Foreign-owned spaza shops linked to R6.3 billion, illicit financial flow in South Africa - IOL

The report exposes how informal businesses are being used for hidden financial flows.

Foreign-owned spaza shops are allegedly being used as channels for illicit financial activities in South Africa. 

This is according to the report titled “The Nature of Stealthy Remittance in South Africa” (Insights from SADC immigrants operating in Tshwane’s informal economy), which revealed that an estimated R6.3 billion generated by these spaza shops was illegally moved out of the country.

The money is being transferred through unregistered SIM cards and informal cash networks.

These unmonitored money flows contributed to South Africa’s grey listing due to poor systems for tracking money laundering and terrorist financing.

The funds reportedly reached terrorist cells, including Islamic State (IS) affiliates, operating across Kenya, Somalia, Nigeria and Mozambique.

Out of roughly 87 000 recently registered spaza shops nationwide in official government data, non-South African citizens own approximately 32 824 (about 38%), though regional estimates and informal sector figures indicate that foreign nationals operate a much higher percentage (ranging from 50% to over 70%) of unregistered or total informal township stores.

The report stated the use of such channels often occurs outside formal financial systems and may result in remittances that are neither recorded nor taxed in either the host country or the migrant-sending country. 

“Consequently, tax authorities and financial regulators face considerable difficulties in tracking financial flows, assessing their economic impact and ensuring compliance with relevant fiscal and financial regulations,” read the report. 

The study also warned that the increase of informal social networks, digital communication platforms and community-based remittance systems has created alternative financial ecosystems that operate parallel to formal banking institutions. 

These networks facilitate the movement of funds while simultaneously reducing the visibility of transactions to regulatory authorities such as the South African Revenue Service (SARS), the South African Reserve Bank (SARB) and other financial oversight bodies.

Parliamentary committees, particularly the Standing Committee on Finance, previously raised serious concerns about billions of rand leaving the country through unmonitored channels, which include cash generated by informal traders like spaza shops. MPs consistently argued that these untaxed, illegal outflows drain the national fiscus and starve public services of vital revenue. 

SARS is actively targeting the estimated R200bn spaza shop sector as part of an aggressive strategy to expand the national tax base. While public and political pressure has mounted to clamp down specifically on foreign-owned outlets due to widespread non-compliance, SARS does not differentiate enforcement based on nationality. Instead, it faces systemic structural hurdles across the entire informal economy. 

Government data shows that only about 30% of spaza shops are registered taxpayers, which means that 70% are entirely outside the formal net. 

Most spaza shops operate strictly with cash or informal, fragmented supply chains. This lack of point-of-sale reporting and formal invoicing leaves virtually no digital or paper audit trail for SARS investigators to trace.  

Financial investigation consultant Emerald van Zyl said the banks were also supporting terrorist groups. He said this action had a profound impact when the majority of political leaders were freed from Robben Island in 1990. 

“Many individuals advanced to positions as Cabinet ministers or bank directors, creating a conflict of interest that prevented them from holding banks accountable and ultimately led to the failure of consumer protection in South Africa,” he said.

The 2025 SARB report (Money laundering, Terrorist financing and proliferation financing sector risk assessment for the South African Banking Sector), revealed that South Africa’s banking sector faces high inherent money laundering, terrorist financing and proliferation financing risks, especially among larger domestic institutions.

These offences generate the largest, most recurrent, and most banking-embedded criminal proceeds in South Africa, as evidenced by suspicious transaction reports, suspicious activity report patterns, supervisory intelligence, and case outcomes.

SARB, through its Prudential Authority (PA), last week announced a R28 million fine against Capitec Bank. 

The fine was issued due to administrative non-compliance with the Financial Intelligence Centre Act (FICA), following regulatory inspections carried out in 2023.

This followed an even larger R56.25m administrative sanction handed down in December 2024 (with R35 million suspended). This penalty related to FICA violations uncovered during retail and business banking inspections spanning 2021 and 2022, which flagged identical issues, including delayed cash threshold reporting, missing documentation on sources of funds, and poor risk-management programmes.

The penalties are part of an aggressive enforcement strategy by regulators to clean up South Africa's financial systems after the country was placed on the global financial watchdog's grey list. South Africa ultimately exited the grey list in October 2025. 

According to the SARB report, the banking sector served about 80.2 million clients at the close of 2024.

However, undocumented foreign nationals reportedly use informal financial mechanisms and, in some instances, access transactional services through proxy setups or unverified means.

SARB analysis of financial transaction trends indicates that local bank accounts are primarily receiving illicit proceeds through money remittances, SWIFT transfers, EFTs and cash deposits. 

The report stated that a domestic bank disclosed via SENS (Sasfin Bank) received administrative sanctions during the review period. These penalties were issued due to non-compliance with the FICA, specifically within its foreign exchange division. Following these compliance failures, SARS instituted legal proceedings against Sasfin, filing a civil damages claim totalling roughly R4.87bn.

The lawsuit stems from a SARS investigation revealing that former foreign exchange clients had formed a syndicate. They allegedly colluded with corrupt bank employees to unlawfully expatriate funds offshore, deliberately obscuring the audit trail to evade tax collection. 

The Financial Intelligence Centre (FIC) report of 2022 also stated that South Africa faces high terrorism financing risks because up to 70% of cross-border remittances in the region move through informal, cash-based channels outside the formal banking system.

The country hosts large diaspora communities from nations heavily associated with terrorism, including Somalia, Kenya, Nigeria and Mozambique.

“Financial transactions within these communities rely predominantly on cash. Unregulated, alternative remittance networks like hawala and mobile money are highly favoured by low-income groups,” read the report.

"Cash transmitted in this manner may be carried directly to a particular conflict country, or more likely, to neighbouring countries where it can be carried overland across further borders. It is difficult to detect and confiscate cash moved across borders and outside the formal banking sector. A significant challenge is to distinguish the alternate remittance systems used for channelling funds by the vast émigré community in South Africa, as these systems are unregistered, unregulated and operate outside the formal banking sector."