Money Laundering

Abstact
The Financial Intelligence Centre Act 38 of 2001 (FICA) is the South African Government's response to the continuing escalation of organised crime in South Africa. As world markets deregulate and countries become more integrated into a single financial, banking, communications and economic system, so the scope for international criminal activities has grown.

Definition
Money laundering is defined in the Act as:
"an activity which has or is likely to have the effect of concealing or disguising the nature, source, location, disposition or movement of the proceeds of unlawful activities or any interest which anyone has in such proceeds"
and includes any activity which constitutes an offence in terms of Section 64 of this Act or section 4, 5 or 6 of the Prevention Act (Prevention of Organised Crime Act 121 of 1988).

The Act is divided into the following five main chapters:
Chapter 1: Financial Intelligence Centre
Chapter 2: Money Laundering Advisory Council
Chapter 3: Money Laundering Control Measures
Chapter 4: Offences and Penalties
Chapter 5: Miscellaneous

Financial Intelligence Centre
The principal purpose of the Financial Intelligence Centre is to help identify the proceeds of unlawful activities and combat money-laundering activities. The Centre will co-ordinate, collect, process and interpret information. It will inform, advise and co-operate with investigating authorities and guide institutions, while exchanging information with similar bodies in other countries.

Advisory Council
The Money Laundering Advisory Council consists of various people who have an interest in combating money laundering - such as a number of Directors-General. The Council will act as a link between the Centre and the government and it will advise the government on policies.

Whom does the Act concern
Chapter 3 concerns us the most, but before turning to it, let's note whom the Act affects. In Schedule 1 of the Act, "accountable institutions" are people whom the state has appointed to control money laundering. This list includes among others, attorneys, banks, trust companies, estate agents, financial instrument traders, managers of unit trusts, long-term insurers, forex dealers, investment advisers, accountants who act as investment advisers, and stock brokers.

According to Section 21, these accountable institutions are obliged not to establish a business relationship (which is defined as "an arrangement between a client and an institution for the purpose of concluding transactions on a regular basis") or conclude a single transaction with a client unless they have taken prescribed steps which identify and verify that client or, if the client is acting on behalf of another person, to establish and verify the identity of that other person and the client's authority to act on that other person's behalf. The same requirements apply if another person is acting on behalf of a client.

These requirements apply even if the relationship predates the FICA. Section 22 requires accountable institutions to keep records of information such as: the identity of the client, how the identity was established, the nature of the business relationship or transaction, and accounts involved. Records of this information must be kept for a period of up to five years.

Furthermore, an accountable institution must report:
* Cash transactions which exceed the prescribed amount (section 28)
* Suspicious and unusual transactions (section 29)
* Conveyance of cash to or from the Republic which is in excess of the prescribed amount (section 29), and
* an electronic transfer that is in excess of the prescribed amount (section 30).

Suspicious and unusual transactions are worthy of comment and emphasis. Section 29. (1) reads as follows:

"29. (1) A person who carries on a business, is in charge of, or manages a business or who is employed by a business and who knows or suspects that -
(a) The business has received or is about to receive the proceeds of unlawful activities:
(b) A transaction or series of transactions to which the business is a party -
(i) facilitated or is likely to facilitate the transfer of the proceeds of unlawful activities:
(ii) has no apparent business or lawful purpose;
(iii) is conducted for the purpose of avoiding giving rise to a reporting duty under this Act; or
(iv) may be relevant to the investigation of an evasion or attempted evasion of a duty to pay any tax, duty or levy imposed by legislation administered by the Commissioner for the South African Revenue Service; or
(c) the business has been used or is about to be used in any way for money-laundering purposes."

Handling suspicious transactions
This means, when read with the rest of the Act, that an accountable institution may not deal in any transactions unless it has taken reasonable steps to confirm the identity of the client (they can't hide behind a front company). They also have to confirm the nature of the transaction and the source of the funds.

As a practical example, estate agents will not be allowed to keep the identity of their clients confidential if they suspect that clients are purchasing properties with the express purpose of renting them out and then selling them later, thereby laundering the money of its illegal provenance. The days of casually accepting suitcases filled with money are over. Attorneys and Banks will also have to be more vigilant; if they have any suspicions, they must report them within the prescribed period to the centre.

Duty to report
The duty to report is governed by section 37 and is important as it states that subject to the common-law right of attorney-client privilege concerning their communications made in confidence, no duty of secrecy or confidentiality or other restriction on the disclosure of information will apply to the other accountable institutions. However, the attorney client privilege is qualified by section 37 (2) in that the communication must have been made for the purposes of legal advice or litigation which is pending or contemplated or which has commenced, or, if the communication is with a third party, for the purposes of litigation.

Burden on institutions
In conclusion, the administrative load will impact on institutions because they will have to keep detailed records of each transaction, the amounts involved, the names of the parties and the means to verify their identification. In order to promote compliance, accountable institutions such as the law societies will have to adopt internal rules to guide their members.


Postscript: KZNLS index
The KwaZulu-Natal Law Society has had many queries about the workings of the Act and has now completed an index, which is available for public scrutiny.

KwaZulu-Natal Law Society Index