South Africa has introduced new banknotes and coins inspired by family, whales, and bees.
Rahn Consolidated’s articles and case studies are aimed at socialising, climatising, creating awareness, and cautioning economic participants regarding economic crime schemes. The focus will be on anti-money laundering and the investigations around economic crime scheme risks, reporting, and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”.
South Africa has introduced new banknotes and coins, the previous notes and coins are now going to be phased out. Below is a case study of how this impacts people who have cash in hand and the impacts this can have on cash threshold reporting from a financial crime perspective.
Image: SARB
ISSUE NO.21-2023, focuses on South Africa’s recently introduced banknotes and coins. This has caused a significant impact on people who have cash in hand. The previous notes and coins are being phased out. This has implications for financial crime prevention, specifically regarding cash threshold reporting.
From a financial crime perspective, cash threshold reporting refers to the obligation of financial institutions. They need to report any cash transactions above a certain threshold to the relevant authorities. This is done to prevent money laundering and other illegal activities.
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The Implications of New Bank Notes and Coins
With the introduction of new banknotes and coins, financial institutions need to implement new controls and checks to ensure that they are accurately reporting cash transactions. This includes updating their systems and procedures to recognize and process the new notes and coins.
For individuals who have cash in hand, the impact of the new notes and coins is significant. They will need to exchange their old notes and coins for new ones before the old ones are phased out. This will require them to go to a bank or other financial institution and exchange their old notes and coins for new ones.
Image: SARB
For those who do not exchange their old notes and coins before they are phased out. They will no longer be able to use them as legal tender. This means that they will have worthless notes and coins. This can have a significant impact on their financial situation.
From a financial crime perspective, the introduction of new notes and coins provides an opportunity for criminals to exploit the system. This is why financial institutions need to implement robust controls and checks to prevent money laundering and other illegal activities.
Image: SARB
The introduction of the new banknotes and coins in South Africa has significant implications. Especially for financial crime prevention, specifically regarding cash threshold reporting. Financial institutions need to implement new controls and checks to ensure that they are accurately reporting cash transactions. For individuals, it is important to exchange their old notes and coins for new ones. Before the old ones are phased out to avoid any financial impact.
Financial Intelligence Centre Act and Financial Action Task Force Recommendations: A case study on the industry impact of South Africa’s Finance Laws.
Rahn Consolidated’s articles and case studies are aimed at socialising, climatising, creating awareness, and cautioning economic participants regarding economic crime schemes. The focus will be on anti-money laundering and the investigations around economic crime scheme risks, reporting, and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”.
In June 2021, the Financial Actions Task Force (FATF) highlighted deficiencies in South Africa’s AML/CFTPF regime. The report issued by the FATF, lists a set of “priority actions”. That government’s required to take before October 2022.
ISSUE NO.20-2022, focuses on South Africa’s requirement to report on the progress made in the FATF plenary in October 2022. If FATF deems the progress to be insufficient. It will be decided on whether South Africa should be placed on a “Grey list”.
The “Grey list” contains a list of jurisdictions. They are under increased monitoring and are required to address strategic deficiencies in their regimes. To counter money laundering, terrorist financing, and proliferation financing. From an industries perspective, when the FATF places a jurisdiction under increased monitoring.It means the country has committed to swiftlyresolve the identified strategic deficiencies. Within agreed timeframes and is subject to increased monitoring.
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The Impact of Grey listing South Africa
Countries that would be placed on the grey list are subject to face economic sanctions from development funders like the European Union and the World Bank. Once there is enhanced monitoring of a country based on the Grey listing, the enhanced monitoring requirements could also impose a burden on global
financial counterparts, such as foreign banks or investors, who will be required to implement additional measures/controls when doing business with entities within Gray listed countries. Many global banks and investors have policies against engagements with Grey listed countries.
Policies Implementation in South Africa to curb AML/CTF&P
The FATF recommended that South African authorities develop policies to address higher risks of money laundering and terrorist financing. It also suggested policymakers provide the Directorate for Priority Crime Investigation (the Hawks) with more staff, especially financial investigators, and forensic accountants.
Given this, the treasury and the Financial Intelligence Centre had already started reviewing South Africa’s anti-money laundering and counter-terrorist financing legislation. The amendments to the FIC Act have widened its scope by including more categories of institutions and businesses that must adhere to the duties of accountable institutions that are not only limited to reporting of suspicious transactions.
