Picture: ISTOCK
Picture: ISTOCK

SA spends more than Switzerland on compliance with anti-money laundering (AML) laws, a new study has found.

The South African financial services sector spends an estimated $2.05bn (R24.3bn) a year on AML compliance, according to research issued on Thursday by LexisNexis Risk Solutions, a company that sells risk management technology. This is higher than the $1.2bn paid annually by the sector in Switzerland and the $2bn paid by Dutch companies, according to Seyfi Günay, head of sales for Europe, the Middle East and Africa.

The South African study is based on responses from a representative sample of 59 banks, insurers and asset managers, including 17 with assets exceeding $50bn. These were extrapolated to reflect the entire sector.

The research underscores the hefty bills banks rack up to remain on the right side of financial sector laws. The cost of non-compliance would be more expensive, as recent fines indicate.

The Reserve Bank fined SA’s big four banks R125m in 2014 over lax AML controls, although no evidence of money laundering was found. Two years later, the regulator fined Bank of Baroda, which offers banking services for Gupta family companies, R10m for failure to comply with the Financial Intelligence Centre Act, aimed at combating money laundering.

Leaked e-mails show how companies connected to the Gupta family have been involved in extensive money laundering, often involving state funds. In court papers lodged last year, then finance minister Pravin Gordhan said banks had reported 72 "suspicious" transactions worth R6.8bn, entered into by the Gupta family between 2012 and 2016, to the Financial Intelligence Centre.

While SA spends more than some countries in Europe on AML compliance, European companies spend more overall. Annual compliance costs in Europe of $83.5bn amounted to 11% of financial sector assets of $760bn.

South African banks, on the other hand, spend just 0.6% of the sector’s $366bn asset base on AML compliance. Large banks spent an average $16.7m annually. Smaller companies spent relatively more on AML compliance as a percentage of their assets, the research found.

The cost of compliance with AML laws was higher in SA than elsewhere due to the country’s reliance on labour, said Günay. While South African companies said that labour absorbed 64% of their compliance spend and technology only 36%, the split was equal among European firms, he said.

A majority of firms were already using or expected to use machine learning and artificial intelligence, while 17% cited these technologies as irrelevant.

As many as 86% of South African companies reported losing between 1% and 4% of prospective customers based on friction during on-boarding due to the effect of AML-compliance processes. This was higher for insurance companies.

The overwhelming majority of South African respondents (90%) said that regulatory compliance was the most important driver of AML initiatives, followed by improving business results (86%); reputational risk (75%); and business de-risking (27%), which had a higher overall weighting among insurers (64%).

Only 36% to 56% of European companies listed regulatory compliance as the primary driver of AML initiatives. "European companies see compliance as a competitive advantage rather than a regulatory burden," said Günay, who suggested South African companies needed to view it as a means to gain customer insights.