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 collective investement scheme 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.8 focuses on a particular product/business service which is perceived in the industry to be the most vulnerable to ML and being susceptible to be used for ML due to the product features within this particular product/business service.

In this issue, Rahn Consolidated’s approach in this regard is to draw the reader’s attention to different nuances of the Collective Investment Scheme product/business service particularly relating to possible ML. Furthermore, this article will assist businesses in the Collective Investment Scheme space to ensure that they have mitigating controls customised to the business to ensure that ML risks are mitigated.

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Item 5 of Schedule 1 of the Financial Intelligence Centre (FIC) Act mentions a Manager registered in terms of the Collective Investment Scheme Act as an Accountable Institution (AI).

Collective Investments Scheme (“CIS”) is often used interchangeably in the industry with Unit Trust. In essence, a Unit Trust as a product is a form of a CIS which ideally operates by pooling money from individual investors for purposes of investing in various portfolios. Schedule 1 as said above focuses on the Managers registered for these CISs.

Understanding CIS and its Managers

Being a Manager of a CIS implies that you are a person that is mandated in terms of the CIS Act to administer a CIS. By definition in accordance to the CIS Act this regulates an open ended platform which allows members to invest money or other assets in a portfolio. The manner in which a CIS is set up includes scenarios where:

• Two or more investors contribute money or other assets to and hold a 35% participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest; and

• The investors share the risk and the benefit of investment in proportion to their participatory interest.

From a ML perspective, this implies that there are quite a number of role players in the CIS space who need to be subject to Customer Due Diligence (CDD) . It is pertinent to identify the direct client with whom you are entering into a business relationship.

Managers who administer the Collective Investment Scheme administer by means of:

• Managing or controlling CIS;
• The receipt, payment or investment of money or other assets including income in respect of CIS;
• The sale, repurchase, issue or cancellation of a participatory interest in a CIS and the giving of advice or disclosure of information on any of those matters to investors or potential investors; and
• The buying and selling of assets or the handing over thereof to a trustee or custodian for safe custody.

From the above mentioned administrative duties of Mangers of CISs, we can conclude that all these AIs are interrelated and therefore have similar FIC requirements.

From a compliance perspective, Section 2(1) of the CIS Act requires managers to administer CIS  honestly and fairly, with skill, care and diligence and in the interest of investors and the CIS industry.

Section 4(4)(a) of the CIS Act imposes a positive duty on managers to organise and control a collective investment scheme in a responsible manner.

As an AI, the Manager of a CIS is not limited to only reporting obligations but should at a minimum comply with the following:

FIC’s website: http://www.fic.gov.za

Product Risk Rating in the CIS space will largely assist business in ensuring that their businesses are not used as vehicles for money laundering. There are therefore a couple of factors to consider in ensuring FIC compliance.

Rahn Consolidated has conducted rigorous reviews on CIS and has seen the extent to which ML is prominent in this business including failure to trace source of income or wealth. As part of its CDD services, Rahn Consolidated has developed a tool to formally customise the needs of a CIS business to curb ML risks.

Assess product risk for ML requirements: points to note

Transaction types

The types of transactions that are conducted in each product is very critical as it should also assess whether the CIS type of product allows a lot of cash injection or not. In assessing this, Rahn Consolidated conducts an assessment as to whether the usage of the product entails structured transactions such as periodic payments at fixed intervals or whether it facilitates an unstructured flow of funds. The results of such assessment will trigger, amongst others, cash transaction reporting and overall rating of the product.

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 the investigations around economic crime schemes, risks, reporting and most importantly, its regulatory compliance and adherence to the sector-specific money-laundering act. 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 being at the forefront of deterring Financial Crime through compliance will focus primarily on compliance regarding Financial Crime and ensuring fines by way of administrative sanctions that fines are mitigated as much as possible.

Issue No.7 deep-dives into the services provided in the authorised security exchange space and how this will be impacted by any money-laundering act, specifically contained in the FIC Act. This particular Accountable Institution is very unique in that it cannot be looked at in isolation, therefore when applying obligation requirements for securities exchange, one needs to consider the securities exchange services as provided in both the banking sector and Financial Service Provider (FSP) sector. This simply implies that securities exchange as a product should satisfy both Prudential Conduct (Financial Stability) and Market Conduct (Treating Customers Fairly).

In this issue, Rahn Consolidated will assist its clients (prospective and existing) on the importance of this requirement as an Accountable Institution and focus on ways to improve compliance going forward.

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Item 4 of Schedule 1 of the FIC Act lists an authorised user of exchange as defined in the securities service act, 2004 as an Accountable Institution (AI). Already this needs further explanation in order to ensure that we are sure what the activities of this particular AI entails.

Section 1 of the aforementioned securities service act defines authorised user as “a person authorised by an exchange in terms of the exchange rules to perform such securities services as the exchange rules may permit”.

What exactly is an exchange?

According to the Financial Action Task Force (FATF) Guide, an exchange is quite a broad term. Authorised exchange users of securities services are required to have applicable compliance measures in place and a clear understanding of their activities that are affected by the FIC Act. From a regulatory perspective, dealers of foreign exchange are supervised by the South African Reserve Bank (SARB) in particular the PrudentialAuthority, Financial Surveillance Department and National Payment System Department. On the other hand, the authorised user of the exchange is supervised by the Financial Sector Conduct Authority (FSCA).