The below key amendments were made to the FIC Act :
The objectives of the Financial Intelligence Centre (“Centre”);
The functions of the Centre include the provision of forensic informatio. Empowering the Centre to request information held by other organs of state;
Providing for additional and ongoing due diligence measures. Amending the process followed when there are doubts about the veracity of information;
Aligning certain provisions and Schedules 3A and 3B. To appropriately refer to domestic and foreign “politically exposed persons”. As distinct from “politically influential persons”, who will deal with in a new Schedule 3C;
Certain provisions relating to resolutions of the Security Council of the United Nations. By amending the powers of access by authorised representatives to records of accountable institutions;
Enabling the Centre to renew a direction not to proceed with a transaction;
by providing for the safeguarding of information;
The provisions relating to the disclosure of information to the Centre and access to information by the Centre;
Empowering Minister to prescribe appropriate requirements relating to access to personal information. To ensure that adequate safeguards are in place. As required by section 6(1)(c) of the Protection of Personal Information Act, 2013;
Certain provisions relating to the risk management and compliance programme. By amending the offences provisions to empower the imposition of administrative sanctions;
The provision relating to the amendment by the Minister of Schedule 2; and
Schedules 2, 3A and 3B, and by inserting a new Schedule 3C.
Lessons from other Countries regarding the Grey List:
Mauritius was taken off the Grey list after one year when meeting all requirements and continues to make great strides in improving its AML/CFTPF regime.
Botswana was removed in October 2021 after meeting the FATF requirements. It took the country three years to succeed, during which time it was automatically included in the EU’s list of non-compliant countries.
Pakistan has an economy roughly the same size as South Africa’s and has been estimated to have lost USD38bn (R600bn)* of economic activity from 2018 to 2019 as a result of being Grey-listed in 2018. In March this year, the FATF plenary kept the country on the grey list despite it having completed 26 of the 27 action items required by the FATF, which indicates that getting off the list is not a simple task.
While South Africa is currently on the watch-list for the Grey List. It is all financial industries’ duties to ensure compliance.
The duties to which Accountable Institutions (Financial Industries) should adhere to. In order to avoid being grey-listed you should include the below:
To develop a Risk Management and Compliance Programme (RMCP);
Conduct Customer Due Diligence (CDD) and ensuring that all clients are identified, verified, screened and risk rated;
To develop a risk based framework that would allow the financial industries.
To curb risks relating to money laundering and terrorist and proliferation financing;
Develop a compliance framework and appoint a compliance officer;
Conduct training on AML/CTPF risks and controls;
Effectively keep records; and
Effectively submit regulatory reports to the FIC.
Given the stringent monitoring on South Africa’s controls around monitoring. It is always key to ensure compliance duties are adhered to.
How Anti-Money Laundering (AML) and Counter Terrorist and Proliferation Financing (CTPF) laws have greatly affected banking
Rahn Consolidated’s articles and case studies are aimed at socialising, climatising, creating awareness. Cautioning economic participants regarding economic crime schemes and Proliferation Financing. The focus will be on anti-money laundering. The investigations around economic crime scheme risks, reporting, and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”.
Issue No.19 focuses on aspects contained in the Financial Action Task Force (FATF) Mutual Evaluation Recommendations and Immediate Outcomes (IOs). Which affect all Financial Institutions. We have seen how Anti-Money Laundering (AML) and Counter Terrorist and Proliferation Financing (CTPF) laws have greatly affected banking, insurance, and financial institutions. There are certainly greater risks of non-compliance at this stage. It is vital to get your business compliant as soon as possible to avoid potential regulatory fines.
In this issue, we will focus on cases affecting Proliferation Financing as part of Immediate Outcome 4 (IO4). South African Accountable Institutions must know which countries are regarded as high-risk . When it comes to Proliferation Financing and start embedding controls to ensure that they curb these risks.
Financial Action Task Force Recommendations: A case study on industry impact of Immediate Outcome 4: Preventative Measures on Proliferation Financing (Broader Africa)
The FATF MER Immediate Outcomes apply to the following financial institutions:
Large banks from a material and risk perspective;
The securities sector (Financial Service Providers and Collective Investment Schemes managers) mostly from a material perspective;
High-risk sectors: estate agents, attorneys, and casinos.
