Prevent your business from being involved in money laundering

Money laundering refers to the passing of illicit , or ‘dirty’ money, through a sequence of transfers, changes or commercial transactions that eventually returns the ‘clean’ money to the launderer in an obscure and indirect way, usually via a respected institution, where it will not be linked with the original crime.

How to Prevent Your Business from Being Involved in a Money Laundering Scheme_DocFox

The funds are deemed as illicit as they often originate from fraud, corruption, drug trafficking, or other unlawful activities or predicate crimes. Money laundering operations have serious negative impacts on global economies as well as local communities and so serious measures have to be put into place to deter individuals from these acts.

Based on the above it is very important that businesses and individuals that are at higher risk of being used as a “tool” for money laundering should follow the international and local guidelines given by the FATF and FIC respectively. Failure to do so not only harms your community but could result in reputational damage, financial penalties and even jail time.

With this being said, what are the common money laundering schemes and what can you do to prevent them?

To start with, although real-life money laundering and terrorist financing schemes can be large, complex and sometimes incredibly creative, they all tend to follow the same three steps, which you can read more about here.

Below are some practical examples of some common money laundering schemes and payment means preferred by money launderers.

1. The use of cash

The use of cash is very much still prevalent in South Africa and though obviously not always a sign of money laundering, it has been assessed as an indication for high risk of money originating from Money Laundering (ML) especially when in large amounts and during cross-border movement. An example of this is individuals insisting to pay for a high value good, such as a motor vehicle, gold or diamond ring, in cash - often this is in one large lump sum or in smaller fractionated amounts to try conceal the large cash payment. Cash is often used in ML schemes due to the inherent difficulty in ascertaining its true source, its movability and its ability to transfer value into a legitimate asset eg: a car, a house, a luxury yacht, a piece of art or jewellery.

How to combat it

Cash Threshold Reporting (CTR) is required to be undertaken by Accountable Institutions (AIs) listed in Schedule 1 of FICA. The monetary threshold for cash reporting is R49 999 and above as a single transaction only and the requirement of Cash Threshold Reporting Aggregation (CTRA) has been repealed and is no longer applicable. This was where aggregated smaller cash deposits appearing somehow linked to each other and exceeding the previous threshold of R24 999 would need to be reported. The FIC Act has put CTR in place in order to assist you in identifying, managing and reporting the above, you can read more about this here.

If you are unsure of what exactly counts as suspicious behaviour or you are not sure how to report suspicious behaviour/transactions then this training is for you.

2. Using “legitimate/trusted” businesses

Perpetrators often use the professional status that some industries have to make their illicit business, financial, or property transactions look legitimate. For example these perpetrators make use of financial institutions and/or legal services to try to make the transaction look legitimate.

In particular law firms typically are seen as a target as they deal with large financial transactions, offer a wide range of professional services and money launderers may use a firm's trust account for illicit purposes. Perpetrators will often target estate agents, attorneys, notaries and conveyancers to assist them with the creation of companies and trusts as well to assist with property purchases and sales.

As per the FIC Money laundering risk indicators for attorneys include:

Unusual payments to an attorney’s trust account
Routing of funds via attorney’s trust accounts to purchase high-end goods, luxury properties and vehicles
Creation of trusts and companies where it appears to be concealing the ultimate beneficial owner (UBO)
Management of trusts and companies
A request to set up and manage charities and/or nonprofit organisations where it appears to be concealing the UBO
Handling the cash proceeds of crime or monetary instruments provided by an offender or nominee, deposit the funds into bank accounts in trusts for clients, and issue cheques on behalf of clients for the purchase of property.
The client has changed legal practitioners numerous times within a short period of time.
There are significant differences between the declared price and the approximate actual values for immovable or movable property.
The client is represented by a third party without logical or economic explanation.
The transaction includes the transfer of funds to or from a foreign geographic area with no valid economical or logical reason.
The transaction involves crypto assets.
The transaction involves the purchase of property with cash and soon thereafter the property is used as security for a loan.
The client is a recently incorporated company or established entity with large.
Capital amounts which does not match the client’s source of funds.

How to combat it

The FIC states that by filing regulatory reports, legal practitioners play an important role in fighting financial crime. Of the 6.2 million regulatory reports the FIC received in the 2019/20 financial year, attorneys filed a total of 2 254. The vast majority of these were cash threshold reports (2 549) while 205 were suspicious and unusual transaction reports (STRs). In terms of the FIC’s 2021/2022 Annual Report, 2 300 reactive and 782 proactive financial intelligence reports were produced, and 32 on illicit financial flows. Of the 782 proactive reports, 131 related to high priority matters. In addition, the FIC contributed to the recovery of over R5 billion in criminal proceeds, a considerable increase in comparison to the R3.3 billion recovered in the previous year.

Another way to assist in combating ML for law firms is to implement, develop, document and maintain a robust Risk Management and Compliance Programme (RMCP), identifying and describing the ML/TF/Proliferation Financing risks envisaged by the AI and the mitigative steps it will take in combating those risks.

Establishing the source of funds for a client transaction is particularly vital at the outset of a single transaction or establishing a business relationship as the further along the ML cycle the funds travel, the more difficult it becomes to identify anything suspicious or out of place.

