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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

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Money Laundering
General Awareness
Module 1

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Money Laundering – General Awareness
Module 1 - Agenda

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

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

• How to recognise money laundering


• Anti-terrorism legislation
• Money Laundering database
• Conclusion

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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)

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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

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Origins of laundered money

• Theft • Drug trafficking


• Fraud • Perlemoen smuggling
• Tax evasion • Counterfeiting
• Bribery / corruption • Extortion/blackmail
• Forgery • Robbery
• Prostitution • Smuggling

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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

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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

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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 FIRM’S NAME

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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

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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

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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

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Introduction to POCA

• Criminalises the act of money laundering


• Criminal confiscation of proceeds of crime
• Civil forfeiture of:
proceeds, and
instruments of offences

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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

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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

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POCA – Offences

Laundering proceeds of another’s 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

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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

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Introduction to FICA

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

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Introduction to FICA

Role players:
Any person in business (including all employees)

Accountable Institutions (AI’s) – Schedule 1

Supervisory Bodies – Schedule 2

Reporting Institutions (RI) – Schedule 3

Duties:
Reporting suspicious transactions (All role players)

Reporting conveyance of cash (> set amount) outside of SA (All persons) – (NB. Not yet operative)

Comply with money laundering control measures (AI’s & RI’s)

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List of Accountable Institutions (1)

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

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List of Accountable Institutions (2)

8. Long term insurance business


9. Licensed gambling businesses
10. 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

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List of Accountable Institutions (3)

14. Postbank
15. Member of a stock exchange
16. 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

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List of Reporting Institutions

1. Motor vehicle dealer (your client?)


2. Kruger Rand dealer

(Section 28 re cash transactions of RI’s not yet operative)

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Implications for You
if you are an Accountable Institution

You (if an AI):


• Duty to be trained and follow firm’s internal rules for AI’s

• 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

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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

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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)

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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 > R100 000

• Report to SAPS

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IT’S HOME VIDEO TIME!

HE’S NOT CRAZY


MY HUSBAND WAS A CLIENT OF YOUR FRANKFURT OFFICE
IT’S THE CHAOTIC WAY HE RUNS THINGS

SUMMARY

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Money laundering stages

$ $ Placement
$ $ $ $ $ $ $ $ $ $ $ $ $ $
Convert cash to monetary instruments or
deposit into accounts

$ $ $ $ $ $ $ $

Corporate
Layering
banking
Equities Treasury Debt
Move funds to other financial institutions
to obscure origin.
$ $ $ $

£ account £ account

Integration Legitimate
asset PricewaterhouseCoopers
Acquire legitimate assets or fund
activities.
Funding of terrorism
Distribution
$Distribute
$ funds
$ to$finance$ terrorist
$ $ $ $ $ $ $ $ $ $ $
activities

$ $ $ $ $ $ $ $

Layering Equities
Corporate
Treasury Debt
banking
Move funds to other financial
institutions to obscure link between
$ and destination.
origin $ $ $

£ account £ account

Placement Legitimate
Deposit potentially legitimate assets asset
into the financial system
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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

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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 PricewaterhouseCoopers
laundering
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

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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 firm’s Money Laundering Compliance Officer
("MLCO").

• If you are an accountable institution, this discharges your personal


responsibility.

• If you are not an accountable institution, the MLCO will ensure that your
responsibility is discharged in an appropriate manner.

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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").

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FICA – PwC Suspicious Transaction
Reporting Procedure (3)
If you discover or suspect money laundering in the course of your
client work you must report through the firm’s procedures,
independently of any procedures the client might have.

If you detect that a client has entered into a suspicious or unusal


transaction with a third party, you will not ordinarily have a duty to
report this under FICA. For the reporting duty to arise, the firm must
become a party to such a transaction, or be abused in any way for
money laundering purposes.
If we are the auditors we will need to consider the PAAB Act
requirements re Material Irregularities

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FICA – Suspicious Transaction
Reporting

Penalties for non compliance


• Imprisonment – up to 15 years
• Fine - up to R10 million

DAMAGE TO REPUTATION

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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

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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 client’s business & providing tailored
advice (e.g. CAKE)

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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”?

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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

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Suspicious transactions – red flags

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

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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

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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.

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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

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Suspicious transactions

Suspicious Transactions

See FAQs in the PwC Anti-Money Laundering Manual

ANY QUESTIONS?

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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

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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

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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

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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

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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 (AI’s and RI’s)
– EFT transactions to or from RSA (AI’s)
– Cash conveyed to or from the RSA (Everyone)

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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

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Conclusion – Implications for You
if you are an Accountable Institution

You (if an AI):

• Duty to be trained and follow internal rules for AI’s


• 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

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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

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QUESTIONS?

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