The Financial Intelligence Centre (FIC) has published a Report regarding the inherent money laundering and terrorist financing risks encountered by South Africa’s motor vehicle dealers’ (MVDs) sector, which includes persons dealing in new and second-hand vehicles. The Report facilitates the requirements of the Financial Action Task Force (FATF) for vulnerable sectors to gain knowledge and a more comprehensive understanding of the associated money laundering risks they face.
The FATF is essentially an inter-governmental body that sets international standards aimed at preventing money laundering and terrorist financing, and encourages its member jurisdictions to bring about legislative change to address these crimes, of which South Africa is a member.
One of the overarching key risks in the MVD sector is that it does not have a designated supervisory body, such as the Financial Services Board or a provincial Law Society contemplated in Schedule 2 of the Financial Intelligence Centre Amendment Act (FICAA) and therefore the sector is directly supervised by the FIC. The MVD sector is also not subject to a licensing requirement, which also increases the risk for its regulation.
Another noteworthy risk to bear in mind is the wide use and preference of using cash for motor vehicle purchases rather than through a financing arrangement. This form of exchange is highly favoured by money launderers due to its untraceability, efficiency of use and difficulty in identifying its true source. The movable nature of an asset like a motor vehicle also makes it an ideal target for use by launderers wishing to swiftly convert illicitly gained cash and cleaning it by selling the motor vehicle.The prevalence of using cash to purchase vehicles is indicated by the statistics compiled by the FIC between April 2016 and March 2021, MVDs filed a total of 153 145 Cash Threshold Reports (CTRs) at an average of 30 629 per year.
MVDs are also Reporting Institutions in terms of Schedule 3 of the FICAA and therefore do not need to conform to the more stringent compliance obligations required of Accountable Institutions. The legal obligations of Reporting Institutions in terms of the FIC’s Public Compliance Communication 37 are that it must register with the FIC, report cash transactions (CTRs) over the amount of R24 999, either as a single deposit or aggregated smaller deposits that appear somehow linked as well as report Suspicious and Unusual Transaction Reports (STRs) to the FIC.
In addition, and in order to file sufficiently completed reports to the FIC, Reporting Institutions are advised to submit reports that contain information regarding the transactional data as well as the details of the person or entity that is conducting the transaction or series of transactions.
An interesting factor is that there are many private transactions regarding pre-owned vehicles without effective monitoring taking place as private individuals are not obligated to report cash transactions, which makes this an ideal way for money launderers to evade being detected.
Online sales platforms for vehicle purchases also present money laundering risks due to the difficulty of identifying and verifying clients. These platforms should consider asking for a copy of an ID or request an ID number and proof of address document as mitigative measures to counter their risks and verify the identity of their customers.
Some money laundering indicators that MVDs can consider in dealing with their customers include:
- Receiving cash deposits below R24 999, being the reportable threshold;
- Customers purchasing several vehicles in quick succession;
- Customers cancelling a purchase and requesting for the repayment of the funds;
- Registering the vehicle in a different name or in the name of an entity; and
- Customers refusing or hesitating to provide information regarding identity and source of funds.
The consequences of non-compliance of MVDs are exemplified by the FIC’s recent focus on this sector in issuing administrative sanctions to several motor dealers and truck dealers. These include considerable financial penalties ranging between R255 575 and R6 015 171 for failing to report cash transactions, in one MVD case for failing to report 211 cash transactions, and reprimands for failing to register with the FIC timeously. Not only does this affect the reputation of these MVDs as these fines are published on the FIC’s website, but also has a serious financial impact on the MVDs concerned and reiterates the importance of compliance with the FICAA. Importantly, during the 2020/21 financial year, the FIC imposed administrative sanctions on 24 non-compliant MVDs, two of which appealed their sanctions. The 22 sanctions imposed amounted to more than R28.5 million.
With the increased focus and spotlight on MVDs and with a potential FIC Schedule amendment in the works for MVDs to become Accountable Institutions, dealers would be well advised to begin paving their road towards FICAA compliance and to start implementing procedures and processes aimed at combating financial crime.
Why not talk to our Compliance Service Team to see how we can help you be confident in your compliance with an independent audit of your files and processes, or prepare you to be ready for the pending Schedule Amendment that will make most car dealerships fully accountable for FICA.