Category Case studies

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 Jewelry business AML compliant, 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.14 focuses on Reporting Institutions particularly relating to Kruger Rand dealing. This industry, dealing primarily in money in the form of Kruger Rands could be cash intensive and therefore easily susceptible to money laundering.

South Africa has specifically applied reporting obligations on Kruger Rand dealers, which are not classified as Accountable Institutions (AI) under the Financial Intelligence Centre Act but rather Reporting Institutions (RI).

This issue highlights risks affecting Kruger Rand dealers when it comes to money laundering.

Enjoy the Read!

Item 2 of Schedule 3 of the Financial Intelligence Centre (FIC) Act identifies a person who carries on the business of dealing in Kruger Rands as a Reporting Institutions (RI) .

The FIC views “a person who carries on the business of dealing in Kruger Rands” to be any person who, as a regular feature of his/her business, deals in jewellery, ornaments, watches or other objects that contain Kruger Rands irrespective of the value of the turnover of the Kruger Rand dealer. For purposes of this article, “dealer” is therefore regarded as someone who trades in Kruger Rands.

• Some businesses including jewellers are buying Kruger Rands and using these to manufacture jewellery, ornaments and watches that contain the original Kruger Rands.
• The inclusion of a Kruger rand in another object such as a piece of jewellery, ornament, watches etc. does not alter the intrinsic nature of Kruger Rand.
• The FIC therefore views any person who, as a regular feature of his/her business, deals in jewellery, ornaments, watches or other objects that contain Kruger Rands to be a dealer in Kruger Rands.

FIC Kruger rands guide

The reporting obligations concerning RI are as follows:

• Cash Threshold Reporting

Kruger Rand dealers are required to report cash transactions above the prescribed threshold in terms of section 28 of the FIC Act.

• Suspicious and Unusual Transaction Reporting

ML/TPF Risks Example: Kruger Rand Dealer

It is important to note that the head office and branches are separate reporting institutions and can be registered separately by the reporting officer responsible for the head office or branch. This also applies to franchises. The registration platform also allows for an instance where one reporting officer is appointed for all branches. A Kruger Rand dealer has one head office and three branches in South Africa. Mr Z is the reporting officer responsible for the head office and all three branches.

It is important to note that only Mr Z can register the head office and branches and only Mr Z will have access to the registration and reporting information. It is furthermore important to note that reporting to the Centre follows the registration structure of the accountable institution. Multiple Money Laundering Reporting Officer (MLRO) can be added per registration structure i.e. per head office and per branch. If the MLRO is registered at branch level, he/she can only see reporting information of that particular branch.

Example of Kruger Rand Dealers registration

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 compliance of Motor Vehicle Dealers, 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.13 shifts its interest into the motor vehicles dealers industry. This industry is very cash intensive and could easily be susceptible to Money Laundering.

South Africa has specifically applied reporting obligations on dealers in motor vehicles (MVDs), as they are subject to a general reporting requirement, but are not classified as Accountable Institutions (AI) under the Financial Intelligence Centre Act, but rather Reporting Institutions (RI).

This issue particularly highlights risks affecting motor vehicle dealers when it comes to money laundering.

Enjoy the Read!

Item 13 of Schedule 3 of the Financial Intelligence Centre (FIC) Act identifies a person who carries on the business of dealing in motor vehicles as a Reporting Institution (RI).

The Financial Action Task Force (FATF) Mutual Evaluation noted some vulnerabilities or channels that could be exploited to launder proceeds of domestic crime, in particular for the use of cash, while motor vehicle dealers’ understanding of more sophisticated Money Laundering (ML) schemes is limited. During onsite inspections, authorities indicated that they believe the proceeds that stay within South Africa are mainly used to support luxurious lifestyles, including purchasing real estate, motor vehicles etc.

It is important that motor vehicle dealers embed controls in their businesses to ensure that they are not used as vehicles to launder money. Similarly, the authorities noted that motor vehicles were often involved in known ML cases, but such knowledge does not seem inform understanding of sector vulnerabilities.

There therefore seems to be more work that needs to be conducted in this regard. The recovery of cash proceeds of crime remains challenging. Authorities acknowledged that many offenders quickly convert their illicit proceeds to cash, which then becomes extremely difficult to trace. Cash is used by the criminal fraternity to maintain a lavish lifestyle for themselves and their immediate families and is spent on luxury items, such as jewelry, high value motor vehicles and property.

FATF Mutual Evaluation Report_October 2021

Activities to consider in the motor vehicle industry are:

• Motor vehicle related services; and
• Buying and selling of motor vehicle parts.

Now that we know that the FATF takes the motor vehicle industry seriously, we expect these principles to be used to legislate in order to address the risks pertaining to ML within this industry. Having said that, let us unpack the Motor Vehicle Industry from a legislative perspective with particular reference to the FIC Act.

• The Financial Intelligence Centre (FIC) views a “person who carries on the business of dealing in motor vehicles” to be any person who is engaged in the business of buying, selling or exchanging any new or second hand self-propelled vehicle, including a vehicle having pedals and an engine, or an electric motor as an integral part thereof or attached thereto and which is designated to be propelled by these means on land, as well as any trailer and caravan.
• Motor vehicle dealers have a duty to register with the FIC in terms of section 43B of the FIC Act.
• Motor vehicle dealers are required to report cash transactions above the prescribed threshold in terms of section 28 of the FIC Act.

ML/TPF Risks Case Notes: Motor Vehicle dealers

Example of Motor Vehicle Dealers registration

Example of Motor Vehicle registration franchise e.g ZZ Motors (Fictitious name)

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.

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.

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.

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)