Financial Service Providers – RAHN CASE STUDY ISSUE NO.12-2022

How Financial Service Providers are 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 Financial Service Providers, 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 regarding Financial Crime and ensuring fines by way of administrative sanctions that fines are mitigated as much as possible.

Calculator pen Coins and documents

Issue No.12 focuses on Financial Service Providers (FSPs) who are authorised in terms of the Financial Advisory and Intermediary Services Act (FAIS Act). These services exclude services provided in the Short-term Insurance Act and health service benefits provided by a medical scheme as defined in section 1(1) of the Medical Schemes Act.

Due to this particular type of service provider having a wide variety of products, it could be very susceptible to money laundering and it is deemed as the most susceptible service provider in the money laundering regime. The main focus of the FSP business is to ensure that the advice and intermediary services provided are aligned to ensure that the correct money laundering questions are asked during establishment of a business relationships. Controls to be implemented in this space need to be efficient and effective to curb money laundering.

Item 12 of Schedule 1 of the FIC Act defines a person who carries on the business of a financial services provider requiring authorisation in terms of the Financial Advisory and Intermediary Services act ,2002 as an Accountable Institution (AI). This needs amplification.

Unpacking Financial Service Providers:

  • A person or entities which provide advice or intermediary services relating to on the investment of financial products (excluding short-term insurance and health service benefits) is an AI.
  • Financial Service Providers (FSPs) which are, in terms of their license conditions defined in the FAIS Act, limited to the provision of advice and intermediary services exclusively on short-term insurance and/or medical aid membership are not accountable institutions.
  • It is important to note that FSPs which are not accountable are not AIs but nevertheless have to comply with the provisions of section 29 with regards to suspicious transaction reporting.
  • Where an FSP uses a juristic representative that is also an accountable institution or a reporting institution, such accountable institution or reporting institution must comply with the requirements of the FIC Act.
  • Where an FSP conducts the business of a reporting institution (motor vehicle or a Kruger rand dealer), the FSP must also register with the FIC.

Guidance Note on Financial Service Provicers

With regards to on-boarding clients, the requirements below are the minimum which FSPs should implement in order to comply with the FIC Act. FSP’s are required to perform client identification and verification in respect of all clients (natural and legal persons / entities) prior to:

  • Entering into a business relationship; and
  • Performing a single transaction.

Rahn Consolidated can assist in the performing the above compliance requirements by ensuring that:

  • A business relationship cannot be established or funds accepted for a product or service if the client has not been identified and verified, where appropriate.
  • FSPs must perform client due diligence (CDD) according to the client type and the risk rating assigned using the FSP’s AML / CFT risk based approach.
  • Where verification is required in the identification process, this is performed by relying on reliable and independent sources of information, using the original source of the documentation wherever possible, obtained from credible sources, such as reliable third party databases.
  • This applies especially to legal entities where data is gathered to be able to support additional due diligence requirements.
Men shaking hands

As an AI, the FSPs are not limited to only reporting obligations but should at a minimum comply with the following:

Apart from Reporting obligations, business of lending money against securities have to comply to the below FIC Act requirements:

  • 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.
Image if the Financial Intelligence centre Logo

FIC’s website:http://www.fic.gov.za

Financial Service Provider case study (focus on reporting)

With the above scenario, Rahn Consolidated can assist with the monitoring of these transactions for FSPs and further conduct reporting in line with their money laundering reporting obligations.

Aggregation example (using R24 999.99 not R49 999.99-same principles apply)

FSP client A deposits cash of R20 000 at a branch of Bank A into the bank account of Mr Y on 1 April 2022.

Client A also deposits R6 000 cash into his own home loan amount held at Bank A on 1 April 2022. On the same day, Client A makes an ATM cash deposit at Bank A into his wife’s cheque account for R4 000. Bank A must submit a cash threshold aggregation report to the Centre to the amount of R30 000.

FIC CTR Guidance Note

Directions of cash transactions when reporting cash transactions (CTR)

FSP/AI ABC receives cash from Client X to the amount of R20 000 in relation to Product YY on 20 January 2022 and receives cash to the amount of R5 000 in relation to the same product from Client X on 21 January 2022. FSP/AI ABC pays out R29 000 to Client X

in relation to FSP/AI ABC pays out R29 000 to Client X in relation to January 2022. FSP/AI ABC pays out R29 000 to Client X in relation to Product YY on 21 January 2022. FSP/AI ABC must report the aggregated cash received from Client X of R25 000 on 20 and

21 January 2022. FSP/AI ABC must also report cash paid to FSP/AI ABC must also report cash paid to would submit two reports to the Centre, one aggregated cash transaction report (CTR) for the two cash transactions received, and one CTR for cash paid.

