Chapter 4

Future Measures Against Money-Laundering

Overview

The picture of South Africa’s legal response to money-laundering has not yet been completely drawn. The part that is still missing is a system of administrative measures to control money-laundering and to facilitate its prevention, detection, investigation and prosecution.

This chapter explores the elements of an administrative money-laundering control structure. It includes customer identification, recordkeeping, reporting of information, and formulating internal policies on these elements by the institutions involved.

Another element of crucial importance is the establishment of a financial intelligence unit. Such a unit should serve as a conduit for information from the private sector to law enforcement authorities. At the same time, the unit should add value to the information passed on to law enforcement authorities by performing an analysis of the reported information.

Legislation on the establishment of a financial intelligence unit and money-laundering control measures is in the process of being promulgated. Elements of the bill being prepared that will most probably find their way into the final statute, are discussed, including the scope of the bill, the establishment of a financial intelligence centre or unit, the money-laundering control measures referred to above and the administrative enforcement of the bill.

Money-laundering control measures

The next step in the process of developing legislation to combat money-laundering is to introduce control measures to complement the criminalisation of money-laundering activities.

One of the items on the shopping list of a money launderer is an efficient financial system. Such a system can be used to move funds away from their place of origin, to perform numerous transactions with these funds and, finally, to make these funds available to the offender under the guise of being legitimate earnings. The importance of the financial system to the money launderer is that it is the device that enables criminals to retain control of and enjoy their illegally gained income. If the control over access to the financial system is weak, it will make the system more attractive to the money launderer.

The criminalisation of money-laundering activities alone will not provide an effective measure to combat money-laundering. However, the fact that a money-laundering scheme needs to involve the financial system to accomplish its objective can be turned to the advantage of law enforcement authorities. This is possible by introducing administrative control measures that apply to the organisations within the business community.

The aim of a system of administrative control measures should be to establish a manner of conducting business that will impede and deter money-laundering activities. This should facilitate the prevention, identification, investigation and prosecution of money-laundering activities. To accomplish this, a legislative framework comprising administrative control measures must be introduced.

Scope of control measures

The first issue is those persons or bodies which should be involved in an administrative control structure. The banking sector immediately comes to mind. It is true that banks are at risk of being abused for purposes of money-laundering schemes. But it will be naive to assume that the banking sector alone should carry the responsibility of guarding against money-laundering. In the interest of maximum effectiveness, the scope of an administrative framework should not be limited to the mainstream banking sector.

Elements of a control structure

The essential elements of a control structure must be in place to ensure its success. The starting point of an administrative system that would assist in combating money-laundering is an institution’s ability to identify its customers. This is the cornerstone of a ‘know your customer’ policy.

A second element is effective recordkeeping, which is essential to the investigation of money-laundering schemes. The only way of identifying the transactions through which the proceeds of crime have been laundered and those who are involved, is to follow the so-called audit trail. By identifying the nature of the transaction and the true participants in the transaction, the money-laundering scheme can be exposed. This will only be possible if institutions involved have kept sufficient records of transactions. Mechanisms to ensure effective recordkeeping must therefore be part of an administrative control scheme.

The most important component of an administrative control structure is a duty to report specific information. The aim of a reporting system should be to identify transactions involving the proceeds of crime. Such transactions will probably, upon further investigation, appear to be part of a money-laundering scheme. It is therefore not expected of institutions to identify the money-laundering scheme itself, but to identify transactions that may involve illegally derived assets, or at least to report the suspicion that particular assets have an illegal origin.

When systems for reporting information are considered, three models are presented: a suspicion-based reporting system, a threshold-based reporting system and a combination of threshold and suspicion-based reporting.

Suspicion-based reporting has the advantage that the person within the institution making the report has had to apply his or her mind to the matter at hand. As a result, the investigating authority is provided with information on the grounds upon which the suspicion was founded on which to base an investigation. This leads to a better quality of disclosure of information to the investigating authority.

A system that ties the reporting requirement to criteria that can be easily ascertained, such as a cash amount exceeding a set threshold, should be less complicated for institutions to comply with. With such a system, the transactions that should be reported can be easily identified and relayed through the proper channels.

A major advantage of a threshold-based reporting system is that it can ensure that a transaction at a reporting institution that appears totally innocent when seen in isolation, is reported and may warrant investigation when compared with information reported by other institutions. Another advantage of a threshold-based system is that it tends to cause a variation in the behavioural pattern of criminals who want to launder the proceeds of crime. Such criminals will usually attempt to structure the transactions aimed at placing these proceeds in the financial system in order to avoid the threshold. In doing so, they may perform transactions that do not make any economic sense and will therefore immediately appear suspicious. In this way, threshold-based reporting can complement suspicion-based reporting.

