Chapter 2

Money Laundering

Overview

This chapter explores money-laundering as a phenomenon by defining the concept and describing the process employed to launder money and assets. The importance of money-laundering to organised crime is considered, as well as the scale of money-laundering globally and within the Southern African region.

Money-laundering aims to thwart the enforcement of criminal law by creating the justification for controlling or possessing money or property derived from any form of criminal activity. It is defined as all activities aimed at disguising or concealing the nature or source of, or entitlement to money or property derived from criminal activities. The process of money-laundering comprises:

Organised criminal groups need to launder their illegal profits in order to avoid the detection of the underlying criminal activity that generates the profits while enjoying those profits or reinvesting them in future criminal activities.

By combating money-laundering activities, law enforcement authorities can disturb the cycle used by organised criminal groups to obtain benefit from illegal profits. Law enforcement authorities can disrupt the functioning of organised criminal groups through financial turmoil.

What is money-laundering?

There are many reasons why people become involved in criminal activity. It would be safe to say, however, that one of the main motivations to commit crime is financial gain. When criminals successfully commit crimes that generate returns, they obtain illegal earnings that cannot be explained. This can expose them to the detection of their criminal activities that generated the proceeds. This risk of detection is increased when these criminal activities yield large amounts of cash in relatively small denominations. For this reason, it is necessary for criminals to disguise the illegal source of their income or proceeds.

Several definitions for money-laundering are available, each designed to fit a specific set of circumstances where money-laundering takes place. For instance, the description given by the United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (the Vienna Convention) reads as follows:

The conversion or transfer of property, knowing that such property is derived from [drug trafficking in terms of the Convention], for the purpose of concealing or disguising the illicit origin of the property … [t]he concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that such property is derived from [drug trafficking offences].

This definition has been internationally accepted for money-laundering for more than ten years and has been used by most as a point of departure when defining the phenomenon. It must be noted that it only refers to the laundering of the proceeds of drug-trafficking. Experience since 1988 has shown, however, that money-laundering will occur whenever there is a need to conceal the source or nature of money or property.

In its simplest and broadest form, money-laundering can be described as the manipulation of money or property in order to misrepresent its true source or nature. Money-laundering in this form can be practised for legal or illegal purposes. Examples of legal purposes are to conceal income from the public, from competitors or from social and religious organisations, in order to protect a reputation, to gain a competitive advantage, or to discourage charitable solicitations. In such cases, no criminal conduct is involved. Such a description is clearly not appropriate for the purpose of this monograph.

Money-laundering acquires a criminal character when it is performed with the aim of thwarting the enforcement of criminal law by creating the justification for controlling or possessing money or property derived from any form of criminal activity. Money-laundering clearly entails much more than just concealing large amounts of cash obtained from the sale of drugs.

If the focus is on the criminal aspects of money-laundering, it can be described as all activities aimed at disguising or concealing the nature or source of, or entitlement to money or property derived from criminal activities.

The result of a successful money-laundering scheme is that proceeds from an underlying criminal activity are no longer associated with the activity. Illegally acquired proceeds appear to be legitimate income.

Money-laundering can refer to two basic processes. The first is simply the act of hiding or concealing the existence of money or property. The second is the more sophisticated process used to ‘clean’ money by disguising its source. In the latter case, the existence of the money or property is not denied, but its illegal source is misrepresented through acts to conceal the source.

How is money-laundering performed?

Money-laundering schemes vary from the most basic to extremely complex series of transactions. Three basic stages can be distinguished in most schemes: placement, layering and integration.

Placement

The placement stage in the money-laundering process entails the physical movement of cash or property away from the location where it was obtained and its placement in the legitimate financial system. Traditional smuggling methods are used to transport the cash or property. These include concealing money or property in luggage or cargo, swallowing it, or mailing it in express packages. In typical cases, money or assets are transported to other countries.

The most common method of placing money in the financial system is to deposit it into a bank account. During this stage, illegally obtained property is converted into money that can be placed in the financial system. The illegally obtained money is often commingled with the legitimate income of a cash-intensive business. When the money is deposited, it becomes indistinguishable from the legitimately earned income of the business.

The placement stage is often referred to as the ‘splashdown point’ for the proceeds of criminal activities. This is where the illegally acquired money or property comes into contact with the financial system. At this point, the money-laundering scheme is most vulnerable to detection. Large quantities of cash in small denominations have to be transported and infused into the financial system involving a considerable risk of detection by law enforcement authorities.

