Blog

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.

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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):

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

ML/TPF Risks relative to the Life Insurance Business

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

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

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 follow the money principle, investigations around 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.9 focuses on one of the most prominent Accountable Institutions (AIs) which is inherently a high risk money laundering “machine” due to its very high volume of transactions.

In this issue, Rahn Consolidated’s approach in this regard is to draw the reader’s attention to specific banking requirements relating to AML/CTPF. This issue will also pinpoint Financial Crime risks as a whole in the banking industry alongside Money Laundering/Terrorist and Proliferation Financing (ML/TPF). The banking industry’s actions relating to ML/TPF should be focused on strategies that mitigate these risks and similarly taking into account the regulatory frameworks at both country, business and client levels. The regulatory framework controlling the banking industry is so vast that  non-compliance could result in serious administrative sanctions.

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Item 6 of Schedule 1 of the Financial Intelligence Centre (FIC) Act identifies an Accountable Institution as a person who carries on the business of a bank as defined in the Banks Act, 1990 as amended by Act 9 of 1993 (“the Bank Act”). A Bank is defined as a public company registered provisionally or finally as a bank for purposes of inter alia deposit taking.

Assessing ML/TPF Risks in the banking industry

Due to the high volume of transactions in the banking industry, there appears to be more risks associated with banks in this regard. 

From a Financial Action Task Force (FATF) perspective, there are evolving risks in which banks should ideally look into that largely affect the operational controls of a bank to enable effective compliance.

The following are money laundering risks and their correlation to other financial crimes, indicating how banking officials would curb the risks if they were to “follow the money”:

• Incidents of corruption and bribery are widespread and do not take place in isolation as the proceeds are always layered and integrated back into the industry through money laundering, resulting in banks being very susceptible.
• Digital banking fraud, including virtual assets, are also prominent amongst other types of ML fraud.
• Effective banking systems and networks assist in exposing and potentially identifying the proceeds of Terrorist and Proliferation Financing through the flow of transactions in South Africa.
• Banks need to place more focus on cross-border transactions and impose restrictions after conducting screening procedures and sanctions.

ML/TPF Risks points to note (including broader Financial Crime risks in view of “follow the money”)

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.