MONEY LAUNDERING
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Money Laundering
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Contents
What is money laundering?
5
Where does money laundering come from?
6
What is the scale of the problem?
7
How does money laundering work?
7
Where does money laundering occur?
12
Why should money laundering be stopped?
15
How can money laundering be stopped?
20
Money laundering trends in South Africa
22
Purchase of goods and properties
22
Abuse of businesses and business entities
23
Cash and currency
24
Abuse of financial institutions
25
The informal sector of the economy
26
Money laundering legislation in South Africa
27
The relevant laws
27
Important definitions
27
The Prevention of Organised Crime Act
29
Negligence and intent (section 1)
29
Laundering offences linked to racketeering (sections 2 – 3)
29
Laundering offences linked to proceeds of unlawful activities (sections 4 – 8)
30
Offences relating to criminal gang activities (sections 9 – 11)
31
Dealing with proceeds of unlawful activities (sections 12 – 36)
31
The Financial Intelligence Centre Act
The Financial Intelligence Centre (sections 2 – 16)
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34
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The Money Laundering Advisory Council (sections 17 – 20)
34
Money laundering control measures (sections 21 to 45)
35
Offences and penalties (sections 46 – 68)
41
Search, seizure and forfeiture (section 70)
42
List of accountable institutions (schedule 1)
43
List of supervisory bodies (schedule 2)
44
List of reporting institutions (schedule 3)
44
Regulations
44
What can I do to combat money laundering?
50
Government
50
Accountants and consultants
51
Independent auditors
51
Internal auditors
53
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WHAT IS MONEY LAUNDERING?
The goal of a large number of criminal acts is to generate a profit for the individual or
group that carries out the act. Money laundering is the processing of these criminal
proceeds to disguise their illegal origin. This process is of critical importance, as it
enables the criminal to enjoy these profits without jeopardising their source.
Illegal arms sales, smuggling, and the activities of organised crime, including for
example
drug
trafficking
and
prostitution
rings,
can
generate
huge
sums.
Embezzlement, insider trading, bribery and computer fraud schemes can also produce
large profits and create the incentive to “legitimise” the ill-gotten gains through money
laundering.
When a criminal activity generates substantial profits, the individual or group involved
must find a way to control the funds without attracting attention to the underlying activity
or the persons involved. Criminals do this by disguising the sources, changing the form,
or moving the funds to a place where they are less likely to attract attention.
Governments are now realising that the pursuit and confiscation of illegal monies from
crime is as effective a way of attacking crime as arresting the felons, perhaps even
more so given that many drug barons are able to continue to conduct business from
their prison cells. So by seizing the rewards from crime it is hoped that such activity is
discouraged. The extent to which money laundering enables criminals to engage in
activities harmful to the economy validates its study so as to prevent such activity.
A second reason for studying the economics of money laundering is that most financial
institutions are unaware of the extent to which the world financial markets and banking
system are being used to process illegal monies. Banks and financial institutions are at
risk from being used for such activities as failure to observe their new legal
responsibilities in combating money laundering leaves many of them open to criminal
prosecution and the subsequent adverse publicity.
Therefore the study of money laundering as a means to countering crime, which
imposes huge economic resource costs on society and threatens the proper functioning
of the economy, as well as threatening the stability of the banking system, is a fully
justified area of research.
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Where does money laundering come from?
The term "money laundering" is said to originate from Mafia ownership of laundromats
in the United States. Gangsters there were earning huge sums in cash from extortion,
prostitution, gambling and bootleg liquor. They needed to show a legitimate source for
these monies.
One of the ways in which they were able to do this was by purchasing outwardly
legitimate businesses and to mix their illicit earnings with the legitimate earnings they
received from these businesses. Laundromats were chosen by these gangsters
because they were cash businesses and this was an undoubted advantage to people
like Al Capone who purchased them.
Money laundering is called what it is because that perfectly describes
what takes place - illegal, or dirty, money is put through a cycle of
transactions, or washed, so that it comes out the other end as legal,
or clean, money. In other words, the source of illegally obtained funds
is obscured through a succession of transfers and deals in order that
those same funds can eventually be made to appear as legitimate
income.
Meyer Lansky (affectionately called “the Mob’s Accountant”) was particularly affected by
the conviction of Al Capone for something as obvious as tax evasion. Determined that
the same fate would not befall him he set about searching for ways to hide money.
Before the year was out he had discovered the benefits of numbered Swiss Bank
Accounts. This is where money laundering would seem to have started and according
to some authors Lansky was one of the most influential money launderers ever. The
use of the Swiss facilities gave Lansky the means to incorporate one of the first real
laundering techniques, the use of the “loan-back” concept, which meant that hitherto
illegal money could now be disguised by “loans” provided by compliant foreign banks,
which could be declared to the “revenue” if necessary, and a tax-deduction obtained
into the bargain.
“Money laundering” as an expression is one of fairly recent origin. The original sighting
was in newspapers reporting the Watergate scandal in the United States in 1973.
Since then, the term has been widely accepted and is in popular usage throughout the
world.
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Money laundering as a crime only attracted interest in the 1980s, essentially within a
drug trafficking context. It was from an increasing awareness of the huge profits
generated from this criminal activity and a concern at the massive drug abuse problem
in western society that created the impetus for governments to act against the drug
dealers by creating legislation that would deprive them of their illicit gains.
Governments also recognised that criminal organisations, through the huge profits they
earned from drugs, could contaminate and corrupt the structures of the state at all
levels.
Money laundering is a truly global phenomenon, helped by the international financial
community which is a 24hrs a day business: When one financial centre closes business
for the day, another one is opening or open for business.
As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds
of crime, which to a large extent also mark the operations of organised and
transnational crime, are its global nature, the flexibility and adaptability of its operations,
the use of the latest technological means and professional assistance, the ingenuity of
its operators and the vast resources at their disposal.
The international dimension of money laundering was evident in a study of Canadian
money laundering police files. They revealed that over 80 per cent of all laundering
schemes had an international dimension.
What is the scale of the problem?
By its very nature, money laundering occurs outside of the normal range of economic
statistics. Nevertheless, as with other aspects of underground economic activity, rough
estimates have been put forward to give some sense of scale to the problem.
The International Monetary Fund, for example, has stated that the aggregate size of
money laundering in the world could be somewhere between two and five percent of
the world’s gross domestic product. That is more than the total economic output of the
United Kingdom, or about ten times the size of South Africa’s economy.
How does money laundering work?
There is no one method of laundering money and those methods that are the most
successful are of course unknown to the authorities. Methods of money laundering
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range from the purchase and resale of yachts and antiques to the transference of
money through a purposefully complex system of legitimate international businesses:
shell companies and banks, which may be held by a holding company, usually
registered in a jurisdiction where no annual accounts need be filed, foreign or domestic
nominee directors may be appointed and bearer shares are permitted, (e.g. the islands
of St. Kitts and Nevis in the Caribbean1). As most money being laundered comes from
street level drug deals, a cash intensive business by nature, this source will be the main
area of focus.
Money laundering has both macro and micro levels. The macro level has three distinct
stages: that of placement, layering and integration, and innumerable micro phases
depending on the size of the operation and the degree of deception required.
Placement
The first stage in the washing cycle is the placement of the monies into the financial
system or retail economy or smuggling them out of the country. The aims of this stage
are to remove the cash from the location of acquisition so as to avoid detection from the
authorities and the attention of other criminals and then to transform it into other asset
forms.
This is perhaps the most difficult stage of the cycle, for the launderer is faced with
converting small denominations of cash into more manageable monetary instruments or
assets. If one imagines a weekly drug revenue of R1 million in R50 notes as a 19 kg
package2 launderers must deposit, some appreciation of the launderer’s problem can
be gained. One could not simply deposit such money into a bank account weekly
without raising some suspicions or, as in South Africa and many other countries, being
1
According to Reuters the Island of Nauru, northeast of Australia, has a population of
10 000, one main road and 400 banks. In 1998 alone those banks received US$70bn
from Russia – most, if not all, from organized crime. Russia was removed from the
blacklist during October 2002 but there are still eleven other countries on the blacklist,
including Egypt, Guatemala, Nauru, Nigeria, Philippines and St. Vincent & The
Grenadines.
2
According to the Reserve Bank the weight of R1 million in cash in different
denominations is: R10 – 85 kg; R20 – 45 kg; R50 – 19 kg; R100 – 10 kg and R200 –
5,25 kg.
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required to file reports with the authorities. To overcome these problems, launderers:

Engage in smurfing - structuring their deposits to avoid having to file reports.