To overcome these difficulties, money launderers make use of a variety of techniques, for example, ‘smurfing’. This method is used to reduce the volumes of cash that have to be transported and deposited. The cash that is obtained from whatever illegal activity, is distributed in small amounts among a large number of people who take the cash to financial institutions where it is deposited or converted into negotiable instruments.

Another approach used by money launderers is to make use of so-called parallel banking systems. The Financial Action Task Force against Money Laundering refers to these systems as alternative remittance systems.1 These are systems for the movement of value from one location to another without physically moving any money.

The International Financial Action Task Force is an intergovernmental body with the purpose of developing and promoting policies, both at national and international levels, to combat money-laundering. The Task Force was established by the G-7 Summit in Paris in 1989 to examine measures to combat money-laundering.

The Financial Action Task Force has 29 member countries and territories and two regional organisations. Its membership includes the major financial centre countries of Europe, North and South America, and Asia. It is a multidisciplinary body that meets several times a year, bringing together the policymaking power of legal, financial and law enforcement experts.

The money launderer deposits money in one currency with an agent in a particular location. A token or special receipt is issued, which is then sent to the place where the money launderer wants to transfer the money. The token is presented there to another agent and exchanged for the amount of money in the required currency indicated on the token. This amount will be equal to the amount originally deposited, less certain fees and charges.

The advantage of this type of laundering scheme is that the money is never physically transported from one place to another. Furthermore, these systems operate largely outside regulated financial structures.

Some of the parallel banking systems came into existence before the introduction of western banking systems in other cultures. In the majority of cases, these systems are based on specific cultural, ethnic or historical factors. As a consequence, they are characterised by strong cultural and linguistic features and business or kinship ties that are difficult to penetrate.2

An example of a parallel banking system is the so-called Chop or Chit system, and similar systems such as Hawalah or Hundi systems, depending on where and by whom the system is operated. Chop or Chit systems are mainly found among East Asian communities while Hawalah or Hundi systems are found among Indian communities. However, these systems are not limited to specific geographic areas, but can be found among these communities throughout the world.

In South Africa, the stokvel can also be considered as an example of a parallel banking system. It presents unique challenges to law enforcement agencies that have to investigate money-laundering within the South African context.

The aim of the money launderer during the placement stage is to remove the proceeds of criminal activities from the place where they originated and to infuse these proceeds into the legitimate financial system.

Layering

The layering stage in the money-laundering process entails the transfer of funds between different locations and the continuous conversion of these funds from one type of instrument to another. During the layering stage, the funds or instruments are distributed through the financial system by using a series of transactions including electronic wire transfers, shell corporations, false invoicing, and fictitious import and export transactions.

Shell corporations (sometimes referred to as front companies) are legal entities, such as companies, created to establish a layer of anonymity between certain assets, funds or activities and the individuals with interests in those assets or funds, or who benefit from those activities. In most cases, such companies exist on paper only without true shareholders who have an interest in the profitability of the company. Shell corporations do not participate in the commercial sphere with a profit motive by carrying on some kind of business as is the case with normal commercial enterprises. Those that do business do so as a front to lend credibility in order to disguise their activities and assets.

False invoicing refers to a practice where false information is reflected in an invoice in order to create the appearance of a legitimate business transaction. This is used as a justification for the movement of funds or assets. In some cases, the goods or services indicated on the invoice will be completely fictitious. In other cases, goods or services will have been delivered, but the amounts payable in terms of the invoice will be substantially inflated (so-called over-invoicing). In both these instances, the invoice will be used to provide an apparent reason for payment, in other words, for the transfer of funds. When goods are undervalued in an invoice (so-called under-invoicing) the invoice is used as an apparent reason for the transfer of the goods.

The layering stage is recognised by a large number of transactions concluded with the funds or instruments derived from the original proceeds of criminal conduct. These transactions are normally carried out through the facilities offered by institutions that are part of the legitimate financial sector.

The primary purpose with these transactions is not to make a profit, but to give the illegally acquired money or assets an appearance of having a legitimate source. To achieve this, the money launderer will be willing to suffer a loss from the transactions in the layering stage in most cases. This loss is regarded as part of the overhead investment in achieving the primary purpose of ‘cleaning’ the money or property. The transactions forming part of the layering stage are therefore not conducted according to normal market principles. If these transactions are examined objectively, they will often not make much economic sense.

