Money Laundering is the process used by criminals to hide, conceal or disguise the nature, source, location, disposition or movement of the proceeds of unlawful activities or any interest which anyone has in such proceeds.
Criminals who have generated an income from their criminal activities usually follow three common stages to launder their money. The first stage is commonly referred to as ‘placement’. This is when criminals introduce their illegally derived proceeds into legitimate financial systems. An example of this would be splitting a large portion of cash into smaller sums and thereafter depositing the smaller amounts into a bank accounts.
The second stage is called ‘layering’. During this stage the launderer engages in a series of transactions, conversions or movements of the funds in order to cloud the trail of the funds and separate them from their illegitimate source. The funds might be channeled through various means for example; the purchase and sale of financial products.
The third stage is ‘integration’. This generally ensues the successful stages of placement and layering. The launderer at this stage causes the funds to re-enter the economy and appear to be legitimate. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
Although use of all three stages is common, it is not always utilised by the criminal who wishes to launder funds. In some instances criminals may choose to merely ‘place’ the illegally derived funds into the economy by merely depositing the money into his or her bank account, without any layering occurring. They can withdraw the money and spend it at their will.
Financing of terrorism
Financing of terrorism is the collection or provision of funds for the purpose of enhancing the ability of an entity or anyone who is involved in terrorism or related activities to commit an act that is regarded as a terrorist act. Funds may be raised from legitimate sources, such as personal donations and profits from businesses and charitable organizations, as well as from criminal sources, such as the drug trade, the smuggling of weapons and other goods, fraud, kidnapping and extortion.
The Financial Intelligence Centre Act, 2001
The Financial Intelligence Centre Act, No 38 of 2001 (the FIC Act) together with the Prevention of Organised Crime Act, 1998 (POCA), the Prevention and Combatting of Corrupt Activities Act, 2004 (PRECCA) and the Protection of Constitutional Democracy Against Terrorist and Related Activities Act, 2004 (POCDATARA) were introduced to combat money laundering and terrorist financing.
The FIC Act introduces a regulatory framework of measures requiring certain categories of business (accountable institutions) inter alia an authorized user of an exchange, a collective investment scheme manager and a financial services provider to take steps regarding customer due diligence, record-keeping, reporting of information to the Financial Intelligence Centre and internal compliance governance. The Financial Intelligence Centre uses this financial data reported to it and other available data to develop financial intelligence, which it is able to make available to the competent authorities i.e. law enforcement agencies, South African Revenue Services and supervisory bodies for follow-up with investigations or to take administrative action.
The Financial Sector Conduct Authority (the FSCA) is responsible to supervise and enforce compliance with the FIC Act by authorized users of an exchange, collective investment scheme managers and financial services providers. The FSCA has delegated its obligation to supervise authorized users to the licensed exchanges. The FSCA may, however, still take enforcement actions against authorised users.
Financial Action Task Force
The Financial Action Task Force (FATF) is an inter-governmental body that focuses exclusively on combatting money laundering and funding terrorism. FATF is essentially a policy-making and standard setting body that promotes policies to combat money laundering and terrorist financing. South Africa is a member of FATF. In addition, it is also a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), a regional body of the FATF which aims to support countries in the region to implement the global AML/CFT standards. The FSCA forms part of South Africa’s delegation that attends FATF and ESAAMLG plenaries and aims to align its policies and process with the standards set by the FATF.
Financial Intelligence Centre (FIC) proposal
The FIC proposes to include certain businesses or institutions that perform certain categories of activities which are currently outside the scope of the FIC Act with a view to potentially including them in Schedule 1 to the FIC Act including, but not limited to, non-life insurers and financial intermediaries.
Non-life insurance working group with the FIC
The South African Insurance Association (SAIA), the Financial Intermediaries Association (FIA), the South African Underwriting Managers Association (SAUMA), the Prudential Authority (PA), the Financial Sector Conduct Authority (FSCA) and the FIC agreed to form a joint Working Group to commence with a money laundering/ terrorism financing risk assessment of the non-life insurance industry. Representatives of the Insurance Crime Bureau (ICB) will also form part of the Working Group. Whilst the risk assessment is being conducted, it was also agreed that an arrangement for information sharing using the FIC’s go-AML online reporting tool would be used for the sharing of information with the FIC. The non-life insurance industry is entering into a voluntary sharing of information. The FIC would prefer that the widest possible range of non-life insurers participate in this voluntary process. Once the risk assessment is complete, a decision on the continuation of the sharing of information will be taken, amongst others.
Risk assessment being conducted by Deloitte
SAIA, the FIA and SAUMA appointed Deloitte to conduct the risk assessment. Deloitte is in the process of developing a comprehensive risk universe to determine whether the universe is at risk for money laundering and/or terrorism financing risks. Deloitte is currently hosting workshops with smaller work groups, which includes insurers and intermediaries in the non-life insurance industry, to understand their respective businesses and determine where possible areas of money laundering and/or terrorism financing risks may lie, if any. The information obtained from these workshops will further inform the questionnaire being developed by Deloitte that will be sent out to the non-life insurance industry. This questionnaire will form the basis of the risk assessment and will be an on-line questionnaire.