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 un-traceability, 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.
As of December 2022, The FICA released changes known as Schedule 1 amendments, and as a result Motor Vehicle Dealers are now Accountable Institutions and so they need to fully comply with all FICA requirements. You can read more about this here.
Continuing with the discussion surrounding risk in the Motor Vehicle sector, 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 R49 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.
- Foreign Politically Exposed Persons and nationals purchasing vehicles
- The use of corporate structures for buying and/or owning companies or corporations which own vehicles
- Use of third parties (minors, spouses, other family members, companies, trusts etc.) to register vehicles, mainly for the purpose of tax evasion.
- Purchase does not match the customer’s profile (age, income, nature of client, nature of vehicle)
As this article highlights, MVDs are now Accountable Institutions that need to comply with ALL FICA requirements, and there are a whole lot of potential penalties that MVDs face for non-compliance. With the increased focus and spotlight on MVDs, 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.
