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Case studies

Anti-Money Laundering – RAHN CASE STUDY ISSUE NO.18-2022

Anti-Money Laundering/Counter-Terrorist and Proliferation Financing (AML/CTPF) impact on multifaceted business

A study on Ithala’s impact on AML/CTPF

Rahn Consolidated (Pty) Ltd’s (“Rahn Consolidated”) articles and case studies are aimed at socialising. Climatising, creating awareness and cautioning economic participants regarding economic crime schemes. The focus will inter alia be on anti-money laundering and the investigations around economic crime schemes. Risks, reporting and most importantly, its regulatory compliance. The term “Economic crime schemes” is often used interchangeably with “Financial Crime”. For the purpose of ensuring all readers are kept in the loop, Rahn Consolidated will make use of both terms. Rahn Consolidated is at the forefront of deterring Financial Crime through compliance. They will focus primarily on compliance regarding Financial Crime. They will ensure fines by way of administrative sanctions that fines are mitigated as much as possible.

anti-money laundering

Item 16 of Schedule 1 of the Financial Intelligence Centre (FIC) Act. Identifies Ithala Development Finance Corporation Limited as an Accountable Institution (AI).

The Corporation’s core strategic objectives are to mobilise financial resources, provide financial and supportive services, to assist with planning, execution, financing and monitoring of the implementation of development projects and programs. Their objectives include assisting and encouraging the development of human resources and social, economic, financial and physical infrastructure. They also seek to encourage and facilitate private sector investment and the

participation of private sector and community organisations in development projects and programs. It is in their best interest to ensure that they are contributing to economic growth and development and act as the government’s agent for performing any development-related tasks and responsibilities that the government considers may be more efficiently or effectively performed by a corporate entity. From a Financial Action Task Force perspective, Public Financial Institutions

operating in South Africa, though not material in terms of size, are relevant due to their customer numbers and the access to the financial infrastructure they provide. These include Ithala SOC Limited, the banking and insurance subsidiary of Ithala Development Finance Corporation Limited, owned by the province of KwaZulu-Natal, whose customers are mostly government employees of the province. Both entities operate under an exemption to provide banking services without a license.

anti-money laundering

FATF MER Recommendations

financial intelligence centre logo

As an AI, Ithala Development Finance Corporation is not limited to only reporting obligations but should at a minimum comply with the following:

  • Register business as an AI with the FIC in order to ensure regulatory reporting through go-AML;
  • Develop a Risk Management and Compliance Programme (RMCP);
  • Conduct Customer Due Diligence (CDD);
  • Develop a compliance framework and appoint a compliance officer;
  • Conduct training on Anti-Money Laundering / CTPF risks and controls;
  • Effectively keep records; and
  • Effectively submit regulatory reports to the FIC.

FIC’s Website http://www.fic.gov.za

ML/TPF Risks Notes (Ithala Development Finance Corporation)

Deposit-taking financial institutions

The South African banking sector is dominated by five large banks, which collectively held 90.5% of the total banking sector assets as of 31 March 2019 (31 March 2018: 90.2%).

Local branches of international banks accounted for 5.6% of banking sector assets at the end of March 2019 (March 2018: 5.9%), while other banks represented 3.8% at the end of March 2019 (March 2018: 3.9%). Note: Banking sector data includes Ithala SOC Limited, conducting banking business in terms of an exemption from the provisions of the Banks Act.

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Ithala SOC Limited must register as per the license issued. The business of Ithala SOC is based on principles of branch business and most activities conducted in the financial industry. All offices or branches should be in a position to provide advice and administrative services to their clients. It is therefore not required that each individual branch registers on its own.

anti-money laundering

Ref: PCC05B

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Case studies

Postbank susceptible to Money Laundering

Is the Postbank susceptible to Money Laundering?

Rahn Consolidated (PTY) Ltd’s (“Rahn Consolidated”) articles and case studies are aimed at socialising, climatising, creating awareness and cautioning economic participants on regarding economic crime schemes. The focus will inter alia be on the investigations around Postbank susceptible to Money Laundering, risks, reporting and most importantly, its regulatory compliance. The term “Economic crime schemes” are often used interchangeably with “Financial Crime”. For the purpose of ensuring all readers are kept in the loop, Rahn Consolidated will make use of both terms. Rahn Consolidated being at the forefront of deterring Financial Crime through compliance will focus primarily on the compliance of regarding Financial Crime and ensuring fines by way of administrative sanctions that fines are mitigated as much as possible.

PostbankMoneyLaundering

Issue No.17 focuses on schedule 1, item 14 of the Financial Intelligence Centre Act (FIC Act). Which names the Postbank as an accountable Institution.