Have an accomplice in the bank or securities/commodities brokers to help them
dispose of the funds.
Eighty to eighty-five per cent of drug sales monies will find their way into the legitimate
economy through these channels, the remaining fifteen to twenty per cent will be
smuggled out to be deposited with offshore banks which have bank secrecy laws, (i.e.
making it a criminal offence for the banks to reveal any information about their client)
e.g. Switzerland. It is estimated that one and a half tons of foreign currency arrives at
Zurich airport daily, destined for Swiss banks.
Layering
Once the cash is transformed into another asset the second stage can begin: the
layering or “the heavy soaping”. The purpose of layering is to disassociate the illegal
monies from the source of the crime by purposefully creating a complex web of financial
transactions aimed at concealing any audit trail as well as the source and ownership of
funds.
Typically layers are created by moving monies in and out of the offshore bank accounts
of bearer share shell companies through electronic funds transfer (EFT). Given that
there are over 500,000 world-wide transfers a day representing over one trillion US
dollars most of which are legitimate, and that not enough information is disclosed on a
transfer to reveal the source of the money (and hence whether it is clean or dirty), these
provide an excellent way of moving dirty monies. An alternative form is by engaging in a
complex set of transactions with stock, commodity and futures brokers. Here, the
unnatural degree of anonymity provides ample room for layering as the likelihood of the
transactions being traced is negligible given the sheer volume of daily transactions.
Integration
The final stage in the process is integration or the “spin dry” of the illegal funds.
Integration of the “cleaned” money into the economy is achieved by making it appear to
be legally earned and so safe from probing officials as to its source. One method of
integration is by companies falsely overvaluing exports and undervaluing imports so as
to move money from one company and country to another. Another simpler method is
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to transfer the money (via EFT) to a legitimate bank from a bank owned by launderers,
as “off the shelf banks” can be purchased in many tax havens.
Techniques and tools
Smuggling
Since 1986 smuggling has been the most common method of beginning the laundering
cycle. Smuggling gets cash out of its country of origin and into countries with strict
bank-secrecy laws. From these offshore banking havens, the proceeds are layered and
repatriated, or smuggled back in the form of non-cash financial instruments.
One example of such a smuggling technique involves a manipulation of the cashreporting regulations at the border. A launderer smuggles cash out of a country without
declaring the money. He then turns around and comes back, declaring the funds as
legitimate revenue, backed up with false invoices, receipts, etc. Customs then issues
the proper form, allowing the smuggler to deposit that cash anywhere without raising
suspicion.
Smuggling cash is generally done in one of three ways:

By shipping bulk cash through the same channels used to bring in the drugs (by
container, ship, truck or airplane)

By hand-carrying cash (by courier)

By changing the cash into negotiable instruments (such as traveller’s cheques),
then mailing these to foreign banks or other foreign destinations.
Structuring / smurfing
Smurfing is the term used to avoid reporting requirements by dividing large deposits of
cash into smaller transactions. The most notorious case of smurfing was the Grandma
Mafia Case where a 60-year old grandmother led a group of middle-aged women in
making structured deposits of over US$25 million in Florida drug money at various
California banks.
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The use of front companies
Front companies are used by launderers to place and layer illicit proceeds. Any cashrich business can be an effective front company – see “Industries that are prone to
money laundering” on page 13.
Front companies are effective tools for money
laundering for two reasons. First, they do not necessarily require the complicity of their
financial institution or any non-bank financial institution to operate. Second, they are
difficult to detect if they are also conducting legitimate business.
The use of shell or nominee companies
Shell corporations are one of the major tools in layering funds. For example, by the
early 1980s, as much as 20% of all real estate in the Miami area was owned by entities
incorporated in the Netherlands Antilles. One piece of property was traced through
three levels of Netherlands Antilles shell corporations, with the final “true” owner being a
corporation with bearer shares. These corporations were in turn owned or controlled by
various drug traffickers.
Bank drafts
In some countries banks are not required to report cash transactions or there are no
sanctions for those that don’t comply with requirements. In these cases deposits can
be made and bank drafts issued.
Counterbalancing loan schemes
This method involves parking illicit funds in an offshore bank while using the value of
the account as collateral for a bank loan in another country. Ironically, launderers using
these schemes often gain tax advantages for their apparently legal operations, using
the interest expense from the loans as tax deductions. Counterbalancing loans were
commonly used by the by the Bank of Commerce and Credit International (BCCI) in its
18-year money laundering run.
Dollar discounting
According to this method a drug trafficker arranges for the cartel’s controller to auction
or factor the drug proceeds to a broker at a discount. The broker then assumes the risk
of laundering the money.
receivable at a discount.
Essentially, the dealer is simply selling his accounts
Discounting drug proceeds may well be the most complex
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form of international finance. In addition to the standard issues of managing foreign
transaction and exchange rate risk the trafficker must factor in law enforcement
intervention risk.
Mirror-image trading
Mirror-image trading was the scheme used by subsidiaries of BCCI in the commodities
market to launder huge sums. Mirror-image trading involves buying contracts for one
account while selling an equal number from another: since both accounts are controlled
by the same individual, any profit or loss is effectively netted. The key is to lose these
transactions among billions of Rands’ worth of legitimate transactions.
Inflated prices
Using inflated prices to pay for imported goods is a common laundering technique.
Launderers, working through front companies or willing accomplices, simply create
false invoices for goods either never actually purchased or purchased at greatly inflated
prices. Examples of actual cases include the importation of raw sugar from Britain at
US$1,400 per kilogram vs. the going rate of US$0.50 per kilogram; the important of cut
emeralds from Panama at US$975 per carat vs. the going rate of about US$44 per
carat; and the importation of razor blades from Colombia at a cost of US$900 apiece,
vs. the going rate of US$0.09 a piece.
Where does money laundering occur?
As money laundering is a necessary consequence of almost all profit generating crime,
it can occur practically anywhere in the world. Generally, money launderers tend to
seek out areas in which there is a low risk of detection due to weak or ineffective antimoney laundering programmes. Because the objective of money laundering is to get
the illegal funds back to the individual who generated them, launderers usually prefer to
move funds through areas with stable financial systems.
Money laundering activity may also be concentrated geographically according to the
stage the laundered funds have reached. At the placement stage, for example, the
funds are usually processed relatively close to the under-lying activity; often, but not in
every case, in the country where the funds originate.
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Industries that are prone to money laundering
Banking
The BCCI affair was a major scandal involving allegations of corruption, bribery, money
laundering, etc. The bank had 3,000 criminal customers and every one of those 3,000
criminal customers is a potential front page story, including financing from nuclear
weapons, gun running, narcotics dealing, etc.
Money laundering becomes relatively easy when a banking institution
and a number of its key officials co-operate in the laundering activity.
Underground banking (sometimes called “parallel” banking)
These systems tend to mirror more conventional bank practices, but are highly efficient
and wholly unauthorised methods of transferring money around the world. The best
known among them are the Chop, Hundi, and Hawallah banking within various ethnic
communities, which enables the avoidance of any conventional paper record of the
financial transaction. Such methods do not require the actual movement of money but
nonetheless facilitate the payment of funds to another party in another country in local
currency, drawn on the reserves of the overseas partner(s) of the Hawallah banker. The
system is dependant on considerable trust and considerable simplicity - the money
launderer places an amount with the underground bank - the identifying receipt for a
transaction being something as innocuous as a playing card or post-card torn in half,
half being held by the customer and half being forwarded to the overseas Hawallah
banker. The launderer then presents his receipt in the target country to obtain his
money, thus avoiding exporting cash out of the country and limiting the risk of detection.
Futures
The UK experience showed that the futures market, through Capcom Commodities, a
BCCI-related institution was another area that money launderers were taking advantage
of for their money laundering schemes. Because of the “anonymous” nature of the
trading strategies, all brokers trading as principals and not in their client’s name, the
true identity of the beneficial owner is not known. Commodities therefore are a “zero
sum” game, which means you can only buy if someone is willing to sell, and vice versa.
Launderers can take advantage by a strategy of buying and selling the same
commodity, thereby taking a small hit for the commission charged by the broker. They
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pay the losing contract out of dirty money and receive a cheque that legitimises their
profits and creates a paper trail for anyone who asks where the money came from.
Professional advisors
Funds can be deposited with attorneys, auditors, etc. and later be filtered back into the
system.
Finance houses / building societies
As with banks, any suspicious transactions must be reported. Money deposits in these
institutions are where the placement stage usually takes place so vigilance is called for
by staff. Any unusual change in regular customers depositing habits need to be
investigated and lenders also have to be aware that money laundering techniques can
also involve paying off a debt faster than income would support.
Bureau de change, international money transmitters, travel agents.
All offer a wide range of services that can be used by the money launderer. Airline
tickets, foreign currency exchanges in the form of cash and travellers cheques, are
recognised as being widely used techniques. Money transmitting services in the form of
wire, fax, draft, cheque or by courier exist for people unable to use traditional financial
institutions. Customer anonymity is a primary feature of such transmissions which
identifies the inherent level of risk.
Casinos
Casinos and gambling establishments are particularly attractive to money launderers.
Cash can be deposited with a casino in exchange for chips or tokens. After a few turns
at the table the player can cash in the remainder for a cashier’s cheque, which can be
deposited in their account. Another method is to buy winning tickets from people in
bookmakers and saying you have won, making bookmakers vulnerable to being used.
Antique Dealers, Jewellers, Designer Goods Suppliers
Any area that involves high value goods that possess great portability and in many
cases are used to being paid in cash is an attractive area for money launderers. All the
above satisfy these criteria and owners and staff have to be aware of their obligations
under the legislation if they are to avoid being unwittingly used in a money laundering
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Cases have been reported in the United States where jewellery stores
managed to launder more than US$1 billion in cash.
The above is not an exhaustive list of at risk institutions; however, some of the
characteristics can be recognised in other groups not mentioned.
Why should money laundering be stopped?
Risks to the financial sector
The role of the financial system in money laundering
A particularly concerning factor is the increasing use of the financial markets by money
launderers to integrate and layer their funds. For example, a new company may issue a
large number of shares, which the launderer director will own through various offshore
agencies, and these shares will then be aggressively marketed and sold to an
unsuspecting public, while the launderer receives clean cash.
Ironically, perhaps the most efficient way to launder money is to pay the relevant tax
due on it, for it becomes very difficult for agencies of the state to claim that a sum of
money represents the proceeds of crime when the beneficial owner has declared tax on
it. The main pillar of money laundering is the role that the financial system plays in the
laundering. The money laundering industry poses certain risks to financial institutions,
risks that are reinforced by the increasingly hard stance of governments around the
world about bank complicity in money laundering.
Given that the size of the global money laundering industry is unknown, the extent of
the risks to the financial system can only be estimated. However, the ruination of some
financial institutions by money launderers in the past indicates that the risk is a potent
one.
On a macro level, money laundering poses a risk to confidence in the financial system
and in its institutions. The confidence in the financial system as a whole could be
seriously jeopardised thereby losing the trust of the public if the financial system is seen
to be laundering criminal proceeds. It would not be difficult to imagine the decline of a
reputable financial centre were it to become synonymous with laundering criminal
proceeds, given the emphasis on name and reputation in attracting and maintaining
business in the financial industry. Therefore the importance of confidence and the need
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for transparency in the financial system cannot be understated, especially as it makes a
significant contribution to certain countries” GNP.
Financial Institutions
Not only is the financial system likely to be at risk, but the individual financial institutions
that either intentionally or unintentionally launder money are too. This includes banks,
stock brokers, life assurance companies etc.
Banks are susceptible to risks from money launderers on several fronts. There is today
a very small step between a financial institution suspecting that it is being used to
launder money and the institution becoming criminally involved with the activity. Banks
that are discovered to be laundering money will face costs associated with the
subsequent loss of business as well as legal costs.
At the very least, the discovery of a bank laundering money for criminals is likely to
generate adverse publicity for the bank. (E.F. Hutton, a US brokerage house, received
a great deal of negative publicity for laundering criminal funds.) A lack of confidence in
a banking institution is likely to result in declining business as clients move elsewhere.
Banks also face the risk of criminal prosecution for money laundering whether they
know the funds are criminally derived or not. The 2002 Financial Intelligence Centre Act
(discussed from page 33) places significant responsibilities on so-called “reportable
institutions”. If it finds an institution flouting these laws, penalties and prison sentences
may be imposed.
More often than not, bank directors are unaware that their institution is being used to
launder money. Typically an employee colluding with a criminal will circumvent the
bank”s depository procedures to launder money. However, the bank is still liable for the
actions of its employees. It is therefore essential that banks adopt and enforce the new
legal procedures in deposit taking and keep tight controls on staff likely to be useful to
money laundering.
Two conflicts of interest arise here that may dampen the enthusiasm of banks in
complying with such laws. The first is that bank officials are under increasing pressure
to bring in new business and drive up profits. Some sources are of the opinion that
many western banks remain afloat due to money laundering services. In the case of the
Bank of Credit and Commerce International (BCCI), the bank needed to earn profits so
as to cover up the huge losses from loans and trading and laundering money provided
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an easy way to do so. The second conflict is that certain banks and countries have a
competitive advantage in providing private banking services, i.e. client confidentiality.
Bank secrecy laws exist in fifty nations world-wide and for such banks these are
important in attracting customers. Any moves to abolish or continually override such
laws are likely to be strongly opposed.
Financial service providers should look out for clients who:

