New money laundering trend growing in South Africa
Criminals are increasingly exploiting microlending services in South Africa to launder money, as these services often lack the robust customer verification processes traditional lenders use.
SearchWorks360 MD Sameer Kumandan recently outlined the compliance burdens placed on microlenders in South Africa.
He defined microlending as the practice of providing small loans to individuals or groups who are unable to access traditional financial services.
“In South Africa, microlenders have become a critical lever for financial inclusion, especially for people without stable employment, credit histories, or access to collateral,” he said.
“These loans enable small business owners and informal traders to start or grow their ventures, and help individuals bridge short-term financial gaps.”
However, he explained that any institution offering credit must implement compliance measures to mitigate financial crime risks.
In South Africa, the Financial Intelligence Centre Act (FICA) states that microlenders are “accountable institutions”.
This means they are legally required to conduct due diligence on borrowers, report suspicious transactions, and implement anti-money laundering (AML) and counter-terrorism financing controls to ensure responsible lending practices.
However, microlenders actually face dual compliance burdens, as they must comply with FICA regulations and with the National Credit Act (NCA).
The NCA is focused on fair lending practices, affordability assessments, and borrower protection to safeguard consumers against predatory lending and over-indebtedness.
Kumandan said non-compliance with FICA and NCA regulations can result in severe penalties, including fines or the suspension of operations.
In addition, failing to follow regulatory policies can negatively affect the sustainability of the industry by undermining both the financial stability and the reputation of microlending institutions.
He noted that the costs of maintaining compliance with both FICA and NCA can be significant, as this includes conducting due diligence, affordability assessments, employee training, reporting, and technological infrastructure.
“These requirements can even render it impossible for smaller microlenders to offer affordable loans,” he said.
Money laundering risks
Kumandan explained that microlending institutions, by their nature, handle numerous small transactions and deal with clients who may not have traditional banking backgrounds or formal credit histories.
This means these lenders are more susceptible to being used for money laundering and fraudulent activities.
For example, he said criminals are increasingly exploiting microlending services to take out multiple loans under different identities because they lack robust customer verification processes.
Microlenders also traditionally offer loans with relatively flexible terms, which usually means there is less scrutiny around how the loan will be used. Kumandan said this enables criminals to easily divert funds to pay for unlawful activities.
In 2024, Finance Minister Enoch Godongwana revealed the sectors at the highest risk of money laundering in South Africa, which include:
- The gambling sector
- Property practitioners
- Legal practitioners
- High-value dealers
- Money remittance businesses
- Informal networks of money transfer services
- The general use of cash
This is a concerning trend for South Africa, which already finds itself on the Financial Action Task Force’s (FATF) “grey list” for the country’s deficiencies in its measures to combat financial crimes.
This came after a 2021 FATF mutual evaluation report highlighted significant gaps in South Africa’s ability to investigate and prosecute money laundering, corruption, and terrorism financing cases.
The regulatory body pointed to weak enforcement of existing laws and limited convictions in high-profile corruption cases, particularly those linked to state capture, as key concerns for South Africa.
Since being grey-listed, South Africa has made significant strides in reducing non-compliance issues and addressing most of the FATF’s recommendations.
However, these efforts are still not enough, and South Africa has already missed the February 2025 deadline to be removed from the list.
This is despite the government initially aiming to exit the greylist by mid-2024. Deputy Finance Minister David Masondo previously suggested a more realistic timeline of October 2025.
Experts have warned that failure to exit the greylist by this deadline could lead to escalating negative impacts.
This could include higher compliance costs, restricted access to global financial systems, and increased funding costs, further hindering South Africa’s economic competitiveness.
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