The purpose of this article is to highlight whether there are areas where the Postbank is susceptible to money laundering. We also would like to highlight areas in which Rahn Consolidated can assist to embed controls in this regard. By definition, a Postbank undertakes activities which are customary for a financial institution carrying on the business of accepting deposits. This therefore implies that with the inflow and outflow of mainly cash. We can already see that there are pertinent requirements in the FIC Act that need to be adhered to.

This article also aims to highlight the risks associated to not embedding any controls to curb money laundering activities.

Enjoy the Read!

Item 14 of Schedule 1 of the Financial Intelligence Centre (FIC) Act identifies the Postbank as an Accountable Institution (AI). As referred to in section 51 of the Postal Services Act, 1998 (Act 124 of 1998). Prior to indicating all Money Laundering risks that may be associated with the Postbank. It is imperative to highlight activities performed by the Postbank in order to arrive at an analysis.

Postbank activities include but are not limited to:

  • Money remittance: Money transfer services which include Money remittance through the postal company either within or outside the Republic at rates determined by the postal company. The postal company may authorise any employee to issue and pay money orders, postal orders and other documents authorised to be used for the purpose of so remitting money.
  • Bank note: Any money order or postal order is regarded as a bank note or an order for the payment of money and a valuable security within the meaning of any law relating to forgery or theft.
  • Any unissued postal order must be regarded as money of the postal company.
  • Acceptance of deposits: Some activities of the postal company include acceptance of deposits and making payments to customers, which is customary to a financial service institution.
  • Interest on deposits: Interest on deposits in the Postbank must be paid at a rate determined from time to time by the postal company and the Minister in consultation with the Minister of Finance in the case of each kind of deposit.
  • Regarding deposits: Deposits in the Postbank made by or for the benefit of, or any National Savings Certificate issued in favour of any person under 21 years of age, may be repaid to that person in the prescribed manner in respect of any particular kind of deposit or account in the Postbank.
  • Transfer of deposits from one country to another: The postal company may, in accordance with arrangements made with any postal authority for the transfer from or to the Republic of sums of money standing to the credit of depositors in the Postbank or depositors in a savings bank controlled by that postal authority and subject to this Act.
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As an AI, Postbank business is not limited to only reporting obligations but should at a minimum comply with the following:

  • Register business as an AI with the FIC in order to ensure regulatory reporting through go-AML;
  • Develop a Risk Management and Compliance Programme (RMCP);
  • Conduct Customer Due Diligence (CDD);
  • 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.

FIC’s website: http://www.fic.gov.za

Based on above activities, we will focus on money remitters and deposits as activities offered by Postbank. Below are money laundering risks which need implementation of controls on

Money Remittances: risks associated with money laundering:

  • Money remittances being cash intensive have high risks owing to large values being remitted to high-risk jurisdictions.
  • Postbank in this regard, particularly relating to the money remitting activity. It has to ensure that they embed transaction monitoring controls relating to reporting.
  • Thus far there have been about 81 964 reports associated Suspicious Transaction and Activity Reports.

Acceptance of deposits and transfers

  • Postbank act as a deposit-taking entity without a banking license under a Banking Act exemption.
  • Postbank engage in deposit-taking activities under an exemption from being licensed as a bank. Thus they are not supervised for AML/CFT by the SARB:PA, but by the FIC.
  • The risks in deposit taking relate to taking cash or any form of money from individuals. It is unable to conduct customer due diligence on.
  • Initial findings identified in the Mutual Evaluation Report in the Financial Action Task Force (FATF). Indicate that 34% of cash deposits are done by unknown depositors.
  • Rahn consolidated can assist in embedding controls in monitoring cash transactions and reporting accordingly.

ML/TPF Risks Notes: Registration of Postbank as AI

Postbank operating as a Financial Institution would require a registered section 43B compliance officer. And a registered MLRO in its respective branches for purposes of registration.

PostbankRegistrationMoneyLaundering

Ref: PCC05B

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Case studies

Money Laundering with Traveller’s Cheques

Can Traveller’s cheques be used to launder money? – An AML/CTPF impact analysis on traveller’s cheques

Rahn Consolidated (Pty) Ltd’s (“Rahn Consolidated”) articles and case studies are aimed at socialising, climatising, creating awareness and cautioning economic participants on regarding economic crime schemes. The focus will inter alia be on the investigations around Money Laundering with Traveller’s Cheques, risks, reporting and most importantly, its regulatory compliance. The term “Economic crime schemes” are often used interchangeably with “Financial Crime”. For the purpose of ensuring all readers are kept in the loop, Rahn Consolidated will make use of both terms. Rahn Consolidated being at the forefront of deterring Financial Crime through compliance will focus primarily on the compliance of regarding Financial Crime and ensuring fines by way of administrative sanctions that fines are mitigated as much as possible.