Travel a great distance to use their services when they know that
equivalent services are available much nearer the client’s home.

Insist on using their services for transactions not within their
normal business and for which there are other firms with publicly
acknowledged expertise.

Are reluctant to co-operate with verification of their identity.

Wish to buy an insurance or investment product, but are more
interested in cancellation or surrender terms than long-term
performance.

Ask to cancel or surrender a long-term investment soon after
setting up the contract.

Want to buy a financial product, but have no clear source of
funds.

Insist on entering into financial commitments that appear to be
considerably beyond their means.

Wish to invest using cash, or make top-up payments using cash.

Use a cheque drawn on an account other than their own.

Refuse to explain why they wish to make an investment that has
no obvious purpose.

Are happy to accept relatively uneconomic terms, when with a
little effort they could have a much better deal
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
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Suddenly vary their pattern of insurance or investment – for
example, ask for a lump-sum contract when they have previously
only invested in small, regular amounts.

Ask for settlement to a third party.

Are introduced by an overseas agent who is based in a country
noted for drug production or exchange.
The Securities Markets
The final area of risk to the financial system is the risk posed to the securities markets,
notably the derivatives markets. As a result of the degree of complexity of some
derivative products, their liquidity and the daily volume of transactions, these markets
have the ability to disguise cash flows and hence are extremely attractive to the
professional money launderer. However, their activities pose huge risks to these
markets.
Firstly, the brokers used to execute orders on behalf of money laundering clients may
be criminally liable for aiding and abetting money launderers. A worrying situation is the
money launderers’ skilful manipulation of the futures markets. They may for example
take correspondingly short and long positions paying debts with dirty money and
receiving profits in clean money. Due to their capital, and collusion in positions they
have also in the past purposefully manipulated market prices. Unless markets are seen
to be transparent and the price system exogenous of individual agents’ actions,
participants may retire from the market and so make the market’s efficiency diminish.
Secondly, another major risk created is through the use of offshore banks who may
wash money using derivative markets. As these banks are foreign, they are not
required to abide by the same regulations as those of domestic investors as regards
overexposure to uncovered risk. They are therefore able to take on huge risk relative to
their institutional size. Should losses result from such positions the debts may not be
fully paid as the contracts purchased may be only one step in the course of a complex
laundering chain that is untraceable. Thus potentially huge loses could be incurred by
legitimate investors, causing damage to the derivatives markets.
It is therefore essential that policies be enforced to ensure money laundering is
prevented from using the financial system as a means to an end and in turn discourage
the original crimes from occurring.
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Consequences for economic development
Launderers are continuously looking for new routes for laundering their funds.
Economies with growing or developing financial centres but inadequate controls are
particularly
vulnerable
as
established
financial
centre
countries
implement
comprehensive anti-money laundering regimes.
Differences between national anti-money laundering systems will be exploited by
launderers, who tend to move their networks to countries and financial systems with
weak or ineffective countermeasures.
Some might argue that developing economies cannot afford to be too selective about
the sources of capital they attract. But postponing action is dangerous. The more it is
deferred, the more entrenched organised crime can become.
As with the damaged integrity of an individual financial institution, there is a damping
effect on foreign direct investment when a country’s commercial and financial sectors
are perceived to be subject to the control and influence of organised crime.
Consequences for society at large
The possible social and political costs of money laundering, if left unchecked or dealt
with ineffectively, are serious. Organised crime can infiltrate financial institutions,
acquire control of large sectors of the economy through investment, or offer bribes to
public officials and indeed governments.
The economic and political influence of criminal organisations can weaken the social
fabric, collective ethical standards, and ultimately the democratic institutions of society.
In countries transitioning to democratic systems, this criminal influence can undermine
the transition.
Most fundamentally, money laundering is inextricably linked to the
underlying criminal activity that generated it. Laundering enables criminal activity to
continue.
The fight against crime
Money laundering is a threat to the good functioning of a financial system; however, it
can also be the Achilles heel of criminal activity.
In law enforcement investigations into organised criminal activity, it is often the
connections made through financial transaction records that allow hidden assets to be
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located and that establish the identity of the criminals and the criminal organisation
responsible.
When criminal funds are derived from robbery, extortion, embezzlement or fraud, a
money laundering investigation is frequently the only way to locate the stolen funds and
restore them to the victims.
Most importantly, however, targeting the money laundering aspect of criminal activity
and depriving the criminal of his ill-gotten gains means hitting him where he is
vulnerable. Without a usable profit, the criminal activity will not continue.
How can money laundering be stopped?
The primary purpose of organised crime is to make profits. Like any business, the
purposes of profit are to enjoy it and re-invest it in future activity. For the organised
criminal, however, profit close to the source of the crime represents a particular
vulnerability and unless the criminal can effectively distance himself or herself from the
crime which is the source of the profit they remain susceptible to detection and
prosecution. Hence the need to launder their illicit profits to make them appear
legitimate.
The biggest source of illicit profits comes from the drugs trade and it was drug
trafficking that provided the initial catalyst for concerted international efforts against
money laundering. The drugs industry is a highly cash intensive business and in the
case of cocaine and heroin the physical volume of notes received is much larger than
the volume of drugs themselves. In order to rid themselves of this large burden it is
necessary to use the financial services industry and in particular, deposit-taking
institutions.
The Financial Action Task Force (FATF) on Money Laundering has identified certain
“choke” points in the money laundering process that the launderer finds difficult to avoid
and where he is vulnerable to detection. The initial focus has to be on these areas if the
war against the launderer is to proceed successfully.
The choke points identified are:

