All posts by Rahn

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)

Enjoy the Read!

Mutual Evaluation Report (MER) Immediate Outcome 4 (IO4): Preventative Measures

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.

“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.

Ref: The Sentry

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.

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

FATF MER Recommendations

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)

Ref: PCC05B

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.

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:

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.

Ref: PCC05B