Money Laundering: Cleaning up on white collar crime

1
pwc

2
FICA (Financial Intelligence Centre Act) Money
Laundering Control Workshop

• Module 1 - Money Laundering General Awareness
• 1 hour
• Module 2 Accountable Institutions their
  compliance obligations
• 30 minutes
• Presenter Anton Lockem
• PWC Tax Services
• Senior Consultant

3

PricewaterhouseCoopers Money Laundering General
Awareness Module 1
pwc
4
Money Laundering General Awareness Module 1 -
Agenda

• Introduction
• Money Laundering legislation
• - Internationally
• - South Africa
• How ML legislation effects the firm
• Video
• Suspicious transaction reporting

5
Money Laundering General Awareness Module 1 -
Agenda (continued)

• How to recognise money laundering
• Anti-terrorism legislation
• Money Laundering database
• Conclusion

6
What is money laundering?

• The process whereby criminals attempt to
• disguise the true origin and ownership of the
  proceeds of their criminal activities
• without jeopardising its source
• Acts committed to fund terrorism (internationally
  2001, SA 2004/5)

7
Money Laundering vs. Fraud

• Fraudulent activity
• loss or disappearance of assets or revenue
• Money laundering
• large quantities of illicit proceeds
• being distanced from their source a.s.a.p.
• in an undetected manner.
• less likely to affect financial statements

8
Origins of laundered money

• Theft
• Fraud
• Tax evasion
• Bribery / corruption
• Forgery
• Prostitution

• Drug trafficking
• Perlemoen smuggling
• Counterfeiting
• Extortion/blackmail
• Robbery
• Smuggling

9
Our vulnerability

• Includes
• Advising or assisting individuals to organise
  their personal affairs
• Helping to set up trusts, companies or other
  business structures (locally and offshore)
• Acting as Attorney, conveyancer, trustee, nominee
  or company director
• Advice on capital structure, the issue of
  securities, industrial strategy, mergers and
  acquisitions
• Corporate finance / tax planning
• Exchange control advice

10
Why authorities concentrate on money laundering?

• Huge business
• Previously focused on the crime itself
• New approach attack proceeds of crime
• Follow the money trail to the crime
• Confiscate proceeds
• Deny criminals access to financial institutions
  advisors without increased risk of detection
• Increasing international pressure

11
Why should you be interested?

• Money laundering is a crime
• Firm is potentially vulnerable
• Suspicious transactions must be reported to the
  FIC
• Accountable institutions must implement
  compliance systems
• Penalties for non-compliance are severe
• WE MUST PROTECT OUR REPUTATION THE FIRMS NAME

12
The international A-ML Regime (1)

• International policy-making and standard-setting
  body
• Financial Action Task Force (FATF)
• Inter-governmental body
• 40 recommendations (revised in 2003)
• 8 special recommendations to combat terrorist
  financing (2001)
• 33 members South Africa a member since 2003

13
The international A-ML Regime (2)

• FATF functions include
• Monitoring compliance by members to international
  standards
• Identifying non-cooperative countries or
  territories
• Nigeria, Philippines, Cook Islands, Guatemala,
  Indonesia, Myanmar, Nauru
• Recently removed Egypt and Ukraine to be
  monitored
• Transactions require heightened scrutiny

14
Money laundering legislation in South Africa

• Prevention of Organised Crime Act (POCA)
• effective date January1999
• Financial Intelligence Centre Act (FICA)
• effective date February 2002
• The Protection of Constitutional Democracy
  against Terrorist and Related Activities Act
  (PROCDATRA)
• Passed by parliament on 12 November not yet
  gazetted
• Prevention of Corrupt Activities Act (PRECCA)
• Effective date August 2004

15
Introduction to POCA

• Criminalises the act of money laundering
• Criminal confiscation of proceeds of crime
• Civil forfeiture of
• proceeds, and
• instruments of offences

16
POCA Offences (1)

• Money laundering (Section 4)
• Any act in connection with property that has
  effect of concealing or disguising source or
  movement thereof, or assists the criminal to
  avoid prosecution
• Where a person knows or ought reasonably to have
  known that the property is the proceeds of
  unlawful activities

17
POCA Offences (2)

• Proceeds of unlawful activities section 1
• Means - any property or part thereof or any
  service, advantage, benefit or reward which was
  derived, received or retained, directly or
  indirectly, in connection with or as a result of
  any unlawful activity carried on by any person,
  whether in the Republic or elsewhere,
• Property
• Means - money or any other movable, immovable,
  corporeal or incorporeal thing and includes any
  rights, privileges. claims and securities and any
  interest therein and all proceeds thereof