entry of cash into the financial system;

transfers to and from the financial system; and
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cross-border flows of cash.
The entry of cash into the financial system, known as the “placement” stage is where
the launderer is most vulnerable to detection. Because of the large amounts of cash
involved it is extremely hard to place it into a bank account legitimately.
The South African system of reporting suspicious transactions to the authorities along
with the procedures adopted by deposit-takers are powerful weapons against money
launderers. In particular, the emphasis being placed on the importance of deposit-taking
institutions “knowing their customer” has severely curtailed this activity to such an
extent that one of the favourite methods for money launderers to “place” their money is
to smuggle the money out of the country. There are penalties attached to the various
money laundering offences for the deposit-taking institutions and these have provided
for a powerful incentive for reporting suspicions to the Financial Intelligence Centre.
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MONEY LAUNDERING TRENDS IN SOUTH AFRICA3
Purchase of goods and properties
South African criminals appear to enjoy the wealth that they derive from crime. In stead
of hiding the wealth, it is often displayed by spending the money on expensive clothes,
personal effects, vehicles, property, furniture, yachts, etc. Although these purchases
are sometimes a front for money laundering they are often made to enjoy the proceeds
of crimes and improve their lifestyles. Criminals purchase these goods from ordinary
vendors – retailers, individuals who sell second-hand goods, auctioneers, etc. The fact
that many of these transactions take place in cash makes it easier for criminals.
The assets that are bought most often appear to be vehicles and real estate.
Financing of purchases
There have been cases where criminals obtained financing for the purchase of assets
from financial institutions.
The proceeds of crime are then used to settle the hire
purchase obligations or pay off the bond in a short period.
In certain cases, the
payments continue after all the obligations to the financial institution were met.
Balances that are accumulated in this way can escape detection by law enforcement
authorities.
Location of property
It appears as if criminals prefer to buy assets in South Africa rather than overseas. One
of the reasons for this is probably the weak exchange rate and the fact that criminals
wish to be able to enjoy their wealth.
However, it is also possible that substantial
international purchases and investments may just not have been discovered yet.
3
Information for this section was from a 2002 publication by The Centre for the Study of
Economic Crime (CenSEC) at Rand Afrikaans University entitled “Money Laundering
Trends in South Africa”.
A full copy of the report can be downloaded from
http://general.rau.ac.za/law/English/CenSec_2.htm
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Abuse of businesses and business entities
Criminals often use business activities and business enterprises to launder money.
Such business activities are conducted in the formal and informal sectors of the South
African economy. These business enterprises can be unincorporated or incorporated.
Shell corporations are sometimes used to open and operate bank accounts. These
entities will not actually be trading and their main purpose would be to provide the
criminal with a corporate cloak under which he could hide his identity and launder
money. These entities could be registered personally or through an agent, such as an
auditor or attorney, or be bought off the shelf. Shareholders, directors or members are
normally family members who take their instructions from the ultimate controller of the
corporation.
Front businesses often feature in laundering schemes. Unlike shell corporations, these
businesses are trading actively. The proceeds of crime are used to fund the business
activities of the enterprise and/or are simply co-mingled with the legitimate proceeds of
the business itself and deposited into the bank account of the business as the proceeds
of the business. If the criminal launders cash, the front business will normally be cash
based to facilitate the process.
Examples of such businesses that have been
encountered in South Africa include bars, restaurants, shebeens, cash loans
businesses and cell phone shops.
Businesses that import and export goods into and from South Africa are also often
abused in laundering schemes. Their business activities can be used to shield overand under-invoicing schemes, thereby allowing a criminal to move criminal funds across
the borders of South Africa. Many South African criminals mastered the art of such
schemes during the periods of strict exchange controls in the 1970s and 1980s. These
skills are still employed to evade the current exchange controls but, in addition, are also
employed in the commission of import/export frauds and in laundering schemes.
The trust appears to be particularly vulnerable to abuse in laundering schemes.
Although the South African trust affords participants the benefit of privacy and limited
liability, it is not closely regulated and the public record system in respect of trusts is
also deficient. As a result, trusts often feature in laundering schemes and schemes to
hide assets that may be subject to confiscation or forfeiture. Off-shore trusts may also
be involved.
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Cash and currency
Criminals who commit offences that generate cash proceeds, for instance cash heists
or drug trafficking, are often unable to transfer or spend substantial amounts without
using the formal financial system.
Evidence has been found that substantial amounts are transferred physically to and
from destinations in South Africa, whether by the criminals themselves or by third
parties who act as couriers.
Cash can be transferred physically in many ways –
strapped to bodies of passengers in motor vehicles and aircraft, hidden in their luggage,
etc.
Cash can be laundered in many ways, including

As outlined above, luxury items, vehicles and real estate

Trust accounts of professionals such as attorneys and estate agents

Automatic teller machines and automatic vending machines selling cell phone
products

Gambling institutions, slot machines, horse racing

Converting South African cash into foreign currency by buying from tourists,
buying in the black market, etc.
Watch out for the following when doing cash transactions:

Unusually large cash deposits made by an individual or company
whose
ostensible
business
activities
would
normally
be
generated by cheques and other instruments.

Substantial increases in cash deposits of any individual or
business without apparent cause, especially if these are
subsequently transferred within a short period out of the account
or to a destination not normally associated with the customer.

Company accounts whose transactions are dominated by cash
rather than the forms of debit and credit normally associated with
commercial operations, such as cheques, letters of credit or bills
of exchange.
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Clients who constantly deposit cash to cover requests for
bankers drafts, money transfers or other negotiable and readily
marketable money instruments.

