4 Money Laundering – General Awareness Module 1 - Agenda IntroductionMoney Laundering legislation:- Internationally- South AfricaHow ML legislation effects the firmVideoSuspicious transaction reporting
5 Money Laundering – General Awareness Module 1 - Agenda (continued) How to recognise money launderingAnti-terrorism legislationMoney Laundering databaseConclusion
6 What is money laundering? The process whereby criminals attempt to:disguise the true origin and ownership of the proceeds of their criminal activitieswithout jeopardising its sourceActs committed to fund terrorism (internationally – 2001, SA 2004/5)
7 Money Laundering vs. Fraud Fraudulent activityloss or disappearance of assets or revenueMoney launderinglarge quantities of illicit proceedsbeing distanced from their source a.s.a.p.in an undetected manner.less likely to affect financial statementsMoney laundering:- Conceal the origin of the assets- Unlikely to affect financial statementsFraud:- Normally result in a loss
9 Our vulnerability Includes: Advising or assisting individuals to organise their personal affairsHelping to set up trusts, companies or other business structures (locally and offshore)Acting as Attorney, conveyancer, trustee, nominee or company directorAdvice on capital structure, the issue of securities, industrial strategy, mergers and acquisitionsCorporate finance / tax planningExchange control advice
10 Why authorities concentrate on money laundering? Huge businessPreviously focused on the crime itselfNew approach = attack proceeds of crimeFollow the money trail to the crimeConfiscate proceedsDeny criminals access to financial institutions & advisors without increased risk of detectionIncreasing international pressure
11 Why should you be interested? Money laundering is a crimeFirm is potentially vulnerable“Suspicious transactions” must be reported to the FIC“Accountable institutions” must implement compliance systemsPenalties for non-compliance are severeWE MUST PROTECT OUR REPUTATION & THE FIRM’S NAME
12 The international A-ML Regime (1) International policy-making and standard-setting bodyFinancial Action Task Force (FATF)Inter-governmental body40 recommendations (revised in 2003)8 special recommendations to combat terrorist financing (2001)33 members – South Africa a member since 2003
13 The international A-ML Regime (2) FATF functions include:Monitoring compliance by members to international standardsIdentifying non-cooperative countries or territoriesNigeria, Philippines, Cook Islands, Guatemala, Indonesia, Myanmar, NauruRecently removed: Egypt and Ukraine – to be monitoredTransactions require heightened scrutiny
14 Money laundering legislation in South Africa Prevention of Organised Crime Act (POCA)effective date: January1999Financial Intelligence Centre Act (FICA)effective date: February 2002The Protection of Constitutional Democracy against Terrorist and Related Activities Act (PROCDATRA)Passed by parliament on 12 November – not yet gazettedPrevention of Corrupt Activities Act (PRECCA)Effective date: August 2004
15 Introduction to POCA Criminalises the act of money laundering Criminal confiscation of proceeds of crimeCivil forfeiture of:proceeds, andinstruments of offences
16 POCA – Offences (1) Money laundering (Section 4) Any act in connection with property that has effect of concealing or disguising source or movement thereof, or assists the criminal to avoid prosecutionWhere a person knows or ought reasonably to have known that the property is the proceeds of unlawful activities
17 POCA – Offences (2) Proceeds of unlawful activities – section 1 Means - any property or part thereof or any service, advantage, benefit or reward which was derived, received or retained, directly or indirectly, in connection with or as a result of any unlawful activity carried on by any person, whether in the Republic or elsewhere,“Property”Means - money or any other movable, immovable, corporeal or incorporeal thing and includes any rights, privileges. claims and securities and any interest therein and all proceeds thereof
18 POCA – Offences Laundering proceeds of another’s offence (Section 5) Assisting another to benefit from proceeds ofAcquisition, possession or use ofNegligently fails to identify the true nature of illicit property (Section 6)Acquiring, possessing or using, where you ought reasonably to have knownNegligence is no excuse
19 POCA – Penalties and defences Fine of up to R100 millionImprisonment for up to 30 yearsDefenceReporting suspicions to Financial Intelligence Centre (“FIC”)Compliance with FICA