Several Financial Institutions are not subject to all the AML/CFT obligations which impact the effectiveness of preventive measures. The legislation has however been evolving to ensure that all Financial Institutions have the same robust controls to curb AML/CFT.
One of the outcomes, emanating from the FATF MER, is that since April 2019 South Africa has implemented Targeted Financial Sanctions (TFS) for Proliferation Financing well, most of the time without delay, but some major improvements are needed, as the private sector’s understanding is uneven, and supervision of Proliferation
Financing related obligations is new. For this reason, the next upcoming desktop reviews by the FIC (followed by Onsite Inspections) will be on the effective embedment of Proliferation Financing measures which should go hand in hand with your currently embedded processes and capabilities on Terrorist Financing
and Sanctions. Rahn Consolidated can assist in the embedment of all these capabilities and in ensuring that there is a single view across all these respective areas. Having said that, in understanding Proliferation Financing, one needs to expand on what it is and how to curb it in your business.
“Proliferation is defined by the Financial Action Task Force (FATF) as the illegal manufacture, acquisition development, export, trans-shipment, brokering, transport, transfer, stockpiling, or use of nuclear, chemical, or biological weapons and their means of delivery and related materials.”
Prohibitions against Financial Institutions
Below are financial prohibitions against which Financial Institutions should be guarding (in this example North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), is the focus point):
Controls on financial institutions : Financial institutions are prohibited from maintaining relationships, including correspondent banking relationships, with DPRK financial institutions
Controls on vessels and aircraft : Leasing or chartering vessels, aircraft, or crew services to/from DPRK is prohibited
Prohibitions on financial support : Includes granting of export credits, guarantees, or insurance
From a FATF perspective, the below recommendations relate to proliferation financing:
Recommendation 1: Requires countries to identify, assess, and understand their Proliferation Financing risks, take commensurate action to mitigate these risks, and require Financial Institutions to do the same.
Recommendation 2: Requires effective national cooperation and coordination mechanisms to combat Proliferation Financing.
Recommendation 7: Requires implementation of United Nations Security Council Resolution Terrorist Financing Sanctions on Proliferation Financing (i.e., asset freezes).
Proliferation Financing Case Study
Although there are not many proliferation case studies in South Africa, the most prominent case in Africa, which showed why North Korea is set at high risk when it comes to proliferation financing, emanates from the Democratic Republic of Congo (DRC).
Background
Congo Aconde was registered as a company by two North Koreans (Pak Hwa Song and Hwang KilSu) in 2018 in the DRC;
They facilitated construction projects for the DRC Government in three provinces from 2018 to late 2019;
They further engaged in activities that appear to violate UN, EU, and US sanctions which include but are not limited to:
Opening bank accounts at Afriland First Bank for their company;
Undertook construction projects in the DRC by erecting statues, a type of construction activity explicitly forbidden by the UN sanctions.
The Congolese government funds reportedly served to pay for the statues.
Act of falsification: this is where conducting Customer Due Diligence is prominent
The Congolese provided the North Koreans with passports during the company formation process;
The passports indicated they are “Ministry of Foreign Affairs” employees;
They were in the DRC for official government business;
The Nationality was therefore recorded as ‘Korea’ or ‘Korean’;
Congo Aconde, therefore, listed a residential address on incorporation records.
Acts of Proliferation Financing:
There were US Dollar bank accounts opened at Afriland First Bank in the name of Congo Aconde, that maintained a corresponding relationship with other Banks, which lead to the opportunity to conduct US Dollar transactions without restriction;
The Bank indicated the account of Congo Aconde received $407,800 in deposits and approximately $408,145 in withdrawals. It was further indicated that these transactions were in cash and not electronic transfers, which shows the importance of establishing Cash Transaction Reporting capabilities embedded in the business.
And finally, the Bank indicated no incoming or outgoing international transfers which then, in turn, meant that the MLRO did not submit an International Fund Transfer Report. This implies domestic funding through Congolese funds or bulk cash transfers.
As part of AML/CTPF capabilities Rahn Consolidated provides, it assists organisations to build systems to conduct client identification and verification and further screen individuals and institutions against among other sanctions, terrorist, and proliferation lists.
