Botswana is intensifying its efforts to combat money laundering and terrorism financing in preparation for a crucial international evaluation.
The Bank of Botswana’s Financial Stability Report (FSR) indicates that Botswana completed a National Risk Assessment for money laundering and terrorist financing (TF) in December 2023. This assessment was conducted in preparation for an international evaluation and to comply with global standards for combating money laundering.
According to the report, “The Assessment identified threats and vulnerabilities in some sectors and recommended countermeasures to mitigate ML/TF risks.
The report also shows that Botswana “is undergoing a mock Mutual Evaluation (ME) with the technical support of the United Nations Office on Drugs and Crime.”
It says the mock ME started in February 2024, and is expected to be completed in August 2024.
“Further, government is in the process of establishing a Centre for Combating Illicit Financial Flows in partnership with the University of Botswana to provide AML/CFT/ CPF training and research,” says the report. The new institution will help build capacity and contribute towards the broader national security objectives of the country.
On a related matter, the report says insurance companies could affect financial stability and contribute to systemic risk through three potential transmission channels, namely, failure to provide critical services; inability to mitigate risk and compensate for loss with respect to systemically important counterparties; and risk to systemically important financial institutions.
It says in a highly concentrated market, substitutability may be difficult upon failure of a dominant market player. Lack of alternative service providers could amplify the effect of an insurance company’s distress on the real economy.
“This condition warranted development of a D-SIIs framework to support enhanced monitoring and supervision of such entities,” the report says. It says life insurers continue to dominate the insurance industry, contributing the largest share of assets, at P20 billion in December 2023, while general insurers’ assets were about P2 billion.
Furthermore, the insurance industry in Botswana is interlinked with various market players and households, signifying a diversified portfolio and a potential contagion risk. A large concentration of the industry’s assets (48 percent) is in the local collective investments units (CIUs), made up of both money market funds and non-money market funds (MMFs and NMMFs).
Further, life insurers are more exposed to local CIUs (at 55 percent) than both general insurers and reinsurers. Local NMMFs hold 91 percent of the life insurance industry assets, hence pose a low risk of asset-liability mismatch since NMMFs invest in long-term assets. General insurance is equally exposed to Botswana residents (31 percent), commercial banks, statutory banks and the Savings and Credit Cooperative Society (31 percent).
About 41 percent of reinsurance companies’ assets are held by residents. Notwithstanding, the risk-based supervision and regulatory approach currently applied by NBFIRA is effective in mitigating the risks identified in the NBFIs sectors.
The report says increased digitalisation presents cyber risks. It says clearing systems are largely resilient in handling large volumes of transactions without any major disruption. Meanwhile, the value and volume of electronic fund transfers (EFTs) continue to increase.
As at 31 March 2024, the Bank had licensed twenty-five electronic payment service (EPS) providers under the EPS (electronic payment systems) Regulations of 2019. The emergence, growth and promotion of electronic payments are well aligned with, among others, digitalisation and financial inclusion initiatives, forming part of the economic transformation and policy reform programme for Botswana.
“It is, however, recognised that digital and electronic payments methods also entail risks that need to be identified, measured, mitigated and controlled,” the report says.