Clients who transfer large sums of money to or from overseas
locations with instructions for payment in cash.
Abuse of financial institutions
South Africa has a relatively sophisticated banking system, offering products that range
from internet banking facilities and off-shore unit trust investments to small savings
accounts. Exchange controls have deterred large scale abuse of the financial system
by international launderers. However, South African criminals are abusing the system
in many different ways to launder and invest their ill-gotten gains.
Bank accounts and products
A sizable amount of dirty money is still deposited into bank accounts.
Criminals
sometimes deposit money into their own bank accounts, but more sophisticated
criminals will often open accounts with false identification documents or open the
accounts in the names of companies or trusts. There is also a trend to use legitimate
bank accounts of family members or third parties where an arrangement is made with a
family member who allows the criminal to deposit and withdraw money from his or her
account.
More sophisticated criminals are also using credit and debit card facilities to launder
money and especially to move proceeds of crime across the borders of South Africa.
Automatic teller machines are also used to deposit and withdraw money. Automatic
teller machines that offer the facility to generate bank cheques make money laundering
even easier.
Insurance products
Insurance products are also sometimes used to launder money.
Single premium
policies are bought with the proceeds of crime or the proceeds are used to pay monthly
premiums. In some cases the launderer would make an overpayment and then ask for
a repayment of the excess amount. When the company repays the excess amount the
launderer represents the money as a payment in terms of an insurance product. In
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other cases the launderer would buy and surrender policies. There is a substantial
market in second-hand policies in South Africa and this market is also vulnerable to
abuse by launderers.
The informal sector of the economy
The prevalence of informal business enterprises in South Africa, coupled with the
general absence of formal financial and other business records, allow for the abuse of
such enterprises by launderers. They serve as convenient front business because it is
difficult to dispute the business’ alleged turnover.
Sizable amounts of cash are also deposited into community-based rotating credit
schemes such as stokvels and burial societies.
Because the members of these
organisations normally know each other it is difficult for a money launderer to penetrate
the scheme, but the criminal may operate a sham stokvel as a front to launder money.
Underground banking systems in the form of hawala/hundi systems are operating in
South Africa within specific ethnic communities. These systems have apparently been
used for many years to evade exchange control restrictions and expensive foreign
exchange transaction fees.
There are a number of other organisations, which operate on the outer fringes of the
regulatory systems, that are also vulnerable to abuse as a front business by launderers.
These include NGOs, charitable institutions and churches.
The abuse of the informal sector by launderers is a cause for concern. The laundering
laws primarily regulate the formal sector of the economy. The extent of laundering in
the informal economy cannot be estimated with any degree of certainty, but it is
probably substantial. Proceeds can be placed, layered and integrated in the informal
sector without entering the formal sector of the economy. If a launderer requires the
proceeds to enter the formal sector, he can ensure that it does so at a stage when it
has been laundered sufficiently and cannot be linked to unlawful activity anymore.
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MONEY LAUNDERING LEGISLATION IN SOUTH AFRICA
The relevant laws
South Africa started fighting money laundering by the introduction of the Drugs and
Drug Trafficking Act 140 of 1992. This Act criminalised the laundering of the proceeds
of specific drug-related offences and required the reporting of suspicious transactions
involving the proceeds of drug-related offences.
The Proceeds of Crime Act 76 of 1996 then broadened the scope of the statutory
laundering provisions to all types of offences. In 1999 the Proceeds of Crime Act as
well as the laundering provisions of the Drugs and Drug Trafficking Act were repealed
when the Proceeds of Organised Crime Act came into effect.
In 2002 these Acts were supplemented by the Financial Intelligence Centre Act, which
will be discussed in detail from page 33.
Important definitions
Business relationship – An arrangement between a client and an accountable
institution for the purpose of concluding transactions on a regular basis.
Criminal gang – Formal or informal ongoing organisation, association, or group of
three or more persons, which has as one of its activities the commission of one or more
criminal offences, which has an identifiable name or identifying sign or symbol, and
whose members individually or collectively engage in or have engaged in a pattern of
criminal gang activity.
Money laundering or money laundering activity – An activity which has or is likely to
have the effect of concealing or disguising the nature, source, location, disposition or
movement of the proceeds of unlawful activities or any interest which anyone has in
such proceeds.
Proceeds of unlawful activities – Any property or any service, advantage, benefit or
reward which was derived, received or retained, directly or indirectly, in the Republic or
elsewhere, at any time before or after the commencement of the Prevention of
Organised Crime Act, in connection with or as a result of any unlawful activity carried on
by any person and includes any property representing property so derived.
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Property – 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.
Transaction - A transaction concluded between a client and an accountable institution
in accordance with the type of business carried on by that institution.
Unlawful activity – Any conduct which constitutes a crime or which contravenes any
law whether such conduct occurred before or after the commencement of the
Prevention of Organised Crime Act and whether such conduct occurred in the Republic
or elsewhere.
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THE PREVENTION OF ORGANISED CRIME ACT
The Prevention of Organised Crime Act No 121 of 1998 (“POCA”):
1.
Criminalises racketeering and creates offences relating to activities of criminal
gangs.
2.
Criminalises money laundering in general and also creates a number of serious
offences in respect of laundering and racketeering.
3.
Contains a general reporting obligation for businesses coming into possession of
suspicious property.
4.
Contains mechanisms for criminal confiscation of proceeds of crime and for civil
forfeiture of proceeds and instrumentalities of offences
POCA creates two sets of money laundering offences:
1.
Offences involving proceeds of all forms of crime; and
2.
Offences involving proceeds of a pattern of racketeering.
Negligence and intent (section 1)
It is important to note that the offences referred to in POCA can only be committed by a
person who knows or ought reasonable to have known that the property concerned
constituted the proceeds of unlawful activities.
A person had knowledge of a fact if he actually knew that fact, or if the court is satisfied
that the believed that there was a reasonable possibility of the existence of that fact and
then failed to obtain information to confirm or disprove the fact.
A person acts
negligently if he fails to recognise or suspect a fact which a person with the general
knowledge, skill, training and experience that may reasonably be expected of a person
in the position of the particular person as well as the general knowledge, skill, training
and experience that he or she in fact has, would have recognised or suspected.
Laundering offences linked to racketeering (sections 2 – 3)
The following acts in connection with property constitute offences if the person knows
that the property is derived from a pattern of racketeering activity:
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1.
If the property is used to establish, fund or acquire an interest in an enterprise.
2.
If the property is received or retained on behalf of an enterprise.
3.
If the property is used to establish, fund or acquire an interest in an enterprise on
behalf of another enterprise.
4.
If a person conspires or attempts to commit any of the offences described above.
The maximum penalty if convicted of a racketeering offence is a fine of R1 000 million
or life imprisonment.
Laundering offences linked to proceeds of unlawful activities
(sections 4 – 8)
This chapter of the Act criminalises the following offences:
1.
Money laundering
2.
Assisting another to benefit from proceeds of unlawful activities
3.
Acquisition, possession or use of proceeds of unlawful activities
4.
Failure to report suspicion regarding proceeds of unlawful activities
Any person convicted of one of these offences shall be liable to a maximum fine of
R100 million or imprisonment of up to 30 years.
Offences (sections 4 – 7)
The term “money laundering” in South African law refers to a number of different
offences that can be committed in terms of POCA:
1.
When a person knows that property includes proceeds from crime and enters into
a transaction which:
1.1
Conceals the nature, source, location, disposition, movement or ownership
of the property or the ownership, or
1.2
2.
Assists a person who committed an offence to avoid prosecution.
If a person knows that another person has obtained the proceeds of crime and:
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2.1
Helps that person to keep those proceeds, or
2.2
Makes funds available or helps that person in any way.
Acquiring, using or possessing property whilst knowing that it forms part of
proceeds of crime.
4.
Failure to report suspicious transactions. This section will be repealed by the
Financial Intelligence Centre Act and replaced with a new and broader provision
relating to suspicious and unusual transactions. Although the relevant provisions
of the Financial Intelligence Centre Act have not yet taken effect, all the
obligations regarding reporting of suspicious transactions will be discussed under
that section on page 37.
Penalties (section 8)
A person who is convicted of one of the money laundering offences outlined above is
liable to a maximum fine of R100 million or to imprisonment for a maximum of 30 years.
Offences relating to criminal gang activities (sections 9 – 11)
These sections deal with gang related offences, penalties and the definition of a
member of a criminal gang. Because it is not directly related to money laundering it will
not be covered in this discussion.
Dealing with proceeds of unlawful activities (sections 12 – 36)
The punishment inflicted by the criminal justice system in the past often failed to strip
economic offenders of the profits of their crimes.
Fines could be imposed and
instruments and evidence of criminal activity could be forfeited to the State but, in many
cases, the offender may still be left with a substantial illicit profit. Criminals regularly
spent terms in prison knowing that they would be able to enjoy the proceeds of their
offences, and perhaps even re-invest these in criminal activities, up their release.
Sections 12 to 62 of POCA deal with confiscation, seizure and forfeiture of the proceeds
of unlawful activities:
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Confiscation orders (sections 18 – 24)
When a defendant is convicted the court may confiscate any benefits that he / she may
have derived from that offence or any other criminal activity that the court finds to be
sufficiently related to the offence.
Restraint orders (sections 24A – 29A) and Preservation of property orders
(sections 38 – 47)
Before a confiscation order is issued a High Court may issue an order prohibiting a
person from dealing in any manner with a specific item. The property may then in
certain cases also be seized if there are reasonable grounds to believe that the
defendant may dispose of or remove the property.
Realisation of property (section 30 – 36)
After a confiscation order has been made a High Court can order the realisation of any
property and confiscate the proceeds. Proceeds must be deposited in a criminal assets
recovery account, as outlined in sections 63 – 70 of POCA.
Forfeiture of property (sections 48 – 57)
If a preservation of property order (see above) is already in place the High Court may
order forfeiting to the State of the property.
Before such an order is given prescribed
notice must be given to enable the defendant to oppose the order or to exclude an
interest in the property from the order.
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THE FINANCIAL INTELLIGENCE CENTRE ACT
Apart from reporting obligations, POCA does not impose the detailed compliance
obligations that are generally associated with a money laundering control system.
These obligations were created by the Financial Intelligence Centre Act No 38 of 2001
(“FICA”), which:

Provides for the establishment and operation of the Financial Intelligence Centre
(“FIC”) and a Money Laundering Advisory Council (“MLAC”).

Creates money laundering control obligations for specific persons and institutions.

Regulates access to specific information.
Accountable institutions are defined in section 1 as those persons referred to in
Schedule 1 to FICA. This Schedule lists inter alia auditors, attorneys, estate agents,
banks, long-term insurers, foreign exchange dealers, investments advisers and money
remitters – see page 43. Reporting institutions are listed in Schedule 3 (page 44). This
Schedule currently lists persons dealing in motor vehicles as well as persons dealing in
Kruger Rands.
The following provisions of FICA came into operation on 1 February 2002:

Section 1 (definitions)

Sections 2 – 16 (FIC)

Sections 17 – 20 (MLAC)

Sections 72 – 78 and 79 – 82 (miscellaneous).
The effect of the proclamation is that the FIC and MLAC were both established on
1 February 2002. In addition, the Minister has been empowered to make regulations to
provide guidance on all matters that must be prescribed by regulation in terms of FICA.
Further provisions of FICA, including the money laundering control obligations, will
come into effect when the regulations are made. The remainder of this discussion will
focus on FICA, including those provisions that are not in effect yet.
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The Financial Intelligence Centre (sections 2 – 16)
The principal objective of the Financial Intelligence Centre (“FIC”) is to assist in the
identification of the proceeds of unlawful activities and the combating of money
laundering activities. Other objectives of the FIC include:

Making information collected by it available to investigating authorities, the
intelligence services and the South African Revenue Service (SARS) to facilitate
the administration and enforcement of the laws of South Africa; and

