The Iceberg on Money Laundering

Contributor: Mr. Panache
Credits: StevePB

Understanding Financial Offences

While it remains a burden on financial institutions, money laundering is criminalised by the POCA Act of 1998, which suppresses the abuse of the financial systems; enabling the unlawful proceeds of all serious crime and terrorist acts to be identified, traced, frozen and even confiscated. An international treaty in response to the growing concerns over money laundering, the Financial Action Task Force on the essence of these concerns (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international effort.

Meant to be adopted by the different national governments, the recommendations by FATF included measures required by these governments in implementing effective anti-money laundering programmes (financial and legal control measures to fight financial crime). Combating money laundering, the financing of terrorist activities, and the use of the financial systems to commit or facilitate the commission of serious offences requires a solid and consistent rapport between the service provider and institutions such as the FIC and different supervisory institutions.

Most importantly, there needs to be a relationship between the regulatory bodies and financial institutions to closely monitor any unusual transactions, which are likely to raise alerts. The relationship must be consistent and championed by “Faithful Remnants” of the law who will provide the assistance and necessary information to all regulatory bodies, for the purposes of combating money laundering, the financing of terrorist activities and the commissioning of serious offences.

FATF as the mother body of regulations on money laundering, this institution sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and related activities posing threats to the integrity of the international financial system. Monitoring progress of its members in implementing the set out measures that all national governments should take in the effective execution of anti-money laundering efforts, FATF still experiences challenges and notes gaps for improvement.

In as far as South Africa, the Financial Intelligence Centre Act, 38 of 2001 (FICA), which came into effect on 1 July 2003. FICA was introduced to fight financial crime, such as money laundering, tax evasion, and terrorist financing activities. In the 2002-2003 budget R35 million was allocated for the establishment of the FIC. Whether this amount has been sufficient for this purpose depended largely on the extent of international assistance that is rendered in connection with the FIC’s information system. While the South African legislator has made provision for comprehensive anti-money laundering preventative measures by means of the Financial Intelligence Centre Act 38 of 2001, there exists no South African legislation explicitly concerned with the regulation of certain other advisory institutions.

The problem is seemingly in finding the relation between financial integrity and financial inclusion. The fact that South Africa has not fully adopted a comprehensive, robust and compelling risk-based approach to identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed; the AML compliance programs as a matter of best practice, was established but they do not necessarily and effectively compel financial institutions to an obligation of filing Suspicious Activity Reports (SARs).

Certain accounts and persons must be of interest to the banking systems, especially if the individual or entity constitutes positions of power. Positions of power may be classified in terms of what the individual or entity contributes to the economy, but most importantly what their earnings are. Some of these accounts may belong to parastatals of government and the moment there are certain transactions going into these accounts, alerts must be raised especially if the remitter is a private company whose relationship does not make any business sense.

Essentially, certain accounts will need to be categorised as priority accounts, not necessarily monitored, but acted on whenever anything unusual is picked up until ascertained that they will not pose anything detrimental to the financial integrity. Enforcement mechanisms are a definite requirement, clearly improving the effectiveness of the AML programs in detecting money laundering, terrorist financing, and other financial crimes.

Being that the goal of a large number of criminal acts is to generate a profit by carrying out certain activities on the financial systems and following the different processes in an effort to conceal their illegal origin; the legislative mandate of all companies being registered in a country needs to be subjecting people to processes of declaring all the beneficial ownership details, restricting certain linkages of entities, questioning certain rapports between private and public entities, and compelling submissions of earnings in every respective period of reporting.

For as long as one cannot ascertain the legitimacy of a transaction, if the analysis is wrong or the context of the transaction is not looked at with critical importance, criminals will enjoy profits of these money crimes without jeopardising their source. Certain thresholds on bank accounts must be set to regulate the bank balances and their appropriacy, making this approach consistent and putting mechanisms in place to prompt alerts when balances change. Considering Investopedia’s opinion on money laundering when it says, “Banks are required to report large cash transactions and other suspicious activities that might be signs of money laundering”, essentially; AML laws adopted by banks have to be stretched very thin to look beyond the traditional detection mechanism and money laundering combating approaches.