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Risk and compliance weaknesses impact financial crime in Sub-Saharan Africa

Our latest survey on financial crime trends in Sub-Saharan Africa (SSA) shows weaknesses in risk and compliance programmes that could side-track business opportunities and constrain economic growth at a time when many regional economies are at a crisis point.

  1. A free trade area agreement – the African Continental Free Trade Area (AfCFTA) – and new broadband initiatives will provide a massive boost to trade and industry in Sub-Saharan Africa.
  2. A report from Refinitiv highlights that risk and compliance deficiencies may exclude SSA-based organisations from opportunities, including forging closer ties with regional and international economies.
  3. Compliance executives encouraged to gain a deeper understanding of effective due diligence reporting, for example understanding the ultimate beneficial ownership (UBO) structure of a company.

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Economic growth in Sub-Saharan Africa is expected to reach 3.4 percent by the end of 2021, which lags behind the projected global growth rate of 6 percent.

The economic recovery from the COVID-19 pandemic requires bold policy choices in a tough environment, but many African governments simply do not have the funds.

There are, however, reasons to be optimistic.

Strategies and policies that have been in the planning stage for some years are now being realised and have the potential to substantially improve cross-border trade and communications.

Financial Crime in Sub-Saharan Africa report statistic

Falling trade barriers and increasing connectivity

The new African Continental Free Trade Area (AfCFTA), launched in January 2021, is expected to create a trade bloc of 1.3 billion people by reducing barriers to trade across the continent, forming the largest free trade area in the world.

The free trade agreement is expected to encourage the growth of inter-regional trade during a time of massive disruption to global supply chains, and may provide a significant competitive advantage for African companies that have often battled to gain traction in regional and international markets.

Around 60 percent of Africans are aged 25 years or younger, and is a mobile phone-enabled generation that is eager to engage and work towards their future. The lack of telecommunications infrastructure across the continent has been an impediment to progress but with innovation in technology moving so fast the infrastructure deficit may turn out to be a boon.

With few legacy systems to impede progress, the region is well placed to use innovation to rapidly bridge the digital divide. Big tech companies have committed to broadband and ICT projects on the continent that will increase the access and availability of a stable internet connection and considerably improve the quality of the connection.

The enhanced connectivity has the potential to be a game-changer and a great equaliser for Africa’s young, entrepreneurial and dynamic population.

Pre-pandemic, Africa was seen as the next great growth opportunity, and while the global health crisis is expected to have a far more damaging impact on developing countries, the potential remains. Jack Dorsey, CEO of Twitter, tweeted in November 2019: “Africa will define the future (especially the Bitcoin one).”

Risk and compliance vulnerabilities

However, while new initiatives can help to grow business, trade and economies, those looking to integrate with the regional and global economies could continue to be excluded due to weak risk and compliance strategies. Indeed, our survey responses reveal that a large number of respondents are vulnerable to heightened risk and rapid regulatory change.

At least 57 percent of respondents say their organisation has experienced financial crime or a regulatory breach over the past five years, and responses to other questions reveal some of the gaps in risk and compliance approaches.

Well over one-third of respondents, 39 percent, lack anti-bribery and corruption controls, 33 percent lack anti-money laundering controls, and 55 percent lack a cyber-crime policy.

It seems that many may have issues with completing an effective due diligence report, with 50 percent of respondents stating that due diligence and know your customer (KYC) processes are the most challenging aspect of onboarding and monitoring business relationships.

Over two-thirds of respondents, 69 percent, indicated they do not have a third-party risk management programme.

Reducing the risk of financial crime and compliance failure

Due diligence, KYC and effective third-party risk management programmes have always been essential components of a well-managed compliance programme. Today, however, it is critical that these processes are carefully considered and implemented to reduce the risk of financial crime and compliance failure.

Global supply chains are under unprecedented strain, and lockdown orders are still in place in various locations across the world, hindering movement and disrupting business relationships. Now more than ever, it is vital that great care is taken to certify credentials and categorise risk appropriately during the onboarding phase of new relationships.

Failure to do so not only substantially increases the risk of unwitting association with heightened risk individuals and entities, it is also likely to exclude several business opportunities.

Organisations based in developed countries are more likely to be tightly supervised and many will not risk entering into a contractual agreement with entities in heightened risk locations that are deficient in compliance controls.

As a first step, it is important to understand international regulatory requirements and ensure that compliance policies are a good fit. There is a growing focus, for example, in due diligence reporting on understanding the ultimate beneficial ownership (UBO) structure of a company.

Such details can be incredibly difficult to locate, yet only 28 percent of respondents have a UBO programme.

Financial Crime in Sub-Saharan Africa report statistic

Expanding scope of due diligence

The scope of risk is changing, and there is a notable regulatory shift towards the inclusion of environmental, social and governance (ESG) criteria in due diligence processes.

The European Union’s Sixth Money Laundering Directive (6AMLD), official since June 2021, harmonises the definition of predicate offence against money laundering by member states, which now includes cyber and environmental crimes.

Due to the perception that Sub-Saharan Africa is closely associated with some ESG-related risks, the issue requires careful attention from SSA-based organisations to mitigate both regulatory and reputational risk.

However, survey responses indicate that there is little awareness of ESG risk.

Only 3 percent of respondents viewed ESG issues as significant concerns, and asked what the focus of their compliance activity will be over the next two years, only five percent said third-party risk or KYC, and only 10 percent said ESG issues.

The need for good data quality and diversification in data feeds is likely to increase substantially as compliance executives begin to understand the importance of easily accessible ESG intelligence.

Visible and clear leadership is required

There has been a great deal of change over the past two years, much of it rapid. We are witnessing, for example, a rapid acceleration in the trend of digitalisation of the financial sector.

There has been a significant impact on the compliance function, and 43 percent suggest that the pandemic has created new risk challenges for their financial crime and compliance programmes.

It seems that respondents may be sensing a lack of leadership or support for their function.

Asked for reasons for lack of confidence in financial crime programmes, the lack of specialist resources and management support were the top of the list.

In times of uncertainty, visible and clear direction and leadership is required. As the business world continues to cope with rapid change, strong leadership is vital.

Financial Crime in Sub-Saharan Africa report