Exchanging information with similar financial intelligence units in other countries
regarding money laundering activities (section 3).
The FIC will collect, retain, compile and analyse all information disclosed to it and
obtained by it in terms of FICA. It will not investigate criminal activity, but will provide
information to, advise and co-operate with intelligence services, investigating authorities
and SARS who should carry out such investigations (section 44 – see page 41). The
FIC will not have a supervisory function in relation to regulated accountable institutions.
The supervisory function will be performed by the relevant supervisory bodies listed in
Schedule 2 of the FICA (Sections 44 and 45). The list includes the Financial Services
Board, the Reserve Bank, the Registrar of Companies, the Estate Agents Board, the
Public Accountants and Auditors Board, the National Gambling Board, the JSE
Securities Exchange and the Law Society of South Africa (see page 44). Although the
FIC will not have a supervisory function it will monitor and give guidance to accountable
institutions, supervisory bodies and other persons regarding the performance of their
duties and their compliance with FICA (section 4).
The Money Laundering Advisory Council (sections 17 – 20)
The MLAC brings together different stakeholders from across the public and private
sectors, including all the Government departments involved, the 9 different supervisory
bodies which oversee the range of institutions which are accountable under FICA, the
representative bodies of these institutions and certain individuals with particular
expertise.
The MLAC’s responsibility is to reflect on the policy framework within which the FIC
operates, taking into account the international and national contexts.
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Money laundering control measures (sections 21 to 45)4
FICA imposes money laundering control obligations that include:

A duty to identify clients;

A duty to keep records of business relationships and single transactions;

A duty to report certain transactions; and

Compliance obligations.
These obligations are primarily imposed on accountable institutions although some
reporting obligations also extend to reporting institutions, persons involved in business
and/or international travellers in general.
Duty to identify clients (section 21)
An accountable institution must establish and verify the identity of a prospective client
before establishing a business relationship or concluding a single transaction with that
client.
A “business relationship” is defined as an arrangement between a client and an
accountable institution for the purpose of concluding transactions on a regular basis. A
“single transaction” refers to a transaction which is not concluded in a business
relationship and a “transaction” is a transaction concluded between a client and an
accountable institution in accordance with the type of business carried on by that
institution.
Identification and verification of the identity of the principal and the authority of the
agent are also required when the client acts or appears to be acting on behalf of
someone else. When an agent acts on behalf of the client the agent’s identity and
authority must be established.
Accountable institutions are also required to establish similar facts in relation to clients
that are parties to business relationships that were established before FICA took effect.
In addition, the institution must trace all accounts at the institution that are involved in
4
As at the time of writing the effective dates for sections 21 to 71 have not been
promulgated yet – see the explanation on page 33.
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transactions concluded in the course of that relationship. In terms of section 82(2)(1)
the duty will only take effect one year after the general identification duty takes effect.
Accountable institutions are therefore allowed a year to identify their existing clients
who still have active business relationships with the institution.
An accountable institution will commit an offence if it performs any act to give effect to a
business relationship or single transaction without identifying the client. An accountable
institution that concludes any transaction in the course of a business relationship that
existed before FICA took effect without identifying the client and tracing the relevant
accounts will also commit an offence. These offences carry a penalty of imprisonment
for a period not exceeding 15 years or a fine not exceeding R10 million.
Duty to keep record (sections 22 – 26)
Accountable institutions are required to keep records of specific details regarding
clients, agents and principals as well as their transactions. These records may be kept
in electronic form. Records relating to the establishment of a business relationship
must be kept for at least five years from the date on which the business relationship is
terminated while records relating to a transaction must be kept for at least five years
from the date on which the transaction is concluded.
Accountable institutions are allowed to outsource the duty to keep these records, but
are liable for any failure by the third party to comply with the requirements of the Act. If
an accountable institution appoints a third party to perform such duties it must provide
the FIC with prescribed information regarding the third party.
The FIC may have access to the records kept by or on behalf of the accountable
institution, if they are public records. If they are not public records, access may be
obtained by virtue of a warrant issued in chambers.
These offences carry a penalty of imprisonment for a period not
exceeding 15 years or a fine not exceeding R10 million (section 68).
Reporting duties
FICA creates a number of reporting duties relating to transactions involving cash
amounts in excess of a prescribed amount, suspicious and unusual transactions, the
conveyance of cash across the borders of South Africa and electronic transfers of
money by accountable institutions.
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Cash transactions (section 28)
Prescribed particulars of every transaction to which an accountable institution or a
reporting institution is party and which involves the payment or receipt by the institution
of an amount of cash exceeding a prescribed amount, must be furnished to the FIC
within a prescribed period.
An accountable institution or reporting institution that fails, within the prescribed period,
to report to the FIC the prescribed information in respect of a cash transaction in
accordance with section 28 commits an offence that also carries a penalty of
imprisonment for a period not exceeding 15 years or a fine not exceeding R10 million
Suspicious and unusual transactions (section 29)
FICA will repeal section 7 of POCA (see page 30) and will substitute the text of section
7A with a different text.
The duty to report suspicious transactions will then be
regulated by section 29. Reports must be submitted in terms of section 7 until section
79 of FICA comes into operation.
Section 7 and section 29 differ in a number of respects, for instance:

Section 7 creates a reporting duty for a person who suspects certain facts while
section 29 applies to a person who has knowledge of certain facts or who
suspects such facts.

Section 7 applies to transactions that the business is entering into while section
29 also extends to transactions that were innocently entered into and even carried
out by the business but are now suspect because of knowledge subsequently
acquired or a suspicion subsequently formed.

Section 7 reports must be made to a designated person, while section 29 requires
reports to be made to the FIC.

Section 29 has a wider ambit because it extends inter alia to transactions that
have no apparent business or lawful purpose or that may be relevant to an
investigation into the evasion of a tax, duty or levy administered by SARS.

Section 7 transactions must be reported within a reasonable time while section 29
reports will have to be submitted within a prescribed time after the knowledge was
acquired or the suspicion formed.
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Section 29 does not address the same aspects that are addressed by section 7.
Conveyance of cash to and from South Africa (section 30)
A person intending to convey an amount of cash in excess of a prescribed amount to or
from South Africa must report prescribed particulars concerning that conveyance to a
person designated by the Minister, before the cash is conveyed.
The designated
person is then required to send a copy of the report to the FIC without delay.
It is important to note that an offence is only committed by a person who “wilfully” fails
to report the conveyance.
Electronic transfers to and from South Africa (section 31)
If an accountable institution sends money in excess of a prescribed amount through
electronic transfer across the borders of South Africa, or receives such a sum from
abroad, on behalf of or on the instructions of another person, it must report prescribed
particulars of that transfer to the FIC within a prescribed period after the transfer.
Continuation and suspension of transactions (section 33)
After reporting a transaction the reporter may continue and carry out the transaction
unless the FIC directs the suspension of the transaction. The FIC may issue such a
directive in writing after consultation with the institution or person concerned, if it has
reasonable grounds to suspect that the transaction is indeed unusual or suspicious.
The directive may require the institution or person not to proceed with the transaction or
any other transaction in respect of funds affected by the particular transaction for a
period not exceeding five days to allow the FIC to make enquiries about the transaction
or to inform and advise an investigating authority. Such a directive cannot be issued in
respect of transactions that are carried out on a regulated financial market.
FIC intervention (section 34)
The FIC may direct the reporter in writing not to proceed with the carrying out of a
transaction for a period of up to five days.
This period should give the FIC an
opportunity to make the necessary enquiries and advise an investigating authority or
the National Director of Public Prosecutions.
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Access to information by the FIC (sections 35 – 36)
A number of provisions of the Act regulate the access to information by the FIC as well
as access to information held by the FIC. Important provisions allowing access to
information by the FIC include the following:

An authorised representative of the FIC who has the necessary warrant may
examine and make copies of records that contain details regarding the
identification of the clients, business relationships and single transactions. The
warrant is only required if the records are not public records. It may only be
issued if there are reasonable grounds to believe that the records may assist the
FIC to identify the proceeds of unlawful activities or to combat money laundering
activities.

The FIC may require an accountable institution to advise whether a particular
person is or was a client, represented a client or was represented by a client.

Reporters of transactions may be required to furnish the FIC with additional
information regarding the report and the grounds for the report.

The FIC may apply to a judge for a monitoring order requiring an accountable
institution to furnish information to the FIC regarding transactions concluded with
the institution by a specified person or transactions conducted in respect of a
specified account or facility at the institution.
No notice of the application or
hearing is given to the person involved in the suspected money laundering
activity. The order may be issued if there are reasonable grounds to believe that
the person may be involved in an unusual or suspicious transaction or that the
account may be used for such purposes.