Scanning card at the card machine

Issue No.16 focuses broadly on the non-banking system that deals with new payment products and services (NPPS). Entities in this industry are still labelled as financial institutions which are issuing and managing different means of payment. These means of payment may include, credit and debit cards, cheques, traveller’s cheques, money orders and bankers’ drafts and electronic money.

The Money laundering and Terrorist financing risks around this area are large require extensive controls to ensure compliance to all AML/CTF laws. This article aims to reflect the AML requirements considering how this particular payment system could be susceptible to money laundering.

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Item 13 of Schedule 1 of the Financial Intelligence Centre (FIC) Act identifies an entity which issues, sells or redeems traveller’s cheques, money orders or similar instruments as an Accountable Institution (AI). When looking into new payment product systems, with reference to traveller’s cheques, the following must be considered:

Traveller’s cheques providers should consider putting in place transaction monitoring systems which can detect suspicious activity based on money laundering and terrorism financing typologies and indicators. Such monitoring systems should take into consideration customer risks, country or geography risks, and product, service transaction or delivery channel risks. The transaction monitoring system could also be used to identify multiple accounts or products held by an individual or group, such as holding multiple traveller’s cheques. Traveller’s cheques providers should consider analysing the information and records retained to determine unusual patterns or activity. Where the traveller’s cheque provider identifies a transaction which it suspects, or has reasonable grounds to suspect, that the funds involved are the proceeds of criminal activity or are related to terrorist financing, it should report its suspicions to the relevant financial intelligence unit in accordance with the FATF Recommendations and the laws in the applicable country.

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FATF new payment products RBA

As AIs, Traveller’s cheque businesses are not limited to only reporting obligations but should at a minimum comply with the below:

  • Register business as an AI with the FIC in order to ensure regulatory reporting through go-AML;
  • Develop a Risk Management and Compliance Programme (RMCP);
  • Conduct Customer Due Diligence (CDD);
  • 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.

FIC’s website: http://www.fic.gov.za

Fic Logo Image

From a reporting perspective, the traveller’s cheques industry only constitutes about 3% of the total reports submitted between 2021/2022 by different accountable institutions and reporting institutions (AI and RI). This implies 3% of 5 247 362 repots received by the FIC.

It was further reported that from a traveller’s cheque perspective, most reports relate to suspicious activities and transactions (SAR/STR). To quantity the above, above 81 964 reports are received from the NPPS alone which includes traveller’s cheques. This makes it about 21% of the total SAR/STR received for different types of AIs and RI for the period 2020/2021.

The above indicates the importance of this industry and how badly it could be susceptible to money laundering.

“It is imperative for this industry to focus largely on detective controls enabling their reporting.”

Rahn Consolidated can assist cash intensive AIs in developing and implementing bespoke transaction monitoring systems and processes to drive out compliance and financial crime controls. This ensures that the SAR/STR reporting reflects the true risk within the organisation and not simply making use of generic approaches which typically over-simplify and over-estimate risks within a particular organisation.

Money Laundering Risks identifies in these payment systems:

Money Laundering with Traveller’s Cheques has increased by allowing cash funding and, in some rare cases, convertibility without any limit on the value placed on the cheque or CDD requirements. This makes traveller’s cheques vulnerable to abuse by criminals who can use them, for example, to launder the proceeds of crime by placing those proceeds into the financial system or using the traveller’s cheques as an

alternative to the physical cross-border transportation of “converted” cash. Mobile payment services (which can be described in the same group as traveller’s cheques) allow accounts and transactions to be funded in diverse ways; many services, whether bank- or centric based models, draw funds from a bank or payment card account, others allow cash funding through a network of agents. While the former

funding method limits ML/TF risks (but also limits potential access), cash and non-bank payment options obscure the origin of the funds creating a heightened risk for ML/TF. A mobile payment service that facilitates account-to-account transfers is also permitting funding through third parties, which may increase the ML/TF risk, if the holder of the funding account was not properly identified.

ML/TPF Risks Case study: Traveller’s cheque (payment systems AI registration)

Example of Traveler’s cheque registration and its structure

An entity’s main line of business is that of an issuer of traveler’s cheques as defined in the schedule 13 of the FIC Act. Below indicates how registration would occur, especially if the payment product system is non-banking.

Mr. X is the compliance officer of all 4 accountable institutions, see diagram below. It is important to note that reporting to the Centre follows the registration structure of the accountable institution (s). Multiple MLRO can be added per registration structure i.e., per schedule item. The MLRO is registered under the main line of business he/she can see all registration and reporting information. If the MLRO is registered for an underlying schedule item only he/she can only see reporting and registration information of that schedule item. N/B: Fictitious structure for illustration purposes.

Travelers Check Issuer Illustration

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