20 Introduction to FICA FICA creates: The Financial Intelligence Centre (FIC)Duties for you!Duties for the firm!
21 Introduction to FICA Role players: Any person in business (including all employees)Accountable Institutions (AI’s) – Schedule 1Supervisory Bodies – Schedule 2Reporting Institutions (RI) – Schedule 3Duties:Reporting suspicious transactions (All role players)Reporting conveyance of cash (> set amount) outside of SA (All persons) – (NB. Not yet operative)Comply with money laundering control measures (AI’s & RI’s)
22 List of Accountable Institutions (1) An admitted attorney (on either practising or non-practising role)2. Board of executors, trust company, any person who administers trust property per Trust Property Control Act3. Estate Agent4. Financial instrument trader5. Unit Trust Management Company6. Bank7. Mutual Bank
23 List of Accountable Institutions (2) Long term insurance businessLicensed gambling businessesForex dealer11. Money lender against securities12. Person who carries on business of providing investment advice or broking services, including a PAAB member who carries on such a business.13. Seller, issuer, redeemer of travel cheques, money orders
24 List of Accountable Institutions (3) PostbankMember of a stock exchangeIthala Development CorporationApproved Investment Manager in terms of:17. Section 4 (1) (a) of Stock Exchanges Control Act18. Section 5 (1) (a) of Financial Markets Control Act19. Person who carries on business of a money remitter
25 List of Reporting Institutions Motor vehicle dealer (your client?)Kruger Rand dealer(Section 28 re cash transactions of RI’s not yet operative)
26 Implications for You if you are an Accountable Institution You (if an AI):Duty to be trained and follow firm’s internal rules for AI’sGeneral provisions (Reporting suspicious transactions), (conveying of cash outside of SA**)Threshold Reporting (specified cash transactions **, electronic transfers outside SA **)** These sections are not yet operative
27 Implications for You if you are NOT an AI You (if not an AI):General provisions (Reporting suspicious transactions )Threshold Reporting (conveying of cash outside of SA**)** This section is not yet operativeMust not provide investment advice/ intermediary services if not FAISA registeredAuditors - be aware of implications on audits of FICA, particularly if your client is an Accountable Institution
28 FICA – offences and penalties Failure to report suspicious transactionsNegligent failure to identify suspicious transactionsTipping offFailure to implement compliance measuresPenaltiesMaximum penalty 15 years jail and/or R10 million fine, orMaximum penalty 5 years jail and/or R1million fine (Compliance procedures)
29 Prevention and Combating of Corrupt Activities Act Offence to handle the proceeds of corrupt activitiesoverlaps with general money laundering offencesCreates reporting duties on persons in positions of authority:All knowledge of corruption / briberyOffences with element of dishonesty > RReport to SAPS
30 IT’S HOME VIDEO TIME! HE’S NOT CRAZY MY HUSBAND WAS A CLIENT OF YOUR FRANKFURT OFFICEIT’S THE CHAOTIC WAY HE RUNS THINGSSUMMARY
31 Money laundering stages PlacementConvert cash to monetary instruments or deposit into accounts$Corporate banking£ accountLegitimate assetEquitiesTreasuryDebtLayeringMove funds to other financial institutions to obscure origin.IntegrationAcquire legitimate assets or fund activities.
32 Funding of terrorism Distribution Layering Placement Distribute funds to finance terrorist activities$Corporate banking£ accountLegitimate assetEquitiesTreasuryDebtLayeringMove funds to other financial institutions to obscure link between origin and destination.PlacementDeposit potentially legitimate assets into the financial system
33 FICA – Suspicious Transaction Reporting -Section 29 Who must report Suspicious Transactions?Anyone carrying on a businessAnyone managing / in charge of a businessAnyone employed by a businessRequirement to report suspicious transactions is contained in section 29.Took effect on 3 February 2003.It is in this area where greatest risk of non-compliaince lies.
34 FICA – Suspicious Transaction Reporting -Section 29(1) When do you report?Where you know or suspect that:Firm received / about to receive proceeds of unlawful activitiesFirm is a party to a transaction which:Facilitates or may facilitate transfer of proceeds of unlawful activitiesHas no apparent business or lawful purposeConducted to avoid reporting dutyMay be relevant to the investigation of tax evasion or attempted tax evasionFirm is used/about to be used in any way for money launderingSuspicion must go to the source of the fundsI.e. one must actually suspect that source of funds is an illegal activity.
35 FICA – Suspicious Transaction Reporting- s29(2), (3) and (4) Transactions that have not yet taken placeTransactions about which enquiries are made which will have the above consequences if concluded - also reportOther matters:May not disclose that you have reported to any other person (tipping off)Suspicious transaction reporting overrides confidentiality restrictionsWe must report to FIC a.s.a.p. but no longer than 15 days after first acquiring the knowledge or suspicionMay continue with transaction unless otherwise directed by FIC.