18
POCA Offences

• Laundering proceeds of anothers offence (Section
  5)
• Assisting another to benefit from proceeds of
• Acquisition, possession or use of
• Negligently fails to identify the true nature of
  illicit property (Section 6)
• Acquiring, possessing or using, where you ought
  reasonably to have known
• Negligence is no excuse

19
POCA Penalties and defences

• Penalties
• Fine of up to R100 million
• Imprisonment for up to 30 years
• Defence
• Reporting suspicions to Financial Intelligence
  Centre (FIC)
• Compliance with FICA

20
Introduction to FICA

• FICA creates
• The Financial Intelligence Centre (FIC)
• Duties for you!
• Duties for the firm!

21
Introduction to FICA

• Role players
• Any person in business (including all employees)
• Accountable Institutions (AIs) Schedule 1
• Supervisory Bodies Schedule 2
• Reporting Institutions (RI) Schedule 3
• Duties
• Reporting suspicious transactions (All role
  players)
• Reporting conveyance of cash (gt set amount)
  outside of SA (All persons) (NB. Not yet
  operative)
• Comply with money laundering control measures
  (AIs RIs)

22
List of Accountable Institutions (1)

• An admitted attorney (on either practising or
  non-practising role)
• 2. Board of executors, trust company, any person
  who administers trust property per Trust Property
  Control Act
• 3. Estate Agent
• 4. Financial instrument trader
• 5. Unit Trust Management Company
• 6. Bank
• 7. Mutual Bank

23
List of Accountable Institutions (2)

• Long term insurance business
• Licensed gambling businesses
• Forex dealer
• 11. Money lender against securities
• 12. Person who carries on business of providing
  investment advice or broking services, including
  a PAAB member who carries on such a business.
• 13. Seller, issuer, redeemer of travel cheques,
  money orders

24
List of Accountable Institutions (3)

• Postbank
• Member of a stock exchange
• Ithala Development Corporation
• Approved Investment Manager in terms of
• 17. Section 4 (1) (a) of Stock Exchanges Control
  Act
• 18. Section 5 (1) (a) of Financial Markets
  Control Act
• 19. Person who carries on business of a money
  remitter

25
List of Reporting Institutions

• Motor vehicle dealer (your client?)
• Kruger Rand dealer
• (Section 28 re cash transactions of RIs not yet
  operative)

26
Implications for You if you are an Accountable
Institution

• You (if an AI)
• Duty to be trained and follow firms internal
  rules for AIs
• General provisions (Reporting suspicious
  transactions), (conveying of cash outside of
  SA)
• Threshold Reporting (specified cash transactions
  , electronic transfers outside SA )
• These sections are not yet operative

27
Implications for You if you are NOT an AI

• You (if not an AI)
• General provisions (Reporting suspicious
  transactions )
• Threshold Reporting (conveying of cash outside of
  SA)
• This section is not yet operative
• Must not provide investment advice/ intermediary
  services if not FAISA registered
• Auditors - be aware of implications on audits of
  FICA, particularly if your client is an
  Accountable Institution

28
FICA offences and penalties

• Offences
• Failure to report suspicious transactions
• Negligent failure to identify suspicious
  transactions
• Tipping off
• Failure to implement compliance measures
• Penalties
• Maximum penalty 15 years jail and/or R10 million
  fine, or
• Maximum penalty 5 years jail and/or R1million
  fine (Compliance procedures)

29
Prevention and Combating of Corrupt Activities Act

• Offence to handle the proceeds of corrupt
  activities
• overlaps with general money laundering offences
• Creates reporting duties on persons in positions
  of authority
• All knowledge of corruption / bribery
• Offences with element of dishonesty gt R100 000
• Report to SAPS

30
ITS HOME VIDEO TIME!

• HES NOT CRAZY
• MY HUSBAND WAS A CLIENT OF YOUR FRANKFURT OFFICE
• ITS THE CHAOTIC WAY HE RUNS THINGS
• SUMMARY

31
Money laundering stages
Placement Convert cash to monetary instruments or
deposit into accounts
Layering Move funds to other financial
institutions to obscure origin.
Integration Acquire legitimate assets or fund
activities.
32
Funding of terrorism
Distribution Distribute funds to finance
terrorist activities
Layering Move funds to other financial
institutions to obscure link between origin and
destination.
Placement Deposit potentially legitimate assets
into the financial system
33
FICA Suspicious Transaction Reporting -Section
29

