All posts by Rahn

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.

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.

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:

• 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

• 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:

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!

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.