36 FICA – Suspicious Transaction Reporting Procedure (1) What is the procedure for reporting? Our procedureFirst discuss the matter with the engagement directorReporting is a personal responsibilityCannot be overridden by the engagement director or management.If after discussions, you still suspect money laundering you must report this to Mike Fairbank, the firm’s Money Laundering Compliance Officer ("MLCO").If you are an accountable institution, this discharges your personal responsibility.If you are not an accountable institution, the MLCO will ensure that your responsibility is discharged in an appropriate manner.May continue with transaction unless otherwise directed by FIC.
37 FICA – Suspicious Transaction Reporting Procedure (2) What next?Initially report your suspicions to MLCO by phoneThis could save you needlessly filing a reportFollow up in writing by submission to MLCO of your report on the PwC Suspicious Transaction Internal Reporting FormEnsure you get a receiptThe MLCO will investigate all reportsIf he concludes that we have the necessary knowledge or reasonable suspicion, he will report the matter to the Financial Intelligence Centre ("FIC").May continue with transaction unless otherwise directed by FIC.
38 FICA – PwC Suspicious Transaction Reporting Procedure (3) If you discover or suspect money laundering in the course of your client work you must report through the firm’s procedures, independently of any procedures the client might have.If you detect that a client has entered into a suspicious or unusal transaction with a third party, you will not ordinarily have a duty to report this under FICA. For the reporting duty to arise, the firm must become a party to such a transaction, or be abused in any way for money laundering purposes.If we are the auditors we will need to consider the PAAB Act requirements re Material IrregularitiesMay continue with transaction unless otherwise directed by FIC.
39 FICA – Suspicious Transaction Reporting Penalties for non complianceImprisonment – up to 15 yearsFine - up to R10 millionDAMAGE TO REPUTATIONReports are submitted electronically on FIC website
40 Suspicious transactions & PwC (1) Main risks for Firm are:Being paid from proceeds of unlawful activitiesBeing used for money laundering purposes because of our reputationBeing party to a relevant transaction should generally be greater risk due to the nature of your businessOne needs to know what is usual, before one can identify what is unusual.Is it normal for a particular customer to carry around large sums of cash?Need to know what his source of income is in order to determine.ID of suspicious transactions will depend on what you know about your customer
41 Suspicious transactions & PwC (2) Preventative strategies could be:Thorough client & assignment acceptance proceduresStrict disengagement policy – avoid being a party to a transaction (but still need to consider if we have been used for ML purposes)Compulsory Client Identification & Verification Procedures for Accountable Institution functionsEmphasis on knowing our client’s business & providing tailored advice (e.g. CAKE)One needs to know what is usual, before one can identify what is unusual.Is it normal for a particular customer to carry around large sums of cash?Need to know what his source of income is in order to determine.ID of suspicious transactions will depend on what you know about your customer
42 Suspicious transaction identification Identification of Suspicious TransactionsDepends on what we know about our clientsConsider:Nature of transactionValue of transactionClients with operations in high risk countriesCommercial logic?Unnecessarily complex or artificial?Does it “make sense”?One needs to know what is usual, before one can identify what is unusual.Is it normal for a particular customer to carry around large sums of cash?Need to know what his source of income is in order to determine.ID of suspicious transactions will depend on what you know about your customer
43 Suspicious transaction identification South African trendsPurchase of goods and properties – enjoying proceedsAbuse of businesses and business entitiesE.g. cash based front businessesCash and currency – buying credits in cash, convert into forexInformal sector – largely unregulatedSham stokvelsAbuse of financial institutions – e.g. banks & insuranceThese ML method were highlighted in a workshop at RAU on 5 December Main aim was to ID major ML trends in SA.Workshop attended by experieinced financial investigators, prosecutors, regulators and compliance officiers who have identified certain laundering schemes and patterns in the course of their work.Purchase of goods and propertiesMoney spent on expensive clothes, personal effects, vehicles, property and furniture. Boats, jet ski’s and yachts in coastal areas and in rural areas livestock and farm implements.Normally aimed at enjoying proceeds of crime.Abuse of businesses and business entitiesPopular front businesses = bars, restaurants, shebeens, cash loan businesses and cellphone shops.Shell corporations operating bank accounts – shareholders and directors are often family members.Trusts often feature, because not closely regulated and afford benefit of privacy.Cash & currencytransferred physically e.g. strapped to bodies of passengers, hidden in luggageBuy luxury goods, gamble or convert into forex.Informal sector – NB part of SA economyPrevalence and absence of formal records allow for abuseLarge cash deposits into community based saving schemes – stokvels. Risk of scham stokvels may go undetected ARTICLEAbuse of financial institutionsSA has well developed financial system: deposits into bank accounts, single premium insurance policies
44 Suspicious transactions – red flags GeneralUse of many different firms of Attorney’s and advisers for connected companies and businesses.Transactions passed through intermediaries (e.g. attorneys, PwC) for no obvious purpose.Unusually complex group structures where complexity does not appear to be warranted.Accounting systems that fail to give an adequate audit trail.