• Who must report Suspicious Transactions?
• Anyone carrying on a business
• Anyone managing / in charge of a business
• Anyone employed by a business

34
FICA Suspicious Transaction Reporting -Section
29(1)

• When do you report?
• Where you know or suspect that
• Firm received / about to receive proceeds of
  unlawful activities
• Firm is a party to a transaction which
• Facilitates or may facilitate transfer of
  proceeds of unlawful activities
• Has no apparent business or lawful purpose
• Conducted to avoid reporting duty
• May be relevant to the investigation of tax
  evasion or attempted tax evasion
• Firm is used/about to be used in any way for
  money laundering

35
FICA Suspicious Transaction Reporting- s29(2),
(3) and (4)

• Transactions that have not yet taken place
• Transactions about which enquiries are made which
  will have the above consequences if concluded -
  also report
• Other matters
• May not disclose that you have reported to any
  other person (tipping off)
• Suspicious transaction reporting overrides
  confidentiality restrictions
• We must report to FIC a.s.a.p. but no longer than
  15 days after first acquiring the knowledge or
  suspicion

36
FICA Suspicious Transaction Reporting Procedure
(1)

• What is the procedure for reporting? Our
  procedure
• First discuss the matter with the engagement
  director
• Reporting is a personal responsibility
• Cannot be overridden by the engagement director
  or management.
• If after discussions, you still suspect money
  laundering you must report this to Mike Fairbank,
  the firms Money Laundering Compliance Officer
  ("MLCO").
• If you are an accountable institution, this
  discharges your personal responsibility.
• If you are not an accountable institution, the
  MLCO will ensure that your responsibility is
  discharged in an appropriate manner.

37
FICA Suspicious Transaction Reporting Procedure
(2)

• What next?
• Initially report your suspicions to MLCO by phone
• This could save you needlessly filing a report
• Follow up in writing by submission to MLCO of
  your report on the PwC Suspicious Transaction
  Internal Reporting Form
• Ensure you get a receipt
• The MLCO will investigate all reports
• If he concludes that we have the necessary
  knowledge or reasonable suspicion, he will report
  the matter to the Financial Intelligence Centre
  ("FIC").

38
FICA PwC Suspicious Transaction Reporting
Procedure (3)

• If you discover or suspect money laundering in
  the course of your client work you must report
  through the firms procedures, independently of
  any procedures the client might have.
• If you detect that a client has entered into a
  suspicious or unusal transaction with a third
  party, you will not ordinarily have a duty to
  report this under FICA. For the reporting duty
  to arise, the firm must become a party to such a
  transaction, or be abused in any way for money
  laundering purposes.
• If we are the auditors we will need to consider
  the PAAB Act requirements re Material
  Irregularities

39
FICA Suspicious Transaction Reporting

• Penalties for non compliance
• Imprisonment up to 15 years
• Fine - up to R10 million
• DAMAGE TO REPUTATION

40
Suspicious transactions PwC (1)

• Main risks for Firm are
• Being paid from proceeds of unlawful activities
• Being used for money laundering purposes because
  of our reputation
• Being party to a relevant transaction should
  generally be greater risk due to the nature of
  your business

41
Suspicious transactions PwC (2)

• Preventative strategies could be
• Thorough client assignment acceptance
  procedures
• Strict disengagement policy avoid being a party
  to a transaction (but still need to consider if
  we have been used for ML purposes)
• Compulsory Client Identification Verification
  Procedures for Accountable Institution functions
• Emphasis on knowing our clients business
  providing tailored advice (e.g. CAKE)

42
Suspicious transaction identification

• Identification of Suspicious Transactions
• Depends on what we know about our clients
• Consider
• Nature of transaction
• Value of transaction
• Clients with operations in high risk countries
• Commercial logic?
• Unnecessarily complex or artificial?
• Does it make sense?

43
Suspicious transaction identification

• South African trends
• Purchase of goods and properties enjoying
  proceeds
• Abuse of businesses and business entities
• E.g. cash based front businesses
• Cash and currency buying credits in cash,
  convert into forex
• Informal sector largely unregulated
• Sham stokvels
• Abuse of financial institutions e.g. banks
  insurance

44
Suspicious transactions red flags

• General
• Use of many different firms of Attorneys and
  advisers for connected companies and businesses.
• Transactions passed through intermediaries (e.g.
  attorneys, PwC) for no obvious purpose.
• Unusually complex group structures where
  complexity does not appear to be warranted.
• Accounting systems that fail to give an adequate
  audit trail.