Lending money against security of securities

Is your business lending and receiving dirty money? A study on business of lending money against security of securities.

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 Lending money against security of securities , 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.11 focuses on businesses registered as lenders of money against securities and mostly provide clarity on credit providers. This article aims to inform readers of what item 11 of schedule 1 of the Financial Intelligence Centre Act (FIC Act) refers to and how such businesses can implement controls to mitigate risks relating to Money Laundering and Terrorist and Proliferation Financing (ML/TPF) in their business.

Enjoy the read!

Item 11 of Schedule 1 of the Financial Intelligence Centre (FIC) Act identifies an Accountable Institution (AI) as a person who carries on with the business of lending money against the security of securities.

Firstly, it is very important to note that credit providers are regulated by the National Credit Act (NCA). The business of lending money against securities on the other hand is regulated by the Financial Intelligence Centre Act as an AI and supervised by the Financial Sector Conduct Authority (FSCA) due to the use of securities.

The Financial Action Task Force (FATF) Mutual Evaluation Report, explains explicitly the exclusion of Credit Providers from being an AI:

FATF Mutual Evaluation Report_October 2021

It is therefore possible to exclude credit providers as AIs, but including the money lenders against securities.

The table below depicts South Africa’s situation regarding registration and supervision of credit providers vs money lenders against securities

TypeNo. Total |No. Registered |Subject to ML/TPF obligations |ML/TPF Supervisor
Credit providers6 8956 895NoNCR (N/A)
Among which, money lenders against securities7676YesFIC and FSCA

Furthermore, there has not been an recorded ML/TPF sanctions reported on credit providers apart from those that conduct business as money lenders against securities.

  • The reference in item 11 of schedule 1 of the FIC Act to a person who lends money against the securities relates to the Stock Exchange Control Act.
  • The Stock Exchange Control Act refers to a “carrier against shares”. Note that this Act was repealed by the Financial Markets Act (FMA).
  • This definition refers to a practice where a trader could lend money to a client to fund a purchase of shares against the security of shares bought by the client in the previous trade.
  • Item 11 specifically relates to securities with particular reference to instruments that are traded on an exchange such as shares, debentures and futures contracts. 
  • All securities defined in the FMA are included in this definition contained item 11 of schedule 1.
  • In conclusion, item 11 of schedule 1 excludes credit providers apart from those that lend money against securities.
  • To provide some context, Rahn Consolidated will highlight some features of these securities in line with the FMA.

Securities as defined in the Financial Markets Act (FMA):

  • Shares, depository receipts and other equivalent equities;
  • Debentures and bonds;
  • Derivatives instruments;
  • Notes;
  • Instruments based on an index;
  • Units or any other form of participation in a collective investment scheme;
  • Money market securities;

Financial Market Act, 19 of 2012

“Credit providers, other than money lenders against securities, are not subject to ML/TPF obligations except the general requirements to file a Suspicious Transaction Report (STR) that applies to any business that is not subject to supervision or monitoring.”

Apart from Reporting obligations, business of lending money against securities have to comply to the below FIC Act requirements:

  • 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

ML/TPF risks notes: Money lending institutions against securities

Background: A possible scenario could be where a client applies for a loan to purchase a house. In this example, a unit trust which is part of a collective investment schemes (CIS) as defined in the FMA as one of the securities. The client provided security of around 30% of the loan by putting a lump sum into a unit trust (CIS). He later withdrew the investment early to pay back the loan (capital and interest), making up the shortfall through other funds whose source is unknown.

Money Laundering Risks Identified and trigger events for FIC Act compliance

The use a proportion of the loan to purchase a unit trust combined with the unexpectedly early repayment of the loan led to the accountable institution filing a suspicious transaction report with the FIC. The suspicious transaction report is most likely to assist the authorities to identify gaps where there were schemes in loans granted and utilised to launder money through the unit trust or CIS. Rahn Consolidated assists with effective reporting controls.