45 Suspicious transactions – red flags IdentificationKnown criminalsDifficult to establish identity or beneficial ownershipReluctance to provide sufficient detailsClients who you do not meet (3rd party introductions)Unknown source of funds / not consistent with profile.Referrals from offices / institutions based in countries known for drug trafficking and productionNew clients – “Walk ins” particular at last minute on trip to SA
46 Suspicious transactions – red flags Large cash transactions – “hot” moneyLacking commercial logic – does not “make sense”Outside of the normal course of business – method of payment / receipt not usual business practiceLarge payments / loans for unspecified services to consultants, related parties, employees or government employees.Abnormally extensive or unusual related party transactions.Unauthorised / improperly recorded transactions.
47 Suspicious transactions – red flags Transactions (continued)At amounts that are undervalued or overvalued + double billingUnusual amount of cash transactions for substantial amounts / many small transactions adding up to a substantial amount.Transfers from 3rd party bank accounts / 3rd party chequesPayments “in error” to be forwarded or cancelledTransfers to numbered bank accounts.Use of bearer cheques
48 Suspicious transactions See FAQs in the PwC Anti-Money Laundering ManualANY QUESTIONS?
49 The Protection of Constitutional Democracy against Terrorist and Related Activities Bill (“PROCDATRA”) APOCA – Brings in property owned or controlled by terrorists or persons involved in such activities or financing thereofFICAPurpose will include combating of terrorism and related activitiesNew section 28A – Accountable Institutions have duty to report property of entities or persons who have committed a PROCDATRA offence in their possession or controlSection 29 (reporting suspicious transactions) will encompass property which is connected to a PROCDATRA offence re financing of terrorism, in addition to proceeds of unlawful activity
50 Money Laundering vs. Fraud Fraudulent activityLikely to affect financial statementsLoss or disappearance of assets or revenueMoney launderingLess likely to directly affect financial statements if your client is being abused for ML purposesBut, if using company as a front to launder large amounts of illicit cash proceeds – watch for fictitious salesMoney laundering:- Conceal the origin of the assets- Unlikely to affect financial statementsFraud:- Normally result in a loss
51 PwC Anti-Money Laundering Database User friendly, with easy navigation, contains:Overview of FICA & your responsibilitiesPwC Policy & Procedures (Internal Rules)Suspicious transactions & reportingAccountable Institutions within PwCPwC Compliance ProceduresPAAB GuidelinesSA legislationFinancial Action Task Force (FATF) materialMLCO contact details
52 PwC Anti-Money Laundering Database Also contains FAQs on:Suspicious transaction reportingAccountable Institutions within PwCExemptionsDetails of your responsibilities if you are a trustee (personal appointment) – see FAQ on this under PwC Compliance Procedures – Accountable Institutions within PwC
53 SA legislation – future developments RSA to review current legislation in the next 12 – 18 monthsRequest for comments on Regulations to FICAPwC submitted our comments on 19 November (will deal with at end of module 2)Coming into effect of of anti-terrorism legislationImplementation of the additional reporting requirementsCash transactions (AI’s and RI’s)EFT transactions to or from RSA (AI’s)Cash conveyed to or from the RSA (Everyone)
54 Conclusion – Implications for Firm General provisions (Reporting suspicious transactions)Accountable Institution (CIV, KYC, record keeping)MLCO should assume compliance obligations, internal rules, and trainingThreshold Reporting (conveying cash outside SA- not yet operative)Not a Reporting Institution
55 Conclusion – Implications for You if you are an Accountable Institution You (if an AI):Duty to be trained and follow internal rules for AI’sMust implement Compliance procedures (e.g. Client Identification & Verification, record keeping, KYC), but only when fulfilling an AI functionGeneral provisions (Reporting suspicious transactions), (conveying of cash outside of SA**)Threshold Reporting (specified cash transactions **, electronic transfers outside SA **)** These sections are not yet operative
56 Conclusion – Implications for You if you are NOT an AI You (if not an AI):General provisions (Reporting suspicious transactions )Threshold Reporting (conveying of cash outside of SA**)** This section is not yet operativeMust not provide investment advice/ intermediary services if not FAISA registeredAuditors - be aware of implications on audits of FICA, particularly if your client is an Accountable Institution
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