An important issue in terms of reporting information is the protection of the person making the report. Such persons or institutions should be protected from any liability for the breach of confidential relationships or any other form of civil liability. This protection should override any privilege or obligation to secrecy or confidentiality, irrespective of the basis for its existence.

The protection of persons reporting information, especially in respect of suspect transactions, however, should go further than protection against liability. The identity of such a person and the fact that he or she has made such a report should be kept absolutely confidential for obvious reasons. This will mean that the investigating and prosecuting authorities will not be able to base their case on the fact that a report was made, or that the person who made the report was suspicious of the relevant transaction. The reporting of the relevant transaction will accordingly only serve as intelligence to identify an occurrence that should be investigated and will not in itself provide evidence of any criminal conduct. It will be the responsibility of the investigating and prosecuting authorities to build a case upon the relevant bank records and other evidence they may find.

In their approach to the implementation of a framework of administrative measures, institutions should follow procedures that are based on responsible business practices. This entails that institutions should develop internal policies to ensure the implementation of procedures to facilitate compliance with an administrative control structure.

Training is crucial to the success of a system of administrative control measures. Institutions should therefore develop training policies to ensure that staff at all levels are aware of the phenomenon of money-laundering and its effects. Staff should also be knowledgeable about the relationship between money-laundering and the proceeds of crime, and should receive guidance on the particular circumstances that should raise suspicion.

An essential element of a system to control money-laundering is the establishment of a body to record and utilise reported information. Such bodies are commonly known as financial intelligence units. The main task of a financial intelligence unit is to receive information through a reporting system, to analyse the information and to disseminate information that warrants investigation to the appropriate investigating authorities (figure 3).

A financial intelligence unit serves as a conduit for information between financial and other institutions in the private sector and law enforcement authorities. The information supplied to such a unit may relate to criminal activity, but may not be an absolute indication of such activity.59 For this reason, value must be added to the information, typically referred to as intelligence, to increase its usefulness to investigating authorities. This value is added through the analysis of the reported information in relation to other information accessible to unit.

A bill on money-laundering control

The South African Law Commission published a report on money-laundering in 1996.60 The report contained recommendations on the type of administrative control structure described above. Annexed to the report is a recommended bill to embody the commission’s recommendations.

The Law Commission’s report was submitted to the minister of Finance who appointed a team of advisors to consider the report and make recommendations on its implementation. Based on the advice of the team, the Department of Finance has produced the Financial Intelligence Centre Bill. At the time of writing, the bill has been published for comment. It is foreseen that it will be tabled in parliament during the 2001 parliamentary session.

Scope of application

The Financial Intelligence Centre Bill will apply to a number of institutions or classes of institutions that participate in the economic sphere. These institutions are thought to be particularly vulnerable to abuse as a result of money-laundering. The institutions to which the bill applies are listed in a schedule to the bill and are defined as "accountable institutions."61 The following is a paraphrased extract of the schedule listing these institutions:

Schedule 1

An attorney



A board of executors or a trust company or any other person that invests, keeps in safe custody, controls or administers trust property within the meaning of the Trust Property Control Act of 1988



An estate agent



A financial instrument trader



A unit trust management company



A bank



A mutual bank



A person, other than a bank, who collects money from other persons into an account and deposits the money in the account into a bank account on behalf of those persons



A long-term insurer, an insurance broker and an agent of an insurer



A short-term insurer, an insurance broker and an agent of an insurer



A casino or gambling institution



A dealer in foreign exchange



A person who lends money against the security of securities



A person who renders investment advice or investment-brokering services



A person who sells or redeems travellers’ cheques, money orders or similar instruments



The Post Office Savings Bank



A public accountant who provides investment advice or an investment service



A member of a stock exchange



A totalisator agency board or a person operating a totalisator betting service



An institution or body designated by the minister of Finance



A person who has been approved by the Registrar of Stock Exchanges



A person who has been approved by the Registrar of Financial Markets

Although this is a long and comprehensive list, it can, by nature, never be complete. Experiences as a result of the implementation of this bill will show which institutions, currently not listed, should be included. The effective implementation of the bill, and the consequent tightening of control measures at accountable institutions, may also have the effect that money launderers will alter the ways in which they conduct their activities. This will put other institutions at risk that will not be on the list when the bill is enacted.

