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Estate Agent Money Laundering – RAHN CASE STUDY ISSUE NO.6-2022

Settling the Anti-Money Laundering (“AML”) Laundry Machine in your Property A study on estate agents and Financial Intelligence Centre (“FIC”) Act Compliance

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.

House with for sale sign

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.

Magnifying Glass over book showing the word fraud

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.

This makes it difficult for estate agents to conduct ongoing-due diligence (ODD) and for regulators and supervisors to pick up inconsistencies.

  • The nature of transactions in the estate agents space reduces the level of understanding of customer profiles as most encounters are are limited to single transactions.
  • Estate agents do not usually collect beneficial ownership details to conduct client identification and verification (CIV) .
  • This type of business allows movement of large sums of money and also to conduct single once off transactions.

As an AI, Estate Agents are 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 AML/CTPF risks and controls;
  • Effectively keep records; and
  • Effectively submit regulatory reports to the FIC.

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:

Reporting Of Crimes By Realtors

“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.
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Case studies

AML Trust – RAHN CASE STUDY ISSUE NO.5-2022

How to instill AML Trust in Trust Companies

The aim of the Rahn Consolidated articles and case studies is to socialise and acclimatise economic participants to economic crime schemes. The focus will inter alia be on the investigations around aml trust, economic crime schemes, risks, reporting, and most importantly its regulatory compliance. The term, economic crime schemes, is often used interchangeably with Financial Crime, and for the purpose of this article, both terms will be used interchangeably.

Rahn Consolidated, being at the forefront of deterring Financial Crime through compliance, will focus primarily on compliance with Financial Crime legislation thus ensuring fines by way of administrative sanctions are mitigated as much as possible.

FinancialCrimeScheme

Issue No.5 deep dives into Trust companies as defined by the Trust Property Control Act and includes company service providers as defined by the Financial Action Task Force (FATF). Trust Companies are Accountable Institutions (AIs) as contemplated in schedule 1 of Financial Intelligence Centre Act (FIC Act). Trust Companies are therefore all liable to comply with all requirements and duties of AIs in the FIC Act.

This article will assist Trust Companies to know what they should comply with as far as Anti-Money Laundering (AML) and Counter-Terrorist and Proliferation Financing (CTPF) are concerned and further highlight the risks of non-compliance thereof.

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FATF definition of Trust and Companies Service Providers relates to providers of Trust Company services that excluded financial institutions, lawyers, notaries, other independent legal professionals, and accountants.

A Trust Company in the South African context implies a legal arrangement whereby ‘control’ of property is transferred to a person or organisation (the trustee) for the benefit of someone else (the beneficiary). There are two types of trusts that can be registered i.e., inter-vivos trust and testamentary trust.

As an AI, the Trust company, as defined, should at a minimum comply with the below:

MoneyWashingMachine
  • Register business as an AI with the FIC to ensure regulatory reporting through go-AML;
  • Develop a Risk Management and Compliance Program (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

According to the FATF Recommendations, Trust companies provide a range of services and activities that largely differ from one to the other. The difference typically lies in the way each AI will be susceptible to ML/TF risks and is based on the method of the Trust Company’s delivery, the nature of customer relationships, and the size of the company.

Vulnerabilities of Trust Companies in ML/TF

LaptopWithCuffs
  • Trust companies are seen as potentially useful vehicles to retain control over criminally derived assets;
  • Criminals may conduct this through opening shelf companies that are used as non-operational companies; and
  • Criminals’ modus operandi with these types of companies is to gain control over them and in turn control the property associated with them. It should be noted that “property” is defined in the Prevention of Organised Crime (POCA) as any movable, immovable, corporeal or incorporeal element that includes rights, privileges, and interests.

Recent stats on registration and reports received of Trust Company as Accountable Institutions:

In the past 2 years, the registration of Trust Companies with the Financial Intelligence Centre (“FIC”) has grown from 173 to 189 indicating a gradual growth in the industry recognising their compliance requirement as set out in the FIC Act.

Trust Companies that are registered as Ais, have largely contributed to the ability to curb AML/ CTPF risks by submitting amongst others, suspicious reports, and cash threshold reports to the FIC to ensure that they comply with the reporting obligations.

“What is quite common with Trust Companies is its correlation with legal practitioners that was alluded to in Issue 4 due to the transfers of funds and property activities in this industry.”

Red flags to focus on from a Trust Company and Trust Attorneys to curb AML/CTPF risks:

From the above possible red flags, it is imperative to note that several types of AIs may work in correlation and therefore be required to provide dual reporting. What is quite common with Trust Companies is its correlation with legal practitioners that were alluded to in Issue 4 due to the transfers of funds and property activities in this industry. We will see more correlation with all AIs, be on the lookout for dual compliance requirements!

TrustCompanyMoneyLaundering

Unusual payments to an attorney’s trust account- Trust Companies should have capabilities to detect such unusual payments. Rahn Consolidated provides such services to various AIs including Trust Companies.