Insurance Companies – RAHN CASE STUDY ISSUE NO.10-2022

How Insurance Companies are used to Launder Money : A Study on long-term insurance companies

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 Insurance Companies, economic crime schemes, 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.10 aims to educate readers on the long-term insurance business and how this type of business could be susceptible to money laundering.  Long-term insurance businesses are defined as Accountable Institutions (AIs) which are often not seen as high risk due to misunderstanding of its business activities.

In this issue, Rahn Consolidated aims to draw the reader’s attention to long-term insurance business activities and indicate possible ways in which money can be laundered in this industry. The main focus will be on life insurance products. Apart from Anti-Money Laundering and Counter Terrorist and Proliferation Financing (AML/CTPF), this issue will also pinpoint financial crime risks including fraud in the long-term insurance industry.

Enjoy the Read!

Item 8 of Schedule 1 of the Financial Intelligence Centre (FIC) Act identifies an Accountable Institution as a person who carries on a long-term insurance business as defined in the Long-Term Insurance Act, 1988 (Act 52 of 1998) herein after referred to act “LTIA”.

Long-term insurance business as contemplated in the LTIA (Replaced by Insurance Act 18 of 2017), means “the business of providing or undertaking to provide policy benefits under long-term policies.” Furthermore, a long-term policy means “an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies.”

Long-term insurance business is therefore not only limited to life policies, however financial crime perpetrators seem to use long-term policies fraudulently and then use the proceeds for money laundering purposes.

How money laundering and ultimate financial crime (predicate offences) affects long-term insurance business (life insurance business):

  • Risks associated with money laundering and terrorist and proliferation financing (ML/TPF) are relatively lower compared to other financial products (loans, payment services) or other AIs or financial sectors that were discussed in our previous publications (banking, gambling, estate agent etc).
  • Many life insurance products are definitely not sufficiently flexible to be the first vehicle of choice for perpetrators (money launderers)
  • What is prominent in the life insurance business is the source of funds, as a predicate offence might have occurred in order to use the proceeds for purposes of investing in life insurance, not for the benefit of the beneficiaries, but the perpetrator.
  • Effective withdrawal processes and conducting customer due diligence at pay-out are crucial, as is ensuring payment is made to the correct individual and therefore ensuring that you are able to trace funds and people should they utilise withdrawn funds for purposes of  proliferation financing and/or terrorism.

“Perpetrators are mostly not flexible when it comes to life insurance products/business, in that invested money cannot easily be withdrawn due to product rules. However there appears greater risks around source of funds and possibility of withdrawn funds being used  for proliferation financing and terrorism”

Apart from Reporting obligations, banks have to comply with the following FIC Act requirements:

  • 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

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ML/TPF Risks relative to the Life Insurance Business

ML/TPF risks relating to the know-how in distributing these life products: Distribution channel

Most long-term insurance companies (life insurance) rely on intermediaries to distribute their products. The intermediaries differ in size and experience in that some intermediaries may not have the know-how how to

conduct customer due diligence (CDD) on money invested in life cover, including knowing the source of funds. As part of conducting CDD, Rahn Consolidated assists both insurance companies and their intermediaries to identify, verify,

screen and risk-rate clients. Based on information received, source of funds is also requested and validated with the bank. This mitigates the risk of allowing illicit funds to be deposited with the insurance company.

Insurance companies ought to be alert of customer base growth

An insurance company, as trigger events, should be alert of any new campaigns that are aimed at increasing customer base significantly. Although this might not be a bad thing from a business perspective, from a regulatory perspective, the manner in which the growth takes place should not open any opportunity for money laundering or any other financial crime risks.

Subscription for a high value life policy by a new customer that does not correlate with the customer’s needs analysis should be investigated. Compliance should ensure that business does not open these opportunities by not conducting proper CDD.

When conducting risk assessments insurance companies should also consider tax related aspects

As part of financial crime compliance (FCC) and regulatory requirements, there are certain ones that straddle fraud and possible tax evasion to which insurance companies should be alert to. The client identification and verification requirements of the FIC Act also encompass the Foreign Account Tax Compliance Act (FATCA) which require intermediaries to consider tax related aspects as part of risk assessment. This is due to the fact that certain parts of life insurance may attract individuals to evading and hiding income through such channels.

FATF RBA Life Insurance Industry