For these reasons, the bill will allow the minister of Finance to include institutions or classes of institutions in the schedule through publication of a notice in the Government Gazette.62 The bill will likewise allow the minister to remove institutions or classes of institutions from the list. The bill will provide further flexibility by allowing the minister of Finance to exempt an accountable institution or class of accountable institutions from any or all of its provisions.

Certain provisions of the bill will also apply to supervisory and regulatory bodies. These are listed in schedule 2 of the bill:63

Schedule 2

List of supervisory bodies

1 The Financial Services Board
2 The Registrar of Banks
3 The Registrar of Companies
4 Any law society
5 The Estate Agents Board
6 The Public Accountants’ and Auditors’ Board
7 The South African Revenue Service

The minister of Finance will also have the power to amend this list.64

The Financial Intelligence Centre

The bill provides for a number of measures that are aimed at improving the state’s ability to address money-laundering. The first of these is the establishment of a financial intelligence unit called the Financial Intelligence Centre.65

The proposed functions of the Financial Intelligence Centre are described as follows:66

Functions

4(1) To achieve its objective the Centre must –

(a) collect, process, analyse and interpret all information disclosed to it and obtained by it in terms of this Act;

(b) inform, advise and cooperate with investigating authorities and the intelligence services;

(c) supervise compliance with this Act by accountable institutions;

(d) give guidance to accountable institutions to combat money laundering activities; and

(e) promote the appointment by accountable institutions and supervisory bodies of persons to specialise in measures to detect and counter money laundering activities.

It appears that the Financial Intelligence Centre is intended to have a dual function. On the one hand, it will collect information supplied through the reporting structures of the bill and supply intelligence on possible money-laundering activities to investigating authorities. On the other hand, it will participate in the enforcement of the bill by supervising compliance with its provisions and giving guidance in this regard to accountable institutions. These functions are in accordance with the functions generally associated with financial intelligence units across the world.67

Money-laundering control measures

The bill will introduce a number of control measures that will apply to accountable institutions. These can be divided into four categories:

The ‘know your customer’ requirements in the bill are mainly focused upon identifying clients or prospective clients at various stages of a business relationship.68 The aim with these provisions is the elimination of anonymous accounts and the identification of hidden principals or beneficial owners. Accountable institutions should establish the actual ownership of accounts, and should refuse to enter into transactions with clients who fail to provide proof of their identity. For example, a bank will not be allowed to operate an account identified only by a number, under a pseudonym, or in the name of an agent.

The minister of Finance will prescribe the steps an accountable institution will have to take to identify a client through regulatory measures.69 These steps may differ from one type of accountable institution to another.70

Recordkeeping

The requirement to keep records is closely related to the requirements to identify customers:71

Record to be kept of business relationships and transactions

23(1) Whenever an accountable institution establishes a business relationship or concludes a transaction with a client, whether the transaction is a single transaction or concluded in the course of a business relationship which that accountable institution has with the client, the accountable institution must keep record of -

(a) the identity of the client;

(b) if the client is acting on behalf of another person -

(i) the identity of the person on whose behalf the client is acting; and

(ii) the client’s authority to establish that business relationship or to conclude that single transaction on behalf of that other person;

(c) if another person is acting on behalf of the client -

(i) the identity of that other person; and

(ii) that other person’s authority to act on behalf of the client;

(d) the manner in which the identity of a person referred to in paragraph (a), (b) or (c) was established;

(e) the nature of that business relationship or transaction;

(f) all accounts at that accountable institution that are involved in -

(i) transactions concluded in the course of that business relationship; or

(ii) that single transaction; and

(g) the name of the person who obtained the information referred to in paragraphs (a) to (f) on behalf of the accountable institution.

(2) Records kept in terms of subsection (1) may be kept in electronic form.

This duty entails that an accountable institutions will have to keep record of the identities of persons involved in transactions and of the nature of transactions entered into. The records are to be kept for a period of five years after a business relationship is terminated, or a transaction concluded.72

The minister of Finance will prescribe the manner in which an accountable institution will have to keep the required records through regulatory measures.73 This may differ from one type of accountable institution to another.74

Reporting of information

The bill contains a number of provisions dealing with the reporting of information. The first of these is the duty to report transactions involving cash amounts above a prescribed limit:75

Cash transactions above prescribed limit

28. An accountable institution must, within the prescribed period, report to the Centre the prescribed particulars concerning a transaction concluded with a client if in terms of the transaction an amount of cash in excess of the prescribed amount -

(a) is paid by the accountable institution to the client, or to a person acting on behalf of the client, or to a person on whose behalf the client is acting; or

(b) is received by the accountable institution from the client, or from a person acting on behalf of the client, or from a person on whose behalf the client is acting.