This stage is referred to as layering because, traditionally, the transactions formed a layered construction. The transactions are performed in a sequential manner where one transaction is stacked on top of another. When the whole sequence of transactions is viewed retrospectively, it resembles a layered cake that can be disassembled to find the origin of the funds.

However, since the early 1990s, a new trend has emerged. More often than not funds are spread throughout the financial system by means of their division between a variety of transactions that are performed simultaneously. One part of the funds may be used to buy and sell property while another part is deposited in a financial institution and transferred between accounts and yet a third is used in investment schemes such as long-term insurance products or unit trusts.

During the layering stage, the money that is laundered becomes virtually indistinct from ‘legitimate’ money in the commercial sphere.

Integration

The integration stage of the money-laundering process entails that the money infused into the normal commercial sphere is collected and made available to criminals to be enjoyed or reinvested into their criminal activities. The funds that were processed during the layering stage are placed in apparently legal businesses. This is done by investing in shell corporations, buying stocks, real estate or art, or by using other avenues of investment. At this stage, it is virtually impossible to connect the funds to the original proceeds from the underlying criminal activity.

The integration stage is the culmination of a successful money-laundering scheme. It allows the criminal to regain control over the proceeds of the underlying criminal activities without fear of detection.

It must be borne in mind that the stages described above do not necessarily exist in the mind of the designer of a money-laundering scheme. They are generalisations based on the experience of investigators who have succeeded in uncovering such schemes. In no money-laundering scheme is there an exact and clearly defined delineation between these stages. Instead, the stages flow into each other creating an overlap between one stage and the next.

It is also not necessary for a successful money-laundering investigation to be able to indicate on which date a specific stage ended and the next one started. The relevance of distinguishing between these stages is simply to explain the basic structure of a money-laundering scheme and to be better equipped to recognise a certain activity as being part of such a scheme. People who are in a position to detect money-laundering transactions should therefore not be blinkered by these traditional perceptions of money-laundering schemes.

People should also not be misled by the traditional concept of the identity of a money launderer. Professional money launderers are not attached to a specific organised criminal group, but make their services and expert knowledge available on a ‘consulting basis’ to whomever is willing to pay. They are often involved in a profession, for example, accountants and lawyers.

The links between money-laundering and organised crime

The links between money-laundering and organised crime can be found in the reasons why organised criminal groups would engage in this practice. The processes to launder money or property can be expensive and are in themselves not free of risk. An organised criminal group will not go to the trouble of laundering the profits of its crimes unless there are external factors making it necessary to do so. There are mainly three reasons why organised criminal groups engage in money-laundering.

The first reason relates to the criminal organisation’s ability to continue its activities. The primary purpose of an organised criminal group is to make profits. Just like a legitimate business, the members of an organised criminal group need to ‘reinvest’ the organisation’s profits in future activity. The reinvestment of proceeds from criminal activities is necessary to sustain the future activities of the organised criminal group. This is similar to a legitimate business concern that needs to plough back a certain portion of its turnover in order to sustain the business. The proceeds from criminal activities become the lifeblood of the organised criminal group.

For the criminal engaged in organised crime, however, any profit close to the source of the crime represents a particular vulnerability. Unless the organised criminal group can effectively distance itself from the crime that generates the profit, it remains susceptible to detection and prosecution. Consequently, the very proceeds of an organised criminal group can pose a significant threat to its members.

In the majority of cases, organised criminal groups obtain cash, or assets that are converted into cash from their criminal activities. When an organised criminal group makes use of these proceeds without altering the appearance of their illegal source, it exposes itself to detection. In order to reduce this risk, organised criminal groups need to launder their illegitimate proceeds before reinvesting them. Hence, one reason why organised criminal groups launder their proceeds from criminal activities is to enable them to sustain and continue their criminal activities.

A second reason for organised criminal groups to engage in money-laundering is to ensure that crime pays. Apart from reinvesting the profits of an organised criminal group, those in control of the organisation would want to use its profits to improve their lifestyles. The risk of detection also exists and, in fact, increases when members of the groups use the unexplained wealth generated by their criminal activities to acquire luxury items.

