Category Case studies

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.

Enjoy the Read!

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.

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.

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.

Enjoy the Read!

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:

• 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:

• 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

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 economic crime schemes, accountable institutions, 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.3 assists all Accountable Institutions (AIs) and Reporting Institutions (RIs) to familiarise themselves with duties and requirements as far as Anti-Money Laundering and Counter Terrorist and Proliferation Financing (AML and CTPF) are concerned. The Financial Intelligence Centre Act (FIC Act) as one of the core regulations in AML and CTPF will be referred to in line with the governance documents that govern these requirements in each business.

Enjoy the read!!

Schedules 1 and 3 of the FIC Act stipulate in a nutshell all businesses (referred to as AIs and RIs) that need to adhere to AML and CTPF requirements. Amongst others business that needs to comply are:

Accountable Institutions (AIs):

• Legal practitioners as defined in the Attorneys Act;
• Board of executors or a trust company as contemplated in the Trust Property Control Act;
• Estate agents as defined in Estate Agency Affairs Act;
• Authorised user exchange as defined in the Securities Service Act;
• Collective Investment Schemes (CIS) Manager as defined in the CIS Act;
• Business of a Bank as defined by the Banks Act;
• A Mutual Bank as defined by the Mutual Bank Act;
• Long-term insurance business as contemplated in the Long-term Insurance Act;
• Gambling activities as contemplated in section 3 of the National Gambling Act;
• Foreign exchange business;
• Business of lending money against the security of securities;
• Business of a Financial Service Provider (FSP) requiring authorisation by FAIS;
• A person who issues travelers’ cheques;
• Postbank as referred to in the Postal Services Act;
• Ithala developmental finance corporation limited; and
• A person carrying out the business of a money remitter.

FIC’s website

Accountable Institutions should register as a minimum requirement.

All accountable institutions mentioned above should as a baseline register with FIC as accountable institutions, then internally develop a (1)Risk Management and Compliance Programme (RMCP) which outlines minimum control measures that the AI will take in mitigating AML and CTPF risks. All sections of the FIC Act including those reporting to the FIC should be adhered to by all AIs. Failure of which will result in penalties or fines that were previously alluded to in issue no.2 of Rahn Consolidated’s articles and case studies.

Some of the requirements that are outlined in the FIC Act, which will be deep-dived in the next issues of Rahn Consolidated articles and case studies, are those of identifying and verifying the clients with which the business is dealing. Rahn Consolidated has realised that many businesses are not aware of their compliance requirement. As a result, some have taken a back seat as the notion has been that of only FSPs being required to comply.The FIC is also very much aware of this and has as a result provided some guidelines and extended exemptions (which were subsequently changed after the FIC amendment Act-refer to Rahn’s Consolidated’s FCC Q/A publications).

An example of AIs which may not be aware: A Client of an Estate Agent is the person who would provide the agent with a mandate, such a client would need to be identified and verified. An Estate Agent as an AI would also need to have a developed RMCP indicating measures on how FIC Act is adhered to. AML risks pertaining to this type of business still involve cash as there are transactions that take place during the sale or purchase of the property.

In such an example, Rahn Consolidated also provides compliance requirements to assist in verifying client identity as part of due diligence.

(1)An RMCP as contemplated in section 42 of the FIC Act is a principles-based document that highlights all FIC requirements to be adhered to. All AIs need to develop, document, maintain and implement this document as a 1st step to being compliant.

Financial Crimes Governance Documents

Duties of each Accountable Institution (AIs) and Reporting Institution (RIs)

Although AIs are seen as primarily the main businesses which should comply with AML and CTPF regulations including FIC Act. There are certain businesses in which the FIC Act requires compliance from mainly a reporting perspective. This implies that measures in these institutions that need to be put in place are not as stringent as those required for Accountable Institutions. These are referred to as Reporting Institutions. These are Institutions that are required to mainly conduct reporting to the FIC at a bare minimum. Rahn Consolidated has realised that many businesses are not aware of their compliance requirement. As a result, some have taken a back seat as the notion has been that of only FSPs being required to comply.

Businesses (AIs and RIs need to bear in mind that the FIC can only deem them compliant if they register with the FIC. This is the 1^st point of being compliant. The FIC can only keep track of compliance and assist in deterring financial crime if all AIs and RIs register and comply. Based on examples provided in this issue. The below case study depicts the number of reports that were provided by estate agents and vehicle dealers. This relates to different reporting requirements as contemplated in the FIC Act:

Reporting conducted by Estate Agents:

Reporting conducted by Motor Vehicles Dealers:

Risk Management and Compliance Programme:

Source: FIC Roadshow slides