The minister of Finance will prescribe the limit through regulatory measures. The bill envisages that the minister will be able to prescribe different limits for specific types of transactions and different types of accountable institutions.76 The minister will also be able to adapt these limits to changing circumstances without having to effect legislative amendments.

A second reporting duty relates to the reporting of information on suspicious transactions:77

Suspicious transactions

29(1) If an accountable institution suspects or reasonably ought to have suspected that, as a result of a transaction concluded by it, it has received or is about to receive the proceeds of criminal conduct or has been used or is about to be used in any other way for money laundering purposes, it must, within the prescribed period after the suspicion arose or reasonably ought to have arisen, report to the Centre -

(a) the grounds for the suspicion; and

(b) the prescribed particulars concerning the transaction.

(2) If an accountable institution suspects or reasonably ought to have suspected that, as a result of a transaction which it is asked to conclude or about which enquiries are made, it may receive the proceeds of criminal conduct or in any other way be used for money laundering purposes should the transaction be concluded, it must, within the prescribed period after the suspicion arose or reasonably ought to have arisen, report to the Centre -

(a) the grounds for the suspicion; and

(b) the prescribed particulars concerning the transaction.

Two different scenarios are foreseen with this provision. The first is where an accountable institution has entered into a transaction with a client. The substance of the suspicion is that the accountable institution has received the proceeds of crime, or has been used in some way for money-laundering purposes as a result of the transaction.

The second is where a client approaches an accountable institution to enter into a transaction that subsequently does not take place or is discontinued. In this case, the substance of the suspicion is that the transaction would have caused the accountable institution to receive the proceeds of crime, or to be used for money-laundering purposes, had the transaction been concluded.

A third reporting duty relates to the electronic transfer of funds upon instructions of a client:78

Electronic transfers of money to or from the Republic

30. If an accountable institution through electronic transfer sends money in excess of a prescribed amount out of the Republic or receives money in excess of a prescribed amount from outside the Republic on behalf, or on the instruction, of another person that is not a bank, it must, within the prescribed period after the money was transferred, report the transfer together with the prescribed particulars concerning the transfer to the Centre.

An accountable institution will have to report the electronic transfer from South Africa of funds exceeding a prescribed limit. Likewise, an accountable institution will have to report the fact that it has received funds exceeding a prescribed limit from outside South Africa by means of electronic transfer. The duty will not apply if the instructing client is a bank. The minister of Finance will prescribe the limit through regulatory measures.

The reporting duties referred to above will all apply to accountable institutions. The bill also contains reporting duties that will not apply to accountable institutions. The supervisory bodies listed in schedule 2 will be required to report certain information.79

Reporting by supervisory bodies

31. If a supervisory body suspects that an accountable institution, as a result of a transaction concluded by the institution, wittingly or unwittingly has received or is about to receive the proceeds of unlawful activities or has in any other way been used for money laundering purposes, it must -

(a) within the prescribed period, report to the Centre -

(i) the grounds for the suspicion; and

(ii) the prescribed particulars concerning the transaction; and

(b) retain the records held by it which relate to that report, for such period as the Centre may reasonably require.

This duty will entail that supervisory bodies will have to report suspicions that accountable institutions have received the proceeds of crime or have been used for money-laundering purposes.

The bill provides for a general reporting duty relating to the conveyance of cash to or from South Africa:80

Conveyance of cash to or from the Republic

32(1) A person intending to convey an amount of cash in excess of a prescribed amount to or from the Republic must, before that person conveys the cash into or out of the Republic, report the prescribed particulars concerning that conveyance to a person authorised by the Minister for this purpose.

(2) A person authorised in terms of subsection (1) must without delay send a copy of the report to the Centre.

This duty applies to every person who conveys cash in excess of the prescribed limit across South African borders. The minister of Finance will determine the limit through regulatory measures.

The bill contains a definition of ‘cash’ that is relevant to the reporting duties relating to cash transactions and the conveyance of cash:81

The reports in terms of all the reporting duties, except for the reports relating to the conveyance of cash, will be made to the Financial Intelligence Centre. Reports relating to the conveyance of cash will have to be made to a person designated for this purpose by the Minister of Finance. This person will then forward the report to the Financial Intelligence Centre.

