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1. pwc

2. FICA (Financial Intelligence Centre Act) Money Laundering Control Workshop Module 1 - Money Laundering – General Awareness 1 hour Module 2 – Accountable Institutions & their compliance obligations 30 minutes Presenter: Anton Lockem PWC Tax Services Senior Consultant

3. PricewaterhouseCoopers Money Laundering General Awareness Module 1 pwc

4. Money Laundering – General Awareness Module 1 - Agenda • Introduction • Money Laundering legislation: - Internationally - South Africa • How ML legislation effects the firm • Video • Suspicious transaction reporting

5. Money Laundering – General Awareness Module 1 - Agenda (continued) • How to recognise money laundering • Anti-terrorism legislation • Money Laundering database • Conclusion

6. What is money laundering? • The process whereby criminals attempt to: • disguise the true origin and ownership of the proceeds of their criminal activities • without jeopardising its source • Acts committed to fund terrorism (internationally – 2001, SA 2004/5)

7. Money Laundering vs. Fraud Fraudulent activity • loss or disappearance of assets or revenue Money laundering • large quantities of illicit proceeds • being distanced from their source a.s.a.p. • in an undetected manner. • less likely to affect financial statements

8. Theft Fraud Tax evasion Bribery / corruption Forgery Prostitution Drug trafficking Perlemoen smuggling Counterfeiting Extortion/blackmail Robbery Smuggling Origins of laundered money

9. Our vulnerability Includes: • Advising or assisting individuals to organise their personal affairs • Helping to set up trusts, companies or other business structures (locally and offshore) • Acting as Attorney, conveyancer, trustee, nominee or company director • Advice on capital structure, the issue of securities, industrial strategy, mergers and acquisitions • Corporate finance / tax planning • Exchange control advice

10. Why authorities concentrate on money laundering? • Huge business • Previously focused on the crime itself • New approach = attack proceeds of crime • Follow the money trail to the crime • Confiscate proceeds • Deny criminals access to financial institutions & advisors without increased risk of detection • Increasing international pressure

11. Why should you be interested? • Money laundering is a crime • Firm is potentially vulnerable • “Suspicious transactions” must be reported to the FIC • “Accountable institutions” must implement compliance systems • Penalties for non-compliance are severe WE MUST PROTECT OUR REPUTATION & THE FIRM’S NAME

12. The international A-ML Regime (1) International policy-making and standard-setting body Financial Action Task Force (FATF) • Inter-governmental body • 40 recommendations (revised in 2003) • 8 special recommendations to combat terrorist financing (2001) • 33 members – South Africa a member since 2003

13. The international A-ML Regime (2) FATF functions include: • Monitoring compliance by members to international standards • Identifying non-cooperative countries or territories • Nigeria, Philippines, Cook Islands, Guatemala, Indonesia, Myanmar, Nauru • Recently removed: Egypt and Ukraine – to be monitored • Transactions require heightened scrutiny

14. Money laundering legislation in South Africa • Prevention of Organised Crime Act (POCA) • effective date: January1999 • Financial Intelligence Centre Act (FICA) • effective date: February 2002 • The Protection of Constitutional Democracy against Terrorist and Related Activities Act (PROCDATRA) • Passed by parliament on 12 November – not yet gazetted • Prevention of Corrupt Activities Act (PRECCA) • Effective date: August 2004

15. Introduction to POCA • Criminalises the act of money laundering • Criminal confiscation of proceeds of crime • Civil forfeiture of: proceeds, and instruments of offences

16. POCA – Offences (1) Money laundering (Section 4) • Any act in connection with property that has effect of concealing or disguising source or movement thereof, or assists the criminal to avoid prosecution • Where a person knows or ought reasonably to have known that the property is the proceeds of unlawful activities

17. POCA – Offences (2) Proceeds of unlawful activities – section 1 Means - any property or part thereof or any service, advantage, benefit or reward which was derived, received or retained, directly or indirectly, in connection with or as a result of any unlawful activity carried on by any person, whether in the Republic or elsewhere, “Property” Means - money or any other movable, immovable, corporeal or incorporeal thing and includes any rights, privileges. claims and securities and any interest therein and all proceeds thereof

18. POCA – Offences Laundering proceeds of another’s offence (Section 5) • Assisting another to benefit from proceeds of • Acquisition, possession or use of Negligently fails to identify the true nature of illicit property (Section 6) • Acquiring, possessing or using, where you ought reasonably to have known • Negligence is no excuse

19. POCA – Penalties and defences Penalties • Fine of up to R100 million • Imprisonment for up to 30 years Defence • Reporting suspicions to Financial Intelligence Centre (“FIC”) • Compliance with FICA

20. Introduction to FICA FICA creates: • The Financial Intelligence Centre (FIC) • Duties for you! • Duties for the firm!