If a supervisory body or SARS knows or suspects that an accountable institution
is involved in an unusual or suspicious transaction, it must inform the FIC and
furnish the FIC with records.
Secrecy and confidentiality (section 37)
No duty of secrecy or confidentiality or any other statutory or
common law restriction on the disclosure of information affects any
duty of an institution, person or SARS to report or to allow access to
information.
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However, this provision does not apply to the common law right to legal professional
privilege as between an attorney and an attorney’s client in respect of communications
made in confidence.
Protection of reporters (section 38)
No criminal or civil action can be instituted against an institution, person or SARS
complying in good faith with the obligations in terms of FICA. A reporter can give
evidence in criminal proceedings arising from the report, but cannot be compelled to do
so. No evidence regarding the identity of that person is admissible as evidence in
criminal proceedings unless that person testifies at those proceedings.
Access to information held by FIC (sections 40 – 41)
Section 40 is the main provision that regulates access to the information held by the
FIC.
In essence investigating authorities, SARS and intelligence services may be
provided with information on request or at the initiative of the FIC. Information may be
provided to foreign entities performing functions similar to those of the FIC, pursuant to
a formal, written agreement between the FIC and that entity or its authority. The FIC
may decide to provide information to an accountable or reporting institution or person
regarding steps taken by the FIC in connection with transactions that it reported to the
FIC, unless it would be inappropriate to disclose such information. Information may
also be supplied to a supervisory body to enable it to exercise its powers and perform
its functions in relation to an accountable institution. In addition, information may be
supplied in terms of a court order or in terms of other national legislation.
Measures to promote compliance by accountable institutions (sections 42 – 43)
Every accountable institution must formulate and implement internal rules concerning:

The establishment and verification of the identity of persons which it must identify
in terms of FICA;

The information of which record must be kept in terms of FICA;

How and where those records must be kept;

The steps to be taken to determine when a transaction is reportable to ensure
that the institution complies with its reporting duties under FICA; and
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Other matters as may be prescribed by regulation.
These rules, which must comply with prescribed requirements, must be made available
to every employee involved in transactions to which FICA applies and the FIC and the
relevant supervisory body may also request copies.
An accountable institution must provide training to its employees to enable them to
comply with FICA and the relevant internal rules. It must furthermore appoint a person
with the responsibility to ensure compliance by the employees of the accountable
institution with FICA and the internal rules as well as compliance by the accountable
institution with its obligations under FICA.
Referral and supervision (sections 44 – 45)
The FIC may refer matters to relevant investigating authorities or an appropriate
supervisory body, e.g. the Public Accountants’ and Auditors’ Board. Section 45 makes
the supervisory body (e.g. the PAAB) responsible for supervising compliance by
accountable institutions regulated by it.
Offences and penalties (sections 46 – 68)5
FICA gives rise to a large number of offences, including:

Failure to identify persons

Failure to keep records

Destroying or tampering with records

Failure to give assistance

Failure to advise FIC of client

Failure to report cash transactions

Failure to report suspicious or unusual transactions

Unauthorised disclosure
5
See footnote 4 on page 35.
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
Failure to report conveyance of cash into or out of South Africa

Failure to send a report to FIC

Failure to comply with a monitoring order

Misuse of information

Failure to formulate and implement internal rules

Failure to provide training or appoint compliance officer

Obstructing of official in performance of functions

Conducting transactions to avoid reporting duties

Unauthorised access to computer system or application or data

Unauthorised modification of contents of computer system
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The majority of these offences carry a penalty of imprisonment for a period not
exceeding 15 years or a fine not exceeding R10 million.
Search, seizure and forfeiture (section 70) 6
FICA provides for the seizure of any cash which is transported or is about to be
transported across the borders of South Africa if the cash exceeds the prescribed limit
and there are reasonable grounds to suspect that an offence is about to be committed.
If a person is convicted of the offence, the court must, in addition to any punishment
that may be imposed, declare the cash amount that should have been reported, to be
forfeited to the State. The forfeiture may not affect the interests of any innocent parties
in the cash or property concerned if that person proves:

That he or she acquired the interest in that cash or property in good faith; and

That he or she did not know that the cash or property in question was:
– conveyed as contemplated in section 30(1) or that he or she could not prevent
such cash from being so conveyed; or
6
See footnote 4 on page 35.
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– used in the transactions contemplated in section 64 or that he or she could not
prevent the property from being so used.
FICA also provides that innocent parties who meet the above criteria may approach the
court within three years of the forfeiture order in order to retrieve their property or
interests or to receive compensation. Although FICA provides protection for the rights
and interests of innocent third parties, it is important to note that the protection does not
extend to interested parties who were merely unaware of the intention to commit an
offence. It is limited to parties who can prove that they did not know that the cash or
property was to be conveyed across the borders of South Africa or used in transactions
contemplated in section 64.
List of accountable institutions (schedule 1)
1.
An attorney
2.
A board of executors or a trust company or any other person that invests, keeps
in safe custody, controls or administers trust property
3.
An estate agent
4.
A financial instrument trader
5.
A Unit Trust management company
6.
A bank
7.
A mutual bank
8.
A long-term insurer
9.
A casino
10.
A foreign exchange dealer
11.
Anyone who lends money against security of securities
12.
Investment advisors and investment brokers, including Registered Accountants
and Auditors who provides these services.
13.
Issuers of travellers’ cheques, money orders or similar instruments
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14.
The Postbank
15.
A member of a stock exchange
16.
The Ithala Development Finance Corporation Limited
17.
A person who falls within a category of persons approved by the Registrar of
Stock Exchanges in terms of section 4(1)(a) of the Stock Exchanges Control Act
18.
A person who falls within a category of persons approved by the Registrar of
Financial Markets in terms of section 5(1)(a) of the Financial Markets Control Act
19.
A money remitter
List of supervisory bodies (schedule 2)
1.
The Financial Services Board
2.
The South African Reserve Bank
3.
The Registrar of Companies
4.
The Estate Agents Board
5.
The Public Accountants’ and Auditors’ Board
6.
The National Gambling Board
7.
The JSE Securities Exchange
8.
The Law Society of South Africa
List of reporting institutions (schedule 3)
1.
Motor vehicle dealers
2.
Kruger Rand dealers
Regulations
FICA will from time to time be supplemented with regulations where necessary. At the
time of writing the regulations discussed below were still only in draft form.
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Establishing identity
Natural persons
The draft regulations make provision for the identification of natural persons who are
South African citizens or residents, on the one hand and foreign nationals who are not
resident in South Africa, on the other. Paragraphs 3, 4, 6 and 7 specify the information
to be obtained for all clients while paragraphs 5 and 8 deal with the verification of the
information.
Legal persons
The draft regulations distinguish between legal persons who are incorporated as such
and are consequently enrolled in public registers, on the one hand, and other legal
persons on the other. There is a further distinction between legal persons incorporated
in South Africa and legal persons incorporated outside South Africa.
Trusts
The word “trust” is defined in the draft regulations to exclude testamentary trusts.
The principle in the case of a trust remains that an accountable institution should avoid
transaction with unknown or undisclosed persons.
The parties involved when an
accountable institution conducts business with a trust are of course the trustees.
However, the phenomenon of the trust provides an excellent mechanism with which a
person with control over property can obscure his or her identity and therefore lends
itself to abuse in a money laundering context. For this reason an accountable institution
should also identify the other persons who are involved in the trust relationship, namely
the donor or settlor and the beneficiaries of the trust. Of course the trust itself should
also be identified.
Verification of identity
The process of verification entails basically that an accountable institution should
compare the identifying particulars provided by the client with other available
information in order to establish whether the particulars provided by the client truly and
correctly reflects the client’s identity.
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Natural persons
The departure point for the verification of the particulars of a natural person is that the
required particulars of a client will be obtained during a face to face meeting with the
client, and that such particulars without a face to face meeting taking place will be the
exception rather than the rule.
An accountable institution is not required to verify all the particulars it obtains in the
course of identifying a client. In respect of a South African citizen, for example, the
basic information such as tax number and residential address must be verified but it is
not necessary to verify the source of income.
Legal persons
The particulars of natural persons associated with a legal person such as directors,
shareholders, members and other authorised persons have to be verified.
Trusts
The particulars of a trust must be verified by comparing those particulars with the trust
deed or other founding document. The particulars of all persons associated with the
trust such as the trustees, beneficiaries, settlers and other authorised also have to be
verified.
When one person acts on authority of another
In this case the accountable institution should obtain a copy of the document which
authorises a person to act on behalf of another person. That document must be verified
by establishing whether the particulars on the document correspond with information
obtained by the institution in the course of identifying the persons involved and verifying
their identities.
Verification in absence of personal contact
The risk in establishing business relationships or entering into single transactions
without face to face contact with a client lies with the verification of the identifying
particulars provided by the client. These particulars can not be verified by reference to
a photo bearing identity document of a natural person. This means that other methods
of verifying the client’s identity are required.
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If the accountable institution obtained the particulars of the client without personal
contact, those particulars must be verified by taking reasonable steps to establish the
person’s existence or to establish or verify that person’s identity, taking into account any
guidance notes concerning the verification of identities which may apply to that
institution (see page 47).
Record keeping
Paragraph 17 of the draft regulations provide for the particulars which an accountable
institution must provide to the FIC if it contracts the storage of its records out to a third
party.
Internal rules
Clause 18 of the draft regulations sets out standards with which an accountable
institution’s internal rues on identifying clients and verifying identities and recordkeeping will have to comply.
Guidance notes
In a number of places in the draft regulations references are made to “guidance notes”
in connection with the verification of identities. The draft regulations also provide that
the FIC must develop and issue guidance notes concerning the verification of identities.
These provisions are based on the premise that the FIC will issue a set of guidance
notes which will provide examples of steps that can be taken to obtain information by
means of which certain facts can be verified.
The guidance notes will provide an
indication of what is expected of a diligent accountable institution in order to comply
with certain obligations laid down by FICA and the regulations. The guidance notes
may therefore be seen as a benchmark indicating the desired level of effort in order to
comply with these obligations.
The contents of the guidance notes will therefore be taken into account when
determining whether an accountable institution has complied with an obligation to verify
certain information.
It is not foreseen, however, that the guidance notes will provide a checklist for
accountable institutions to follow in a mechanical manner, irrespective of whether the
required verification is thereby achieved or not. The obligation that will be contained in
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FICA and the regulations will be to verify certain information, an accountable institution
will therefore in each case be required to apply its mind in order to determine whether
the action it takes in order to verify the relevant information in fact achieves such
verification. Accordingly the verification of information remains a question of judgement
that will have to be exercised taking account of all the facts and circumstances of each
case.
If an accountable institution realises that the examples of steps set out in the guidance
notes do not achieve verification of particulars in a certain set of circumstances the
accountable institution concerned will have to devise alternative steps in order to
comply with the obligation of FICA and the regulations. This may then provide an
indication that the guidance notes need to be adapted.
In other circumstances an accountable institution may apply a method of verification
that is not contained in the guidance but which nevertheless achieves proper
verification of the particulars in question. In such a case the efforts of the accountable
institution should be regarded as sufficient to comply with the obligations of FICA and
the regulations.
Exemptions
The obligations of FICA are cast in wide terms and apply to a wide variety of
institutions.
The provisions can therefore not function without exemptions being
granted in general or in respect of certain types of institutions and certain types of
business. The Minister may therefore make certain exemptions from compliance with
FICA.
According to the latest draft regulations the exemptions relating to the following
situations are proposed:
1.
Members of partnerships, companies or close corporations where another person
employed by the partnership, company or close corporation already complies with
the requirements.
2.
Where two accountable institutions work together in a transaction with the same
client.
3.
Recurring transactions with the same client and listed clients.
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Some long term insurance business, unit trusts, pension funds and other
products, including those where annual premiums do not exceed R25 000 or
single premiums do not exceed R50 000.
5.
Recurring contractual premiums, e.g. life insurance premiums.
6.
Where the client is a legal person and a non-controlled client as defined in Rule
14.20 of the JSE.
7.
Some business done by estate agents.
8.
Repeated transactions by a casino with the same client in a 24-hour period.
9.
Unsecured loans not exceeding R15 000.
10.
Accounts where withdrawals and deposits are less than R15 000 per day and the
balance is less than R20 000.
11.
Normal business transactions under R5 000.
12.
Where total transactions by the same person in a 90 day period are less than
R150 000
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WHAT CAN I DO TO COMBAT MONEY LAUNDERING?
Government
A great deal can be done to fight money laundering, and, indeed, many governments
have already established comprehensive anti-money laundering regimes. These
regimes aim to increase awareness of the phenomenon – both within the government
and the private business sector – and then to provide the necessary legal or regulatory
tools to the authorities charged with combating the problem.
Some of these tools include:

Making the act of money laundering a crime;

Giving investigative agencies the authority to trace, seize and ultimately
confiscate criminally derived assets; and

Building the necessary framework for permitting the agencies involved to
exchange information among themselves and with counterparts in other
countries.
It is critically important that governments include all relevant voices in developing a
national anti-money laundering programme. They should, for example, bring law
enforcement and financial regulatory authorities together with the private sector to
enable financial institutions to play a role in dealing with the problem. This means,
among other things, involving the relevant authorities in establishing financial
transaction reporting systems, customer identification, record keeping standards and a
means for verifying compliance.
Money launderers have shown themselves through time to be extremely imaginative in
creating new schemes to circumvent a particular government’s countermeasures. A
national system must be flexible enough to be able to detect and respond to new
money laundering schemes.
Anti-money laundering measures often force launderers to move to parts of the
economy with weak or ineffective measures to deal with the problem. Again, a national
system must be flexible enough to be able to extend countermeasures to new areas of
its own economy. Finally, national governments need to work with other jurisdictions to
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ensure that launderers are not able to continue to operate merely by moving to another
location in which money laundering is tolerated.
Accountants and consultants
Accountants in commerce and industry need to be aware of the new regulations and
what their duties and responsibilities are. In response to criminal organisations moving
into a wider variety of organizations – estate agents and financial advisors, for example
– legislators ensured the new act governs these and others. All are places who employ
or regularly use the services of an accountant. So accountants and consultants in a
variety of workplaces can play a crucial role.
Because of their role and expertise, employees/consultants assigned to the finance
function can be involved right from the start; they can take part in developing the action
plan the organisation intends to implement in order to comply with laws and regulations.
They can also actively participate in setting up a compliance program and ensure its
ongoing operation.
An effective action plan should determine from the outset the extent to which the new
requirements will affect the processes and employee units concerned.
It is also
advisable to perform an impact analysis in the early stages of implementation.
The legal requirements also have considerable financial implications for organisations.
Any assessment of its financial impact should include the costs tied to developing
policies, establishing systems for collecting and forwarding reports to the relevant
federal agency, training human resources and, in certain circumstances, assigning
additional staff.
As a partner, the consultant of an organisation can provide advice on how to minimize
the cost and the effort needed to develop and implement the measures required. Risk
management can become a key factor in obtaining valid results at a reasonable cost.
The specific characteristics of an organization should always be taken into account
when analysing its risk exposure when it comes to money laundering.
Independent auditors
Generally, businesses are most useful to money launderers as conduits for tainted
funds. So, since money launderers usually don’t expropriate assets, they seldom leave
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evidence of their activity on financial statements, making it difficult to detect their
illegitimate activities during conventional audits.
Nevertheless, auditors have a responsibility under SAAS 250 “Consideration of laws
and regulations in an audit of financial statements” to be aware of the possibility that
illegal acts may have occurred, indirectly affecting amounts recorded in an entity’s
financial statements. In addition, if specific information comes to the auditor’s attention
indicating possible illegal acts that could have a material effect on the entity’s financial
statements, the auditor must apply auditing procedures specifically designed to
ascertain whether such activity has occurred.
Possible indications of money laundering activity include the following:

Transactions that seem to be inconsistent with a client’s known legitimate
business or personal activities or means; unusual deviations from normal account
and transaction patterns.

Situations in which it is difficult to confirm the identity of a person.

Unauthorised or improperly recorded transactions or inadequate audit trails.

Unconventionally large currency transactions, particularly in exchange for
negotiable instruments or for the direct purchase of funds transfer services.

Apparent structuring of currency transactions to avoid regulatory recordkeeping
and reporting thresholds.

Businesses seeking investment management services when the source of funds
is difficult to pinpoint or appears inconsistent with the client’s means or expected
behaviour.

Uncharacteristically premature redemption of investment vehicles, particularly
with requests to remit proceeds to apparently unrelated third parties.

The purchase of large cash value investments, soon followed by heavy borrowing
against them.

Large lump-sum payments from abroad.

Insurance policies with values that appear to be inconsistent with the buyer’s
insurance needs or apparent means.
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
Purchases of goods and currency at prices significantly below or above market.

Use of many different firms of auditors and advisers for associated entities and
businesses.

Forming companies or trusts that appear to have no business purpose.
When an auditor becomes aware of information concerning a possible illegal act,
SAAS 250 requires him / her to obtain from management – at a higher level than those
employees potentially involved – information on the act’s nature, the circumstances in
which it occurred and its possible effect on the client’s financial statements.
If management does not provide conclusive evidence that an illegal act has not
occurred, the standard requires the auditor to consult with the client’s legal counsel or
other specialists about how relevant laws apply to the situation and the impact it may
have on the financial statements.
To better understand the act, the auditor may also have to perform additional auditing
procedures, such as comparing invoices, cancelled cheques and other supporting
documents with accounting records.
In cases where the auditor concludes the act is illegal and could have a material effect
on the entity’s financial statements, he/she must inform management and the audit
committee of it immediately. Further, under section 20(5) of the Public Accountants’
and Auditors’ Act the auditor must furnish a prescribed report to the directors if he/she
believes all the conditions stated in that section are applicable.
Internal auditors
Internal auditors also have an important role to play. Like all professionals involved in
the finance function, they can be very effective in helping organizations deal with money
laundering issues and apply related legislation and regulations.
First of all, because of their extensive knowledge of the organization, internal auditors
can be instrumental in making management aware of the implications of the new act
and regulations.
The can also contribute to developing and putting in place their
organization’s compliance program.
And thanks to their expertise and their
understanding of the entity as a whole, they can participate in the risk analysis, which in
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turn will enable the organisation to develop more effectively its compliance and control
mechanisms.
Internal auditors can also incorporate into their audit programs indicators of suspicious
transactions that are applicable to their organisation to help identify suspicious
transactions and improve anti-money laundering measures. These indicators include:

Employees living above their means

Weak internal control, especially regarding bank transfers

Clients paying more than the value of sold goods.

Transactions in foreign countries with little business grounds.

Discrepancies between transfer prices and imported/exported goods.

Loans destined for, or originating from, foreign countries.

Use of letters of credit or other commercial financing methods in order to transfer
money between countries, where these commercial links do not correspond to the
client’s usual business.
Finally, internal auditors can take charge of reviewing the compliance policies and
measures provided for in the guidelines. This review consists of determining how the
measures and policies in place effectively ensure compliance with FICA and the
proposed regulations, as well as identifying areas for improvement in bringing them to
the attention of management with a view to preparing remedial action plans when
necessary.
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