Securities include, but are not limited to the following:

Anti Money-Laundering Act – 2021 FIC Submissions

Cases related to Estate Agents are mostly In April 2021, exactly a year ago, approximately 1.9 million Cash Threshold Reports were submitted to the FIC. About 4% of those reports emanated from forex services and exchange services and obviously, Banks being the largest reporters.

Rahn Consolidated would like to emphasize the importance of compliance with the FIC Act in this particular industry, and these are not limited to reporting obligations as addressed above.

As an AI, the authorised exchange’s users (including forex) are not limited to only reporting obligations under a Money Laundering Act (FIC), but should at a minimum comply with the following:

FIC’s website:http://www.fic.gov.za

“The items below pose the greatest Money Laundering and Terrorist and Proliferation Financing (ML/TPF) risks in the securities industry:

• Wholesale markets;
• Unregulated funds;
• Wealth management;
• Investment funds; and
• Bearer securities.”

FATF Typologies, 2017

Authorised Exchange notes

Securities products are growing exponentially and the Financial Intelligence Centre is aware of it. Allow Rahn Consolidated to assist with the minimum requirements of this critical anti money-laundering act, prior to enactment, and advise your business on the more stringent controls imposed on the Authorised Exchange business.

FATF Guidance on Authorised Exchange

Rahn Consolidated (Pty) Ltd’s (“Rahn Consolidated”) articles and case studies are aimed at creating awareness and cautioning economic participants regarding economic crime schemes. The focus will inter alia be on the investigations around economic crime schemes, risks, reporting and most importantly, 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 by way of administrative sanctions that fines are mitigated as much as possible.

Issue No.6 focuses on professionals involved with the selling and buying of real estate. Role players such as real estate agents and brokers are required to remain compliant. Estate Agents are Accountable Institutions (AIs) as contemplated in schedule 1 of Financial Intelligence Centre Act (FIC Act), as amended.

Estate Agents should also be aware that they could easily be used as vehicles to launder money that are proceeds of criminal activities. They also need to be alert to the fact that they could be used alongside other Accountable Institutions (AIs) such as Legal Practitioners to launder money. As a result, FIC Act requirements and obligations such as reporting should always be looked into as a dual mandate for AIs.

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Criminals usually approach industries that apply less comprehensive regulation and mitigation measures and where basically they simply don’t want to comply. This is mostly due to misunderstanding of the regulations and what is expected of them or simply ignorance. The Estate Agent industry, as AIs has to ensure it implements money laundering control measures in terms of all requirements contemplated in the FIC Act.

Just to put Estate Agents into context!

Cases related to Estate Agents are mostly around illicit funds emanating from criminal activities being used to purchase property and the estate agents not taking corrective measures to conduct customer due diligence (CDD) on the clients they are building a business relationship with.

One case once dealt with is where a Ponzi Scheme was established (predicate offence) with the intention of purchasing private property worth millions. Due to this particular Estate Agent having money laundering controls in place, it established a business relationship with the clients from the Ponzi scheme but as part of its CDD procedures, it sent the client to the lawyers for conveyancing.

During the conveyancing, it was discovered by the lawyer that the client was involved in a Ponzi scheme and was being investigated for fraud. The lawyer and the estate agent suspected that the money to purchase the property was illicit and therefore reported the matter in a Suspicious Transaction Report (STR).  The compliance of these 2 AIs eventually led to the property being frozen and the proceeds being taken back to the rightful source.

Reasons for Estate Agents being susceptible to Money Laundering and Terrorist Financing risks

Unlike banking, insurance and other AIs, buyers and sellers of real estate don’t intend to maintain a relationship over a period of time with AIs.

FIC’s website:http://www.fic.gov.za

Although there are lots of risk factors associated with money laundering as Estate Agents, it is quite encouraging to observe the number of Estate Agents that are registered with the regulator.

The Financial Intelligence Centre (FIC) has been very successful over the years in driving the registration awareness for all AIs including Estate Agents. Estates agents are one of the largest registered AIs with the FIC. In the past 2 years, registration has moved from 10 242 to 10 444 which indicates the awareness of Estate Agents being AIs. As already alluded even in previous issued articles, registration alone does not constitute compliance.

According to the FIC, below are reports submitted by Estate Agents in the past 2 years:

“The lawyer and the estate agent suspected that the money to purchase the property was illicit and therefore reported the matter in a Suspicious Transaction Report (STR).”

Legal Practitioner advising on purchase and sale of real property

Background

The real Estate industry is very susceptible to abuse and can therefore assist criminals to launder their illicit proceeds from criminal activities. Once they layer the money through the system their motive is always for profit gain.

Modus Operandi

Below are activities that criminals would use to launder money through Estate Agents:

• Use of complex loans;
• Use of client accounts;
• Use of monetary instruments;
• Manipulation of the appraisal or valuation of property;
• and Construction and renovation of real estate

The duties of an Estate Agent

The duties of an Estate Agent in this instance lies  in performing simple/standard due diligence on the seller of real property , when acting for the buyer and seller and the buyer appears to be a related party. This forms part of due diligence that needs to be performed by this AI.

Administrative Sanctions and Financial Penalties

Lack of performing customer due diligence by the legal practitioners conducting such activities will lead to administrative sanction as per below:

• R10 Million (Natural person);
• R50 Million (Legal person)
• There are no criminal sanctions applicable.