Cleaning money or property acquired from illegal activities provides the avenue to enjoy it without revealing its illegal origin. As a result, members of an organised criminal group are able to use these proceeds without fear that the underlying criminal activity will be detected.

There is also a third important reason why organised criminal groups launder the proceeds from their criminal activities. Many countries have introduced, or are in the process of introducing procedures for the confiscation of the proceeds of criminal activities. A confiscation procedure adds to the risks faced by an organised criminal group. Apart from being prosecuted and punished for their criminal activities, groups also face the prospect of losing the profits they had hoped to gain from those activities. Organised criminal groups are no longer just facing a prosecution risk, but also a confiscation risk.

The possession and enjoyment of criminal profits can pose the danger not just of detection and prosecution, but also of confiscation. The added risk of losing the profits from their criminal activities serves as a further incentive to criminals to launder their ill-gotten gains. The third reason why organised criminal groups become involved in money-laundering is therefore to circumvent confiscation procedures and to retain the proceeds of their criminal activities.

What is the scale of the problem?

Money-laundering activities are secretive and misleading by nature. It is therefore only possible to provide figures on the incidence of money-laundering based on estimates and speculation. There are, however, a few indicators from which conclusions on the incidence of money-laundering can be drawn. These include the number of suspicious transactions identified by financial institutions, the number of organised criminal groups identified by law enforcement authorities, the number of prosecutions for money-laundering activities and forfeitures of the proceeds of criminal activities, and global economic trends concerning trade and the flow of funds.

According to one estimate, the annual worldwide value of laundered funds in 1997 was in the range of US $300 to $500 billion.3 There are also a number of other estimates: the US Senate Foreign Relations Committee’s Subcommittee on Narcotics and Terrorism, (1990) estimated that US $300 billion is generated annually through international drug-trafficking that needs to be laundered in some way. In 1989, the United Kingdom Parliamentary Home Affairs Committee estimated that around £1 800 million of drug-related money was flowing through the United Kingdom at the time.4

The development of a model to quantify global money-laundering flows (the Walker model) has been in process in Australia since 1998.5 It is based on a similar model developed in 1995 for the Australian Financial Transactions Reports and Analysis Centre on internal money-laundering. According to early results obtained from applying this model to a number of international databases in 1998, a total of US $2 850 billion was laundered mainly in Europe and North America.

The question now arises what percentage of global money-laundering takes place in South Africa. At this stage, there are no statistics available on money-laundering incidences in South Africa. Furthermore, there have been no prosecutions for money-laundering activities in South Africa. It would be foolish, however, to assume from this that money-laundering does not occur in the country.

Despite the lack of statistics, there are indications that money-laundering is taking place in South Africa. These include the existence of some of the driving forces behind money-laundering such as the presence of organised criminal groups, a well developed financial infrastructure, and a procedure for the forfeiture or confiscation of the proceeds of criminal activities. All of these are present in South Africa.

One of the most influential driving forces giving rise to money-laundering is the presence of organised criminal groups. In 1994, there were 278 active criminal organisations known to the South African Police Service (SAPS).6 By 1995, this number had grown to 481.7

Information published in 1997 by the Crime Information Analysis Centre (CIAC - then the Crime Information Management Centre) of the SAPS indicated that 192 organised criminal groups were known to be active in South Africa at the time.8 Apart from these, another 500 so-called target groups had been identified. A target group is described as an organised criminal group that has come to the attention of the SAPS, but with the full extent of its criminal activities not yet known.

According to a report of the CIAC on the incidence of serious crime in South Africa between January and December 1999, there were at least 500 organised criminal groups operating in South Africa in 1999.9 The following extract from the report provides an explanation for the apparent growth in organised crime in the country:10

South Africa has very porous borders [long sea and land borders with little natural boundaries]. Contraband can be smuggled into the country by simply walking across the borders.



South Africa’s isolation of the past disappeared over the past decade and air, telecommunication and seaborne links to the outside world increased dramatically.



South Africa is a country with both the natural resources and the markets needed to feed organised crime. Gold, diamonds, ivory, rhino horn, abalone, motor vehicles [especially luxury vehicles], originating from South Africa can be marketed in Africa and further afield, while it simultaneously presents a market for illegal firearms [partly as a result of high levels of insecurity caused by crime] and drugs.



Until 1998, South Africa did not really have legislation and measures in place to really combat money laundering effectively. In a situation where organised crime can easily invest the illegal profits of crime in legal business concerns, organised crime will always flourish.



