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It is necessary to consider the issue of money laundering and the background to international efforts to combat this crime for us to fully appreciate the impact of anti-money laundering legislation on our institutions in South Africa .
Money laundering is, in short, the process whereby criminals attempt to change the nature of their ill-gotten gains in order to create the illusion of legitimate wealth thereby enabling them to enjoy the proceeds of their crime without the interference of the authorities.
Since the 1980's governments all over the world have realised that they are losing the fight against crime in general and drug trafficking in particular. Anti-money laundering legislation and regulations were devised as strategies to target the proceeds of crime and to take the profit out of crime. It is often argued that the only successful way to combat crime is to deprive the criminal of the fruits of his unlawful activities.
The drive to implement anti-money laundering legislation is spearheaded by the United States of America and the Financial Action Task Force (FATF) of the G8 countries. The so-called 40 recommendations of the FATF lay down the ground rules that any government or institution must adhere to, to be able to be considered part of the international economic community. These include:
pro-active identification of customers irrespective of the capacity in which they act and a ban on anonymous accounts (recommendation 10);
the requirement that reasonable measures must be taken to obtain the true identity of prospective customers (recommendation 11);
the requirement to keep records for at least five years (recommendation 12); and
the requirement to pay special attention to threats inherent in new or developing technologies which might favour anonymity.
The compliance requirements of FICA and the proposed implementation schedule.
FICA follows on the Prevention of Organised Crime Act, no. 121 of 1998, commonly referred to as POCA. The latter Act creates the offence of money laundering and governs action of individuals and institutions when encountering money laundering or unlawful activity.
The main features of FICA are the provisions for:
the establishment of a Financial Intelligence Centre (FIC);
the establishment of a Money Laundering Advisory Council (Council);
the implementation of money laundering control measures applicable to accountable institutions, reporting institutions, certain other persons and the FIC; and
the creation of offences and penalties.
It is not necessary to consider the formal sections of the Act that deal with the establishment of infrastructure. It is more important to consider the compliance requirements of FICA.
Money Laundering Control Measures
The money laundering control measures form the heart of the compliance requirements of Act and these measures are divided into four main parts:
- Client identification and verification
- Record keeping
- Reporting of transactions
- Internal rules and compliance requirements .
A firm duty is placed on an accountable institution to establish and verify the identity of its clients and persons acting on behalf of its clients. This requirement is contained in Section 21 of the Act.
These identification and verification actions must take place whenever a business relationship is concluded, a single transaction is concluded or even when a transaction within a business relationship is concluded. The requirement for the latter is still subject to debate.
It is important to note that the establishment and verification of identity must take place before the relationship is established or before the conclusion of a single transaction. It will not suffice to identify the client after the transaction has taken place.
The importance of this requirement, is highlighted by the offence created in the event of failure to comply with this duty and the penalties imposed in case of such an offence.
It is necessary to consider the client identification requirements of FICA as opposed to the "Know your Client" requirements in the forty recommendations of the FATF. At first glance one would assume that client identification and "Know your Customer" requirements are one and the same. This is, however, not the case.
Client identification and verification merely requires a process whereby the identity of the client is established. No further knowledge of the client is required. Proposed regulations would prescribe the steps necessary to establish and verify the identity of a client. At this stage the process would entail obtaining the personal particulars of the client, or persons acting on behalf of the client, as well as a physical address. These particulars must be verified against documentary proof of such information.
"Know your Client" involves the gathering of information on the client and his or her lifestyle, background, financial position and personal circumstances. This is a far more complicated process than the mere establishment and verification of personal particulars.
It has been debated that FICA should go further than the identification and verification and include "Know your Customer" requirements. Some people are of the opinion that "Know your Customer" is not provided for in the FICA. However, if one scrutinises the Act more closely, you will find that the "Know your Customer" requirements are implied.
The identification and verification requirements of Section 21 read with Sections 22, 26, 27,29, 32 and 35 indicate that an institution must be in a position to evaluate and provide information on a much wider level than mere personal particulars of a client. It would for instance be impossible to determine whether a transaction is unusual in respect of a client or that the same transaction may have no apparent lawful or business purpose in respect of that client unless some form of "Know your Customer" exercise precedes the establishment of a relationship or the conclusion of a transaction. One should therefore be careful not to consider the requirements to identify a client and to verify that identity as the only requirement in respect of a customer.
An institution needs to gather sufficient information to create a profile of a client and keep records of such information in a manner as to enable it to comply with the aforementioned Sections and so avoid the severe penalties imposed in the case of offences.
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