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Money Laundering A0250-2

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 33

The Financial Intelligence Centre (sections 2 – 16) 34

©Beta Professional Training (Pty) Ltd Ref: document.doc 23/05/23 04:00


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 45

What can I do to combat money laundering? 50

Government 50

Accountants and consultants 51

Independent auditors 52

Internal auditors 53



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.



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.



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



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

required to file reports with the authorities. To overcome these problems, launderers:

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.



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



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 cash-

reporting 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.



The use of front companies

Front companies are used by launderers to place and layer illicit proceeds. Any cash-

rich 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. Essentially, the dealer is simply selling his accounts

receivable at a discount. Discounting drug proceeds may well be the most complex



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 anti-

money 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.



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



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



scheme. 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



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



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



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.



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



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



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.



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



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 over-

and 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.



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.



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



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.



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.



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.



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:



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 Assists a person who committed an offence to avoid prosecution.

2. If a person knows that another person has obtained the proceeds of crime and:



2.1 Helps that person to keep those proceeds, or

2.2 Makes funds available or helps that person in any way.

3. 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:



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.



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.



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.



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

transactions concluded in the course of that relationship. In terms of section 82(2)(1)

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.



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.



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.



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.



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.



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



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

Failure to report conveyance of cash into or out of South Africa

5 See footnote Error: Reference source not found on page 35.



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

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

– used in the transactions contemplated in section 64 or that he or she could not

prevent the property from being so used.

6 See footnote Error: Reference source not found on page 35.



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

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.



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.



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.



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 record-

keeping 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



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.



4. 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



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



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



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.



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



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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