HAWKEN MCEWAN: How SA is closing the net on corporate secrecy

In the battle against financial crime SA has taken a significant step forward. The Financial Intelligence Centre (FIC) recently issued new guidance on ultimate beneficial ownership (UBO), lowering the threshold expected for identifying controlling ownership from 25% to 5%. This change, detailed in public compliance communication 59 (PCC59), represents a crucial shift in our approach to combating money laundering, corruption and other financial crimes.

For years it was generally understood that a 25% shareholding was sufficient to establish ownership or control of a company. However, criminals have become increasingly sophisticated, often using complex webs of smaller shareholdings to obscure their control over legal entities. The new 5% threshold is a direct response to these tactics, making it significantly harder for bad actors to hide behind corporate structures.

This change did not come out of nowhere. It aligns with the Companies & Intellectual Property Commission’s (CIPC) beneficial ownership register and addresses the high levels of financial crime in SA. It particularly aims to tackle the well-publicised issue of tender corruption, where shell companies are often used to front illicit transactions.

The lowered threshold is a powerful tool in uncovering what criminals might try to hide. By looking closer at ownership structures investigators are far more likely to identify scenarios where one person holds multiple smaller shareholdings across various entities — a common tactic used to maintain control while staying under the radar.

This change is reminiscent of the challenges faced when SA was greylisted by the Financial Action Task Force (FATF) in February 2023. Just as the greylisting highlighted gaps in our financial crime-fighting infrastructure, this new UBO regulation addresses a critical vulnerability in our system.

While this change strengthens our defences against financial crime, it introduces new considerations for businesses. Many companies have historically viewed detailed shareholder disclosures as an invasion of privacy. The new 5% threshold demands an even closer look at ownership structures, which may be met with some resistance.

However, it is worth noting that the recent requirement for the beneficial ownership register at the CIPC, which mandates the declaration of all shareholders at 5% or greater, should make this task less laborious. Many companies will have already done the groundwork to comply with CIPC requirements.

Technology will also play a crucial role in navigating these new requirements. While technological solutions cannot directly obtain the UBO information from clients — the responsibility still lies with the institution — they can significantly streamline verifying the identities of all identified UBOs. This helps businesses maintain compliance without drowning in paperwork.

Consequences of noncompliance

It is important to note that while the FIC “strongly recommends” the 5% threshold, the industry expects it to become the de facto standard from now on. Noncompliance with the Financial Intelligence Centre Act (Fica) can have significant consequences, ranging from reprimands to substantial fines. In a post-greylisting environment, where SA is under increased international scrutiny, the stakes for compliance have never been higher.

You might wonder how these seemingly technical changes affect the person on the street. In reality, increased transparency in business ownership has far-reaching effects on our daily lives. When businesses are more transparent, it becomes harder for corrupt individuals to exploit company structures for personal gain. This can lead to fairer competition, potentially lower prices for consumers, and reduce the risk of job losses because of fraudulent business practices.

Moreover, as we have seen with the fallout from scandals such as the VBS Mutual Bank heist, when financial crimes go unchecked society’s most vulnerable often suffer the most. By tightening our UBO regulations we are creating a more robust system that protects everyone — from individual savers to entire communities.

As we implement these new regulations it is important to remember that compliance is not just about ticking boxes. It is about creating a financial ecosystem that is hostile to criminals and welcoming to legitimate businesses and investors. This shift towards greater transparency represents a significant cultural change in how we approach business and finance in SA.

While the path to full compliance may seem daunting, it is a necessary step that requires collaboration across all sectors. Businesses, regulators and technology providers must collaborate to develop innovative solutions that make UBO verification and overall know-your-customer processes more efficient and effective. This collaborative approach will be vital if these changes are to be implemented without overburdening legitimate businesses.

As we strengthen our defences further against financial crime, we move closer to not just getting off the FATF’s greylist, but to building a financial system that is truly world class in its integrity and transparency. This evolution will have far-reaching effects, potentially attracting more foreign investment, improving our global economic standing and fostering a more ethical business environment domestically.

• McEwan is director of risk & compliance at DocFox.