Training is also of utmost importance for employees of law firms in order to understand not only the application of FICA to the firm but also the ins and outs of its RMCP.

Appointing a Compliance Officer with sufficient seniority in the firm and FICA knowledge and competence is also vital in combating ML as he/she will assist the board or senior management with discharging their FICA obligations.

3. Selling and reselling assets

Whether it be in cash or an online transaction, the origin of money can be made to look legitimate through the reselling of goods. Perpetrators often purchase big-ticket items, and then quickly resell those items to make their money look transaction based. Rolexes, Real estate, luxury cars, luxury yachts and expensive jewellery and other such items are popular placements for money laundering.

Another example is setting up a business such as a “luxury” carpet shop and then declaring “goods have been purchased using cash” meaning that the cash gets disguised as legitimate money from an item sold, where in fact there was no item or the item was of little value but has been sold for a large sum of money.

How to combat it

In the example above, it shows why property owners / developers should perform FICA checks on the people they are letting office or shop space to.

The FIC Amendment Act (FICAA) stipulates that Accountable Institutions should adopt a risk-based approach when establishing a business relationship and/or conducting a single transaction with a client. Part of this risk-based approach includes developing controls which mitigate and manage the businesses AML risks, and fulfil the FICAA requirements. All the controls developed and implemented should be documented to form part of their RMCP. Part of taking a risk based approach is performing customer due diligence (CDD). CDD refers to the process of analysing information about an individual or legal person from multiple sources. This means that to adequately perform due diligence you will need to collect and evaluate specific information to truly know your client and ultimately ensure that your client is who they say they are.

DocFox can assist you with developing an RMCP that is unique to your business as well as can assist you in truly getting to know your client by collecting and analysing documentation and screening your client against sanction lists. Having a system like DocFox also means you can ensure consistency throughout your business to make sure that every person is following the correct risk rating workflow each time.

4. Trade-based money laundering

It was recently released and estimated that misinvoicing was responsible for 63% of trade based money laundering. Trade based money laundering refers to individuals or businesses that take advantage of the complexity of international laws and regulations for their illicit purposes. For example a money launderer may alter invoices or the value of goods, move funds through different countries, or get several individuals or businesses involved to try make funds look legitimate or ultimately use these creative changes to evade AML checks.

How to combat it:

As recommended by the Financial Action Task Force (FATF) and Financial Intelligence Centre (FIC), geographic risk is an important component to consider when assessing client and transaction risk as each country poses different levels of risks based on the features and activities that are associated with it, you can read more about this here.

Also in conjunction with taking someone's geographic location into account, you should also perform due diligence on businesses that you are working with. For example common documents that you should request to perform due diligence on Juristic entities include:

Company statutory documents – Certificate of Registration, Memorandum of Incorporation, Certificate of Name Change (if applicable) and signed by a director of the company;
Proof of physical operating address, e.g. invoice, rates bill etc;
Letter from the Auditors confirming shareholding;
SARS issued document confirming Income Tax and VAT registration number;
Directors resolution appointing the authorised representative of the Company;
Certified copy of the ID document of the Directors/Partners/Members as related parties, UBO/s and authorised person/s;
Certified proof of residential address of the Directors/Partners/Members as related parties, UBO/s and authorised person/s;

Although there is no single globally accepted list that Accountable Institutions can rely on to determine the risk posed by a particular area, the FIC considers the listings issued by the FATF as a minimum.

5. Shell companies and complicated structures

A more commonly known method of money laundering is where money launderers use companies, trusts or other similar legal arrangements to retain control over criminally derived assets. A very prevalent and infamous example of this would be the Digital vibes saga. Due to the fact that these criminals use complex structures or legal persons to conceal true ownership makes it often very challenging to trace back to the original source of funds as well as to identify UBOs.

How to combat it

The concept of identifying an Ultimate Beneficial Owner (UBO) exists in an effort to combat the above. A UBO is effectively the person/s at the top of the tree – who have ultimate benefit from, or ultimate control of an entity and its operations.

Whilst it’s usually a natural person majority shareholder holding 5% of the entity and above, not all entities have a majority shareholding or even shareholding at all eg: a listed company having thousands of shareholders with no clear majority holder over the 5% threshold. In this case you can take a risk-based approach and use a process of elimination, looking first for ownership, and then control eg: the CEO, CFO or COO of a listed company, and then identify these individual/s as the UBO/s

In the same way you must identify and verify your clients, the FIC Amendment Act requires that you identify and verify all UBOs.

You can read more about identifying UBO’s and how DocFox can assist you here.

In closing you can see that there are multiple ways that criminals try and launder money. Together with international guidelines, the FIC has set out the FIC Act which serves as a basic guide / requirement that all Accountable Institutions need to follow in order to reduce the risk of facilitating money laundering. In order to combat crime, businesses should identify and assess the risk of all their customers as well as put together an RMCP that will guide all employees, in other words all employees of AIs should be trained on the anti-money laundering procedures in the business described within the RMCP and have adequate knowledge of FICA itself. Finally it is important that businesses monitor, review and audit these processes to ensure that they are consistently being followed at all times, which is a challenging task. This is why we recommend that businesses use software like DocFox to make sure these steps are followed correctly each and every time.