21. Introduction to FICA Role players: • Any person in business (including all employees) • Accountable Institutions (AI’s) – Schedule 1 • Supervisory Bodies – Schedule 2 • Reporting Institutions (RI) – Schedule 3 Duties: • Reporting suspicious transactions (All role players) • Reporting conveyance of cash (> set amount) outside of SA (All persons) – (NB. Not yet operative) • Comply with money laundering control measures (AI’s & RI’s)

22. List of Accountable Institutions (1) • An admitted attorney (on either practising or non-practising role) 2. Board of executors, trust company, any person who administers trust property per Trust Property Control Act 3. Estate Agent 4. Financial instrument trader 5. Unit Trust Management Company 6. Bank 7. Mutual Bank

23. List of Accountable Institutions (2) • Long term insurance business • Licensed gambling businesses • Forex dealer 11. Money lender against securities 12. Person who carries on business of providing investment advice or broking services, including a PAAB member who carries on such a business. 13. Seller, issuer, redeemer of travel cheques, money orders

24. List of Accountable Institutions (3) • Postbank • Member of a stock exchange • Ithala Development Corporation Approved Investment Manager in terms of: 17. Section 4 (1) (a) of Stock Exchanges Control Act 18. Section 5 (1) (a) of Financial Markets Control Act 19. Person who carries on business of a money remitter

25. List of Reporting Institutions • Motor vehicle dealer (your client?) • Kruger Rand dealer (Section 28 re cash transactions of RI’s not yet operative)

26. Implications for You if you are an Accountable Institution You (if an AI): • Duty to be trained and follow firm’s internal rules for AI’s • General provisions (Reporting suspicious transactions), (conveying of cash outside of SA**) • Threshold Reporting (specified cash transactions **, electronic transfers outside SA **) ** These sections are not yet operative

27. Implications for You if you are NOT an AI You (if not an AI): • General provisions (Reporting suspicious transactions ) • Threshold Reporting (conveying of cash outside of SA**) ** This section is not yet operative • Must not provide investment advice/ intermediary services if not FAISA registered • Auditors - be aware of implications on audits of FICA, particularly if your client is an Accountable Institution

28. FICA – offences and penalties Offences • Failure to report suspicious transactions • Negligent failure to identify suspicious transactions • Tipping off • Failure to implement compliance measures Penalties • Maximum penalty 15 years jail and/or R10 million fine, or • Maximum penalty 5 years jail and/or R1million fine (Compliance procedures)

29. Prevention and Combating of Corrupt Activities Act • Offence to handle the proceeds of corrupt activities • overlaps with general money laundering offences • Creates reporting duties on persons in positions of authority: • All knowledge of corruption / bribery • Offences with element of dishonesty > R100 000 • Report to SAPS

30. IT’S HOME VIDEO TIME! HE’S NOT CRAZY MY HUSBAND WAS A CLIENT OF YOUR FRANKFURT OFFICE IT’S THE CHAOTIC WAY HE RUNS THINGS SUMMARY

31. $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Equities Corporate banking Treasury Debt $ $ $ $ £ account £ account Legitimate asset Money laundering stages Placement Convert cash to monetary instruments or deposit into accounts Layering Move funds to other financial institutions to obscure origin. Integration Acquire legitimate assets or fund activities.

32. $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Equities Corporate banking Treasury Debt $ $ $ $ £ account £ account Legitimate asset Funding of terrorism Distribution Distribute funds to finance terrorist activities Layering Move funds to other financial institutions to obscure link between origin and destination. Placement Deposit potentially legitimate assets into the financial system

33. FICA – Suspicious Transaction Reporting -Section 29 Who must report Suspicious Transactions? • Anyone carrying on a business • Anyone managing / in charge of a business • Anyone employed by a business

34. FICA – Suspicious Transaction Reporting -Section 29(1) When do you report? • Where you know or suspect that: • Firm received / about to receive proceeds of unlawful activities • Firm is a party to a transaction which: • Facilitates or may facilitate transfer of proceeds of unlawful activities • Has no apparent business or lawful purpose • Conducted to avoid reporting duty • May be relevant to the investigation of tax evasion or attempted tax evasion • Firm is used/about to be used in any way for money laundering

35. FICA – Suspicious Transaction Reporting- s29(2), (3) and (4) Transactions that have not yet taken place Transactions about which enquiries are made which will have the above consequences if concluded - also report Other matters: May not disclose that you have reported to any other person (tipping off) Suspicious transaction reporting overrides confidentiality restrictions We must report to FIC a.s.a.p. but no longer than 15 days after first acquiring the knowledge or suspicion

36. FICA – Suspicious Transaction Reporting Procedure (1) What is the procedure for reporting? Our procedure • First discuss the matter with the engagement director • Reporting is a personal responsibility • Cannot be overridden by the engagement director or management. • If after discussions, you still suspect money laundering you must report this to Mike Fairbank, the firm’s Money Laundering Compliance Officer ("MLCO"). • If you are an accountable institution, this discharges your personal responsibility. • If you are not an accountable institution, the MLCO will ensure that your responsibility is discharged in an appropriate manner.

