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.
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.
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.
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.
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;
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.
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.