The political transformation of South Africa, and especially the public service, has created conditions in which public servants [and especially those serving in the criminal justice system who came under much scrutiny for their links to apartheid in the past] are either very uncertain about their future [especially those who served in the pre-1990 era] or have unrealistic material expectations [some of those who are new in the public service]. Both these conditions may tend to make these public servants highly susceptible to bribery and corruption, because they may either consider filling their pockets before being kicked out or consider this a much quicker way to reach the top.



During the years of political struggle [especially the 1980s and early 1990s] many members of the former security forces and liberation armies were trained in guerrilla warfare skills like intelligence gathering, ambush techniques, the handling of firearms and explosives, etc. Many of these combatants are now out of work and many of these skills can be used to commit hijackings, house and business robberies, bank robberies and robberies of cash in transit.

It is interesting to note the types of offences in which organised criminal groups are involved. A quarterly crime report of the CIAC for 1997 reflects that, of the offences committed by organised criminal groups during January to March 1997, drug-trafficking was by far the most important (96 out of a total of 394). This was followed by vehicle-related crimes excluding hijackings (69), commercial crime and fraud (46), diamond and gold-related crime (38), firearm-related crime (26) and murder and robbery (25).11

Crimes showing a surprisingly low level of involvement by organised criminal groups in this report are hijackings (10 out of a total of 394), corruption (8), gang-related crime (4), prostitution (3), and intimidation and other violent crimes (1).

From these indications of the presence and, more importantly, the growth of organised crime, it can be deduced that money-laundering is taking place in South Africa and is likely to be increasing.

Another indication of money-laundering taking place in South Africa is the work of the Asset Forfeiture Unit of the National Prosecuting Authority. The unit has initiated proceedings for the confiscation or forfeiture of the proceeds and instruments of criminal activity in 74 cases in the period March 1999 to September 2000. By the end of this period, proceedings were pending with respect to assets to the value of R165.7 million.12 This is an indication that large volumes of proceeds of criminal activity are finding their way into the South African economy.

There are also international indications of the extent of money-laundering in South Africa. The Bureau for International Narcotics and Law Enforcement Affairs of the United States Department of State undertakes annual global assessments of money-laundering and rates countries based on, among others, concern about the flow of illicit money through their financial systems. In the 1996 International Narcotics Control Strategy Report of this Bureau, South Africa’s priority rating was increased from a country about which there was low to medium concern to one raising medium concern.13

The Walker model for quantifying global money-laundering flows also produced figures for this activity in the Southern African region.14 According to the results obtained with the application of the model for 1998, a total of US $22 billion was laundered through the financial system in the region. Of this, US $15 billion was generated within the region. An estimate US $7 billion infiltrated the region from other regions, including East Asia (US $1 billion), North America (US $5 billion) and Europe (US $1 billion).

Why combat money-laundering?

As illustrated above, money-laundering allows organised criminal groups to perpetuate their criminal activities without fear of punishment and with the prospect of enriching their members. In short, money-laundering is a major contributing factor that keeps organised criminal groups in existence and therefore allows criminal activity to continue. It allows organised criminal groups to weaken the social fabric, influence the collective ethical standards and undermine the democratic institutions of a country.15

One of the effects of disguising the source of illegal profits and creating the illusion that those assets represent legitimate earnings is to place economic power in the hands of organised criminal groups. This power is used, in turn, to open ways for expanding the criminal activities of the group. One of the most common ways of achieving this is through corrupting government and law enforcement officials, politicians and individuals within the business community. If this process of corruption is left unchecked, it will reach a point where it will become systemic and therefore very difficult to root out.16

The aim of the money launderer with this process is to gain enough control over the institutions of the financial system to ease the recycling of future profits from criminal activity. Apart from negative public reaction, an institution that becomes involved with money-laundering also faces the dangers of corrupt employees, fraud and the loss of control over the institution.

Money-laundering also has a more direct impact apart from the influence it bestows upon organised criminal groups over society. This impact affects the institutions of the commercial and financial sphere and can have a knock-on effect on economic development in a country.

To assess the impact of money-laundering upon the financial sector, consideration should be given to the consequences when institutions in the business community become involved in money-laundering activities.