45
Suspicious transactions red flags

• Identification
• Known criminals
• Difficult to establish identity or beneficial
  ownership
• Reluctance to provide sufficient details
• Clients who you do not meet (3rd party
  introductions)
• Unknown source of funds / not consistent with
  profile.
• Referrals from offices / institutions based in
  countries known for drug trafficking and
  production
• New clients Walk ins particular at last
  minute on trip to SA

46
Suspicious transactions red flags

• Transactions
• Large cash transactions hot money
• Lacking commercial logic does not make sense
• Outside of the normal course of business method
  of payment / receipt not usual business practice
• Large payments / loans for unspecified services
  to consultants, related parties, employees or
  government employees.
• Abnormally extensive or unusual related party
  transactions.
• Unauthorised / improperly recorded transactions.

47
Suspicious transactions red flags

• Transactions (continued)
• At amounts that are undervalued or overvalued
  double billing
• Unusual amount of cash transactions for
  substantial amounts / many small transactions
  adding up to a substantial amount.
• Transfers from 3rd party bank accounts / 3rd
  party cheques
• Payments in error to be forwarded or cancelled
• Transfers to numbered bank accounts.
• Use of bearer cheques

48
Suspicious transactions

• Suspicious Transactions
• See FAQs in the PwC Anti-Money Laundering Manual
• ANY QUESTIONS?

49
The Protection of Constitutional Democracy
against Terrorist and Related Activities Bill
(PROCDATRA)A

• POCA Brings in property owned or controlled by
  terrorists or persons involved in such activities
  or financing thereof
• FICA
• Purpose will include combating of terrorism and
  related activities
• New section 28A Accountable Institutions have
  duty to report property of entities or persons
  who have committed a PROCDATRA offence in their
  possession or control
• Section 29 (reporting suspicious transactions)
  will encompass property which is connected to a
  PROCDATRA offence re financing of terrorism, in
  addition to proceeds of unlawful activity

50
Money Laundering vs. Fraud

• Fraudulent activity
• Likely to affect financial statements
• Loss or disappearance of assets or revenue
• Money laundering
• Less likely to directly affect financial
  statements if your client is being abused for ML
  purposes
• But, if using company as a front to launder large
  amounts of illicit cash proceeds watch for
  fictitious sales

51
PwC Anti-Money Laundering Database

• User friendly, with easy navigation, contains
• Overview of FICA your responsibilities
• PwC Policy Procedures (Internal Rules)
• Suspicious transactions reporting
• Accountable Institutions within PwC
• PwC Compliance Procedures
• PAAB Guidelines
• SA legislation
• Financial Action Task Force (FATF) material
• MLCO contact details

52
PwC Anti-Money Laundering Database

• Also contains FAQs on
• Suspicious transaction reporting
• Accountable Institutions within PwC
• Exemptions
• Details of your responsibilities if you are a
  trustee (personal appointment) see FAQ on this
  under PwC Compliance Procedures Accountable
  Institutions within PwC

53
SA legislation future developments

• RSA to review current legislation in the next 12
  18 months
• Request for comments on Regulations to FICA
• PwC submitted our comments on 19 November (will
  deal with at end of module 2)
• Coming into effect of of anti-terrorism
  legislation
• Implementation of the additional reporting
  requirements
• Cash transactions (AIs and RIs)
• EFT transactions to or from RSA (AIs)
• Cash conveyed to or from the RSA (Everyone)

54
Conclusion Implications for Firm

• General provisions (Reporting suspicious
  transactions)
• Accountable Institution (CIV, KYC, record
  keeping)
• MLCO should assume compliance obligations,
  internal rules, and training
• Threshold Reporting (conveying cash outside SA-
  not yet operative)
• Not a Reporting Institution

55
Conclusion Implications for You if you are an
Accountable Institution

• You (if an AI)
• Duty to be trained and follow internal rules for
  AIs
• Must implement Compliance procedures (e.g. Client
  Identification Verification, record keeping,
  KYC), but only when fulfilling an AI function
• General provisions (Reporting suspicious
  transactions), (conveying of cash outside of
  SA)
• Threshold Reporting (specified cash transactions
  , electronic transfers outside SA )
• These sections are not yet operative

56
Conclusion Implications for You if you are NOT
an AI

• You (if not an AI)
• General provisions (Reporting suspicious
  transactions )
• Threshold Reporting (conveying of cash outside of
  SA)
• This section is not yet operative
• Must not provide investment advice/ intermediary
  services if not FAISA registered
• Auditors - be aware of implications on audits of
  FICA, particularly if your client is an
  Accountable Institution

57
QUESTIONS?
pwc