Transfers from the attorney’s trust account to purchase high-end goods, luxury properties, and vehicles. These transactions can constitute suspicious transactions and will assist the FIC to “follow the money” and identifying any ML/TF activities that may be happening around the Trust Companies.

Routing of funds via attorneys’ trust accounts to purchase high-end goods, luxury properties, and vehicles.

The FIC Act with the new FATF recommendations will now focus on compliance of Trust companies with regards to beneficial ownership and customer due diligence at large. Ask Rahn Consolidated how to get your entity compliant.

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Case studies

Legal Practitioners – RAHN CASE STUDY ISSUE NO.4-2022 

Bringing legal practitioners into compliance

An AML/CTPF South African Study

The aim of the Rahn Consolidated articles and case studies are to socialise and acclimatise economic participants on economic crime schemes. The focus will inter alia be on the investigations around legal practitioners, risks, reporting and most importantly its regulatory compliance. The term, economic crime schemes, is often used interchangeably with Financial Crime, and for the purpose of this article both terms will be used interchangeably.

Rahn Consolidated, being at the forefront of deterring Financial Crime through compliance, will focus primarily on the compliance with Financial Crime legislation thus ensuring fines by way of administrative sanctions are mitigated as much as possible.

Man and Law

Issue No.4 deep-dives into legal practitioners as Accountable Institutions (AIs) within the context of schedule 1 of Financial Intelligence Centre Act (FIC Act), as amended. Practitioners who practice as defined in the Attorneys Act are all liable to comply to all requirements and duties of AIs in the FIC Act.

Often, we are of the impression that attorneys or legal practitioners are fully compliant with their entire regulatory universe looking into their areas of expertise. Although every act has a legal opinion, there are exceptionally fine lines between how an act can be interpreted and how section of such an act can be condensed into good compliance.

This article will assist legal practitioners to know what they should comply to as far as Anti-Money Laundering (AML) and Counter-Terrorist and Proliferation Financing (CTPF) is concerned and further highlight the risks of non-compliance thereof.

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The legal industry has diverse business structures which range from small to large practitioners, multi-national firms, and numerous services in different jurisdictions. Compliance by legal practitioners to AML and CTPF risks will therefore not be a one size fits all approach.

It is critical to distinguish the type of legal practitioner and type of service provided thereby, prior to identifying what needs to be complied with. All these should be embedded in the Risk Management and Compliance Programme (RMCP) based on each legal practitioner business structure.

As an AI, legal practitioners should at a minimum comply with the below:

People meeting in the office
  • Register business as an AI with the FIC to ensure regulatory reporting through go-AML (the reporting portal used by the FIC);
  • 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

Rahn Consolidated’s approach with regards to identifying and mitigating AML and CTPF risks is to embed controls to ensure that legal practitioners’ operations and services are not susceptible to being used in facilitating criminal activities relating to ML/TPF.

At what point do legal practitioners get susceptible to ML/TPF risks?

In each of these designated legal practitioners’ services, there are ways in which money could be laundered, Rahn Consolidated will touch on one of them briefly to gain an understanding of the depth of compliance required in this regard:

Bank in the city
  • Advising on purchase, sale, leasing, and financing of real property;
  • Tax advise;
  • Advocacy before courts and tribunals;
  • Representing clients in disputes and mediations;
  • Advice in relation to divorce and custody proceedings;
  • Advice on structuring of transactions;
  • Advisory services on regulation and compliance;
  • Advisory services relating to insolvency/ bankruptcy;
  • Administration of estates and trusts;
  • Assisting in the formation of entities and trusts;
  • Trusts and company services;
  • Legitimising signatures by confirming identity of clients;
  • Overseeing the purchase of shares or other participations.

In all these activities, a legal practitioner could be susceptible to ML/TPF risks. Rahn Consolidated has investigated one of the above services to provide a case study to understand the magnitude and relevance of compliance, please refer to the table below. Depending on each activity, requirements may differ with a legal practitioner.

Recent stats on registration and reports received of legal practitioners as Accountable Institutions:

The Financial Intelligence Centre (FIC) has been remarkably successful over the years in driving the registration awareness for all AI, including legal practitioners, which in turn leads to the first step in establishing compliance within this industry.

In the past 2 years, registration has moved from 13 322 to 14 298 which indicates the awareness of legal practitioners who qualify as AIs. However, registration alone does not satisfy compliance.

From a regulatory reporting perspective, legal practitioners have reported the following in the past 2 years:

  • Cash Transaction Reports (“CTR” including aggregates “CTRA”): 2505 filed reports
  • Suspicious Transaction Report (“STR” including Activities “SAR”): 430 filed reports 

Based on the above stats there remain a number of compliance interventions required to steer us to a comfortable level of compliance.

Due to the regulator’s focus on other types of AIs in recent times, there have not yet been any substantial fines issued in the industry. Best practice and country risk assessments have however shown that this industry will be subjected to sanctions and fines soon. Having said that, time is not on our side, the time to comply is now!

Case Study 1: Legal Practitioner advising on purchase and sale of real property

Legal practitioner advising on purchase and sale of real property