South Africa kissing R91 billion a year goodbye 

South Africa loses R90.6 billion a year to illicit financial flows, with the money either leaving the country entirely or never being taxed. This money is also often used to finance illicit trade and criminal activity. 

Despite South Africa having one of the most sophisticated financial systems in the world and the most developed economy in Africa, it faces significant challenges from illicit financing. 

The Organisation for Economic Cooperation and Development (OECD) estimates South Africa loses over 1% of its annual GDP to illicit financial flows. 

In absolute terms, this equates to a loss of between $3.5 billion (R63.4 billion) and $5 billion (R90.6 billion). 

The country also ranks seventh in the top worst-offending countries for anti-money laundering (AML) events in the last decade.

The magnitude of the losses is staggering, draining revenue and resources from an economy that desperately needs them to improve the living standards of citizens and boost growth. 

SARS estimates that illicit trade, excluding financial flows, costs South Africa over R100 billion a year. Business Leadership South Africa (BLSA) puts the figure at around R250 million a day. 

This is dominated by the illicit cigarette trade but also includes the illegal production and sale of alcohol and intellectual property violations from improper labelling. 

To tackle the growth in illicit trade, South African authorities have increasingly begun to pursue profits generated by illegal traders. 

The shift in focus is also due to pressure from the Financial Action Task Force (FATF), which placed South Africa on its anti-money laundering greylist last year. 

Money laundering is the process through which criminals conceal the origins of their wealth, assets, and cash. 

Common tactics used in South Africa include trade-based laundering, where trade transactions are manipulated to disguise the movement of money. 

Layering, where illicit funds are concealed through complex layers of financial transactions, and the misuse of digital currencies, a recent trend that capitalises on the anonymity of these platforms.

In October 2023, FATF conducted an exercise to determine the country’s progress since being added to the greylist. 

It found that South Africa has made significant progress in addressing most concerns. However, it failed to adequately improve the coordination of anti-money laundering legislation and provisions relating to terrorism financing.

Central to this are the illicit financial flows stemming from the trade in illegal cigarettes and other products. 

The Transnational Alliance to Combat Illicit Trade (TRACIT) said this problem is primarily a product of poor law enforcement. 

According to its data, South Africa ranks 37th out of 84 countries it tracks in terms of its structural capability to effectively protect against illicit trade. 

This is better than the global average and places the country above Brazil, China, Saudi Arabia, and other more developed economies. 

However, South Africa performs poorly in almost all other categories and is well below expectations, considering its sophisticated financial system. 

It also said that combatting money laundering is hampered by widespread corruption in the country’s civil service and the involvement of private businesses in corrupt practices. 

This suggests a significant prevalence of financial crime amongst some of the institutions meant to combat illegal activity. 

Despite this, SARS and other financial sector authorities appear to be regaining their ability to investigate and clamp down on illicit trade and financial flows. 

SARS has significantly tightened its compliance requirements for the current tax year, with a specific focus on the beneficial ownership of companies. 

This was one area identified by FATF that was being used by criminals to finance illicit activity and take money out of the country. 

Another area in which South African authorities are increasing their oversight is real estate, with the Financial Intelligence Centre (FIC) issuing a record number of fines in the sector during the first quarter of 2024.