern, with representatives from financial regulators highlighting the results of the June 2024 Terror Financing National Risk Assessment (known as the TF NRA). The TF NRA primarily focused on Islamic State and right-wing terrorism, rather than the activities of Wagner Group or other Russian-backed military groups. However, representatives from the supervisory authorities said that “the financial aspect of foreign military training” had been taken into consideration in the TF NRA.
+
+Participants noted the potential overlap between the TF and PF regimes, on one hand, and the Russia sanctions regimes, on the other. They noted similarities to the May 2024 Mutual Evaluation Report for Jersey, released by the Council of Europe’s permanent monitoring body, the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). The evaluation reported few TF and PF regimes in relation to UN sanctions, but highlighted the significant action undertaken by the Jersey authorities on Russia sanctions implementation, which assured assessors that the relevant systems and controls are in place.
+
+Participants from government bodies also discussed the closer relationship between the Democratic People’s Republic of Korea (DPRK) and Russia, and the potential conventional weapons and nuclear weapons proliferation implications of that relationship. One participant asked, “Do you start coming to Russia sanctions through DPRK or vice versa?”, suggesting that the growing nexus between Russia and the DPRK, in breach of UN Security Council sanctions on the DPRK, might play a future role in assessing South Africa’s response to Russia sanctions. Reflecting this perspective, participants said that South African government bodies responsible for counter-proliferation controls had become more active recently, but that they needed to widen their focus: “They’re looking at a very narrow aspect of PF, so we need to refresh the PF risk assessments.”
+
+Nonetheless, both private and public sector representatives accepted that banks’ focus on beneficial ownership, as well as improving their TF and PF controls, would not solve their geopolitical dilemma. “The implications of things that are not [UN Security Council-endorsed] sanctions would be a problem for us to manage”, a government representative said.
+
+
+### Secondary Sanctions and Correspondent Banking Relationships
+
+While needing to balance these policy concerns, banks said they were aware of the sanctions risks and demonstrated their commitment to improving their controls in order to maintain strong relationships with overseas partners.
+
+To the degree possible, regulators also sought to support banks to get the information they require. Government representatives said they were committed to awareness raising, outreach and training for compliance personnel, although “we don’t prescribe any search criteria”. As noted previously, much of this guidance refers to general controls, rather than sanctions-specific guidance.
+
+Banking representatives also criticised international private and public sector partners for a lack of guidance relevant to the South African context. Private sector representatives said that many case studies and typologies for evasion and circumvention were focused on Russian evasion activities in or from Europe or the US, rather than reflecting the African context. Similarly, banks said they would be able to carry out better risk assessments of their customers and transactions if they received more detailed information from correspondent banks, which often change their criteria without notification or explanation. They said they may be able to proactively identify potential clients or transaction patterns of concern if they had more detailed information.
+
+There were also concerns about new financial technologies (including cryptocurrencies and stable coins) and smaller banks, which were seen to have less mature financial crime compliance systems. The regulatory participants said they were aware of and considering the implications of these and were working to align their standards. However, one private sector representative said that they noted a large difference in compliance maturity between the country’s few larger banks, when compared to smaller (“Tier 2”) banks. Most illicit actors, they said, would not carry out transactions through the larger banks, but instead through the mid-sized and smaller institutions.
+
+Another issue, one participant said, was the lack of knowledge within South African banks about how to consider trade-related sanctions and restrictive measures. There was little discussion, they said, between the trade finance and sanctions teams. As a result, “a lot of the banking industry doesn’t know how to apply sanctions in a trade environment”.
+
+
+### Aligning Financial Services Supervision
+
+Another theme from the engagement with government representatives was that supervision was spread across several departments spanning banking and non-banking financial services, financial surveillance and the SARB payments department. Participants said that there was an “imbalance” in the capacity and coverage of the sectors.
+
+Participants said they had been surprised by the Jersey MONEYVAL evaluation because the jurisdiction had one main supervisor, causing them to consider their own supervision architecture. The participants said they were also engaging with other international regulatory bodies to understand their supervision model. The key, participants agreed, was to have consistency and communication between them.
+
+
+### Conclusion
+
+Based on these discussions, it was clear that the South African government had a clear policy of non-alignment and neutrality when it comes to G7 sanctions on Russia, despite trade relations favouring closer alignment with the West. At the same time, there appears to be room for open and pragmatic conversations on both sides: for South African policymakers to express their reservations and material concerns about the financial impacts of sanctions for their economic security, stability and development, and for G7 governments to provide greater information about their priorities. There may also be an opportunity for G7 countries to consider the specific concerns of South Africa (and other non-aligned countries) – for example, how to support both alternative resolutions to energy supply issues (notably the forthcoming gas supply issue), and intra-African trade. Even within the South African framing regarding its neutrality, discussions emphasised that Russia sanctions had implications for South Africa’s economic stability. Where impacts on particular sectors were keenly felt, participants highlighted a greater need for dialogue with the EU, the US and the UK, as well as potentially some coordination with regional African organisations, to raise similar concerns. This may be particularly relevant for issues around the debt crisis and evidencing any impacts of the sanctions on the population. Even within the South African framing regarding its neutrality, discussions emphasised that Russia sanctions had implications for South Africa’s economic stability. Where impacts on particular sectors were keenly felt, participants highlighted a greater need for dialogue with the EU, the US and the UK, as well as potentially some coordination with regional African organisations, to raise similar concerns. This may be particularly relevant for issues around the debt crisis and evidencing any impacts of the sanctions on the population.
+
+Many of the concerns raised by the private sector centred on how to obtain better information relevant to their context to improve their financial crime compliance (including but not limited to information related to Russian sanctions). This may include G7 countries providing country- or region-specific typologies for Russian evasion and circumvention. It may also include better communication between correspondent banks and their partners in South Africa. At the same time, private sector representatives remain legally bound to comply with South African law, which excludes the G7 sanctions.
+
+One partial solution to this tension may be to improve wider financial crime controls, highlighted by South Africa’s focus on better beneficial owner identification, which was driven by the country’s effort to escape the FATF greylist. However, this can only be a partial solution at best: banks will face the same dilemmas if they receive beneficial ownership information indicating that an account is held by a sanctioned Russian individual.
+
+In sum, when it comes to sanctions on Russia, the private sector in South Africa finds itself caught in an invidious position between stewarding critical international relationships (notably with correspondent banks) that are central to the country’s economic security and a government that for political – not economic – reasons, chooses a policy of non-alignment with the West.
+
+---
+
+__Olivia Allison__ is an Associate Fellow at RUSI and an independent consultant. She has more than 15 years’ experience carrying out complex international investigations and supporting the development of integrity and governance for state-owned companies, international companies and international financial institutions. She has a wide range of financial crime and asset-tracing experience from leadership roles held in London, Moscow, Kyiv and Kazakhstan.