An important factor concerning the reporting of information is the effect it may have on the duties of secrecy or confidentiality. The bill will provide that no such duty will affect the duty to report information in terms of the bill:82

Reporting duty not affected by confidentiality rules

37(1) No duty of secrecy or confidentiality or any other restriction on the disclosure of information, whether imposed by legislation or arising from the common law or agreement, affects compliance with a provision of this Part.

(2) Subsection (1) does not apply to the common law right to legal professional privilege as between an attorney and the attorney’s client.

 It is important to note that a general exception is made concerning the privilege between an attorney and a client.

The bill will offer protection to persons or institutions making reports to the Financial Intelligence Centre:83

Protection of persons making reports

38(1) No action, whether criminal or civil, lies against an accountable institution, supervisory body or person complying in good faith with a provision of this Part, including any director, employee or other person acting on behalf of such accountable institution, supervisory body or person.

(2) A person who has made, initiated or contributed to a report in terms of a provision of this Part is competent, but not compellable, to give evidence in criminal proceedings arising from the report.

(3) No evidence concerning the identity of a person who made a report in terms of a provision of this Part or the contents of such a report, or the grounds for such a report, is admissible as evidence in criminal proceedings unless that person testifies at those proceedings.

(4) No evidence concerning the identity of a person who initiated or contributed to a report in terms of a provision of this Part is admissible as evidence in criminal proceedings unless that person testifies at those proceedings.

The person who makes or initiates a report to the Financial Intelligence Centre will be protected from criminal and civil liability arising from the fact that a report has been made. More importantly, such a person’s identity will also be protected. The bill will go so far as to exempt a person making or initiating a report from any obligation to testify in subsequent criminal proceedings arising from the report to the Financial Intelligence Centre.

Internal rules

In order to be able to comply with the control measures discussed above, an accountable institution will have to ensure that its employees are aware of the requirements of the bill and how they affect the way in which they perform their duties. For this reason, the bill will place an obligation on accountable institutions to formulate and implement internal rules concerning the control measures provided for in the bill. The following extract from the bill gives an indication of the matters to be addressed in internal rules:84

Formulation and implementation of internal rules

42(1) An accountable institution must formulate and implement internal rules concerning-

(a) the establishment and verification of the identity of persons which the institution must identify in terms of Part 1 of this Chapter;

(b) the information of which record must be kept in terms of Part 2 of this Chapter;

(c) the identification of reportable transactions; and

(d) the training of employees of the institution to recognise and handle suspected money laundering activities.

(2) Internal rules must comply with the prescribed requirements.

(3) An accountable institution must provide a copy of the internal rules to each of its employees involved in transactions to which this Act applies.

The minister of Finance will be able to prescribe through regulatory measures the aspects that accountable institutions will have to address in their internal rules.85 These may differ from one type of accountable institution to another.86

Enforcement

As has been pointed out earlier, one of the expected functions of the Financial Intelligence Centre will be to participate in the enforcement of the bill by supervising compliance by accountable institutions. This will be done by means of administrative inquiries held by the Financial Intelligence Centre about the conduct of an accountable institution that may constitute an offence in terms of the bill:87

Administrative inquiries

43(1) If the Centre has reasonable grounds to suspect that an accountable institution has committed an act (including an act of omission) which may constitute an offence in terms of this Act, it must institute an inquiry to establish whether an offence has been committed if -

(a) the institution agrees to submit itself to the inquiry and to abide by any findings made in terms of section 46; and

(b) the institution -

(i) deposits with the Centre an amount determined by the Centre, not exceeding the maximum fine which may be imposed by a court for the alleged offence; or

(ii) makes such other arrangements or complies with such conditions with regard to securing payment of an appropriate penalty as the Centre may determine.

The inquiry can only take place with the co-operation of the accountable institution in question. The amount that an accountable institution deposits with the Financial Intelligence Centre will be used to levy a penalty against the institution if the inquiry results in a finding that the institution, in fact, did contravene a provision of the bill.

Apart from the penalty that will be imposed on an accountable institution, the institution will also face public exposure of its contravention of the bill. The bill will require all findings of inquiries by the Financial Intelligence Centre and the penalties that are imposed to be made public.

Regulatory measures

Many of the effects of the bill will only become apparent when the minister of Finance defines the regulatory measures applicable to the bill. Issues such as the determination of thresholds for reporting of information, steps to be taken to identify customers and ways in which records must be kept have the potential to affect the business of accountable institutions seriously. Consequently, the bill envisages a process of consultation with representatives of accountable institutions, as well as other interested parties before regulatory measures are defined.88