One of the items on the shopping list of a money launderer is an efficient financial system. It is useful as a device to transfer and alter the appearance of the proceeds of criminal activity. Involving the financial system in money-laundering schemes necessarily means involving those institutions that can serve as intermediaries in such schemes. If control over access to the financial system is weak, it will make the system more attractive to the money launderer.

The integrity of institutions in the financial system is dependent upon, among others, the perception that they function within a framework of high legal, professional and ethical standards.17 Involving these institutions in money-laundering activities can draw them into a relationship marked by complicity with organised criminal groups. This can take the form of employees or directors turning a blind eye to the criminal nature of money or property, or of accepting bribes from organised criminal groups. Public knowledge of such complicity will damage the attitudes of other institutions, regulatory authorities and customers towards such institutions.

The involvement of financial institutions in money-laundering schemes led the Basle Committee on Banking Regulations and Supervisory Practices to adopt a Statement of Principles in December 1988. In the statement, it is said that supervisory authorities "cannot be indifferent to the use made of banks by criminals." Indifference to this fact may cause banks to suffer losses through fraud and the adverse effects of being associated with criminals. The involvement of banks in criminal activity erodes public confidence and undermines the stability of the banking system.18

The statement of the Basle Committee is founded on the belief that "the first and most important safeguard against money laundering is the integrity of banks’ own managements and their vigilant determination to prevent their institutions becoming associated with criminals or being used as a channel for money laundering." This statement is, of course, equally true of any intermediary in the financial system that becomes involved in criminal activity.

When the integrity of individual institutions in the financial system is affected, the financial services marketplace itself becomes affected. If money-laundering is allowed to become entrenched in a country’s commercial and financial sectors, these sectors will be perceived to be under the influence of organised crime. This will eventually have a negative effect on foreign investment in the country.19

One answer to the question why money-laundering should be combatted is therefore that it serves to protect society and, in particular, the commercial and financial spheres and the institutions that function within those spheres.

This question can also be approached by considering the relevance of addressing money-laundering to attempts to combat organised crime.

As was shown earlier, there are a number of reasons why organised criminal groups become involved in money-laundering. These mainly focus on reducing the prosecution and confiscation risk associated with enjoying and reinvesting the proceeds of criminal activities. In fact, while attempting to reduce these two risks, organised criminal groups are exposing themselves to the risk that their money-laundering activities may be detected.

Money-laundering is not an isolated criminal activity, but is always associated with some or other underlying profit-generating criminal activity. This underlying criminal activity is often referred to as the predicate offence. The aim of the money launderer is to break the link between the underlying criminal activity and its proceeds by means of laundering money and/or other assets.

The reason for investigating money-laundering hinges upon the assumption that, if money-laundering can be identified, the link with the underlying criminal activity may be restored. When money-laundering is seen as an integral part of the activities of an organised criminal group, law enforcement authorities are placed in a better position to determine the involvement of the group in the underlying criminal activities which generate the proceeds to be laundered.

The investigative methods used to collect evidence to prove money-laundering offences include some that may not normally be used to investigate the underlying crimes. These are methods such as the tracing of assets or the reconstruction of transactions. These methods may allow investigators to trace the funds or property representing the original proceeds back to the underlying offence. This may enable investigators to establish the relations and connections between individuals that are created by the financial transactions of a money-laundering scheme. If successful, investigators may be able to determine the identity of those involved in the underlying criminal activity. This may include high-level members of the organised criminal group who cannot be readily connected to the underlying criminal activity itself.

The following example of a relatively simple scheme may illustrate this point:

Mr X is the leader of an organised criminal group that generates income through the sale of drugs. Mr X is the main beneficiary of this criminal activity, but never becomes involved in the actual purchase or sale of any drugs.

The purchase and sale of the drugs are undertaken by lower ranking members of the group. These members all have access to bank accounts. On Mr X’s instructions, some members deposit payments from drug sales into these accounts, while others withdraw payments for drug purchases from these accounts.

The surplus funds in the accounts are periodically transferred to an account held by a shell corporation of which Mr X is the director. From this account, funds are transferred to an account held by Mr X under the guise of a salary paid to him. Apart from this, luxury items are bought in the name of the shell corporation for use by Mr X.