37. FICA – Suspicious Transaction Reporting Procedure (2) What next? • Initially report your suspicions to MLCO by phone • This could save you needlessly filing a report • Follow up in writing by submission to MLCO of your report on the PwC Suspicious Transaction Internal Reporting Form • Ensure you get a receipt • The MLCO will investigate all reports • If he concludes that we have the necessary knowledge or reasonable suspicion, he will report the matter to the Financial Intelligence Centre ("FIC").

38. FICA – PwC Suspicious Transaction Reporting Procedure (3) If you discover or suspect money laundering in the course of your client work you must report through the firm’s procedures, independently of any procedures the client might have. If you detect that a client has entered into a suspicious or unusal transaction with a third party, you will not ordinarily have a duty to report this under FICA. For the reporting duty to arise, the firm must become a party to such a transaction, or be abused in any way for money laundering purposes. If we are the auditors we will need to consider the PAAB Act requirements re Material Irregularities

39. FICA – Suspicious Transaction Reporting Penalties for non compliance • Imprisonment – up to 15 years • Fine - up to R10 million DAMAGE TO REPUTATION

40. Suspicious transactions & PwC (1) Main risks for Firm are: Being paid from proceeds of unlawful activities Being used for money laundering purposes because of our reputation Being party to a relevant transaction should generally be greater risk due to the nature of your business

41. Suspicious transactions & PwC (2) Preventative strategies could be: Thorough client & assignment acceptance procedures Strict disengagement policy – avoid being a party to a transaction (but still need to consider if we have been used for ML purposes) Compulsory Client Identification & Verification Procedures for Accountable Institution functions Emphasis on knowing our client’s business & providing tailored advice (e.g. CAKE)

42. Suspicious transaction identification Identification of Suspicious Transactions • Depends on what we know about our clients • Consider: • Nature of transaction • Value of transaction • Clients with operations in high risk countries • Commercial logic? • Unnecessarily complex or artificial? • Does it “make sense”?

43. Suspicious transaction identification South African trends • Purchase of goods and properties – enjoying proceeds • Abuse of businesses and business entities • E.g. cash based front businesses • Cash and currency – buying credits in cash, convert into forex • Informal sector – largely unregulated • Sham stokvels • Abuse of financial institutions – e.g. banks & insurance

44. Suspicious transactions – red flags General • Use of many different firms of Attorney’s and advisers for connected companies and businesses. • Transactions passed through intermediaries (e.g. attorneys, PwC) for no obvious purpose. • Unusually complex group structures where complexity does not appear to be warranted. • Accounting systems that fail to give an adequate audit trail.

45. Suspicious transactions – red flags Identification • Known criminals • Difficult to establish identity or beneficial ownership • Reluctance to provide sufficient details • Clients who you do not meet (3rd party introductions) • Unknown source of funds / not consistent with profile. • Referrals from offices / institutions based in countries known for drug trafficking and production • New clients – “Walk ins” particular at last minute on trip to SA

46. Suspicious transactions – red flags Transactions • Large cash transactions – “hot” money • Lacking commercial logic – does not “make sense” • Outside of the normal course of business – method of payment / receipt not usual business practice • Large payments / loans for unspecified services to consultants, related parties, employees or government employees. • Abnormally extensive or unusual related party transactions. • Unauthorised / improperly recorded transactions.

47. Suspicious transactions – red flags Transactions (continued) • At amounts that are undervalued or overvalued + double billing • Unusual amount of cash transactions for substantial amounts / many small transactions adding up to a substantial amount. • Transfers from 3rd party bank accounts / 3rd party cheques • Payments “in error” to be forwarded or cancelled • Transfers to numbered bank accounts. • Use of bearer cheques

48. Suspicious transactions Suspicious Transactions See FAQs in the PwC Anti-Money Laundering Manual ANY QUESTIONS?

49. The Protection of Constitutional Democracy against Terrorist and Related Activities Bill (“PROCDATRA”)A POCA – Brings in property owned or controlled by terrorists or persons involved in such activities or financing thereof FICA Purpose will include combating of terrorism and related activities New section 28A – Accountable Institutions have duty to report property of entities or persons who have committed a PROCDATRA offence in their possession or control Section 29 (reporting suspicious transactions) will encompass property which is connected to a PROCDATRA offence re financing of terrorism, in addition to proceeds of unlawful activity

50. Money Laundering vs. Fraud Fraudulent activity • Likely to affect financial statements • Loss or disappearance of assets or revenue Money laundering • Less likely to directly affect financial statements if your client is being abused for ML purposes • But, if using company as a front to launder large amounts of illicit cash proceeds – watch for fictitious sales