Normal investigative methods will link the lower ranking members of the group with drug-dealing. However, this will not expose Mr X’s involvement in these activities. By extending the investigation beyond drug-dealing, it will be possible to establish where the funds go that are generated by the drug-dealing. Once these funds are traced to the shell corporation, it will be possible to establish the link between members dealing in drugs and the income of the shell corporation. If this is followed by investigation of the next step in the process, the link between Mr X and the shell corporation, and consequently the drug dealers can be established.

This investigation can also be approached from another perspective. By starting the process with an investigation of Mr X’s lifestyle, his income and the property that ostensibly belong to him can be traced back to the shell corporation. Tracing the funds further will reveal the connection between the shell corporation and the accounts used by the members of the organisation for the operation of the criminal group. Once this is achieved, it will be possible to link the activities of the members of the group with the leader of the group.

Combating money-laundering provides law enforcement authorities with an additional weapon to fight organised crime. The efficacy of this weapon is increased substantially if it is used hand-in-hand with a system to enable the forfeiture of proceeds from criminal activity.

The continued existence of an organised criminal group is dependent upon its ability to recycle the proceeds of its criminal activities and to use these proceeds to sustain future criminal activity. If an effective forfeiture system enables the removal of the proceeds of an organised criminal group’s activities, this cycle can be broken. This allows law enforcement authorities to use financial disruption as one more line of attack on organised criminal groups.

The aim of a money-laundering investigation is to identify the relationship between the funds or property representing the proceeds of criminal activity and the underlying criminal activity from which these proceeds had been acquired. If this type of investigation is carried out successfully, it will enable law enforcement authorities to identify the underlying criminal activity and to deprive organised criminal groups of their ill-gotten gains. The subsequent disruption of an organised criminal group will affect the members, including those who have sufficiently distanced themselves from the criminal activities of the organisation to avoid prosecution.

What are South Africa’s international responsibilities?

Currently, the most widely recognised international legal instrument dealing with money-laundering is the Vienna Convention. The convention obliges states parties to criminalise the laundering of the proceeds of drug-trafficking. South Africa has acceded to the Vienna Convention in 1998.

The United Nations has embarked on a process to elaborate a Convention against Transnational Organised Crime. This convention contains a general obligation to criminalise the laundering of the proceeds of serious crime.20 It obliges signatories to introduce a domestic regulatory control structure to combat money-laundering. This structure will have to contain elements such as identifying customers, recordkeeping and reporting of information.

The Convention against Transnational Organised Crime was adopted by the United Nations in November 2000 at a signing conference that took place in Palermo. It was opened for signature in December 2000. South Africa has participated in all the meetings to elaborate the convention and became a signatory to the convention at the signing conference in Palermo. When the South African parliament ratifies the signing of the convention, it will incur obligations to criminalise money-laundering and develop a domestic control structure in accordance with the convention.

The international intergovernmental Financial Action Task Force developed 40 recommendations on combating money-laundering in 1990 that were revised and updated in 1996. The recommendations cover a wide range of issues related to the combating of money-laundering, among others, the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation.21

The recommendations relating to the criminal justice system encourage states to criminalise money-laundering and establish procedures for freezing and confiscating the proceeds of crime. The recommendations relating to the financial system encourage states to introduce customer identification and recordkeeping rules, reporting requirements, increased diligence requirements for financial institutions, as well as the establishment of regulatory and other administrative authorities. The recommendations relating to international co-operation provide for the exchange of information between states and encourage states to co-operate with one another with regard to confiscation, mutual assistance and extradition. These recommendations are seen as a blueprint for action against money-laundering, and have been recognised almost universally as the standard for action against money-laundering.

South Africa is not a member of the Financial Action Task Force and is therefore not obliged to adhere to the 40 recommendations. However, the degree to which a country implements these recommendations is increasingly relevant when members of the Financial Action Task Force assess the risk associated with investing in the country. It is in South Africa’s own interest to take note of the recommendations and to consider their implementation seriously. For this purpose, the country has embarked on a process that will bring its regime against money-laundering in line with the recommendations of the Financial Action Task Force, as will be discussed below.

In 1999, a regional body to combat money-laundering was established in Eastern and Southern Africa called the Eastern and Southern African Anti-Money Laundering Group. One of the objectives of the group is to ensure that each of its members implement the 40 recommendations of the Financial Action Task Force.

South Africa is not a member of this group, although it has participated in the meetings that led to the formation of the group.22 If South Africa becomes a member of the group, it will be obliged to implement the recommendations of the Financial Action Task Force.