Confidential

THE FINANCIAL INTELLIGENCE CENTRE ACT, 2001

MANUAL

INTERNAL RULES

V2.10

IMPORTANT NOTICE: USE OF THIS DOCUMENT IS LIMITED TO AUTHORISED USERS ONLY AND UNDER NO CIRCUMSTANCES SHALL IT SHOWN OR FORWARDED TO UNAUTHORISED PERSONS BY THE INTENDED RECIPIENT OR ANY OTHER PERSONS.

Contents

  1. Glossary
  2. Responsible Compliance Persons
  3. Money Laundering Overview
  4. Legislative History
  5. Financial Intelligence Centre Act 2001 “FICA”
  6. Financial Intelligence Centre “FIC” (The Centre)
  7. The Role of the section 43 Compliance Officer(Money Laundering Reporting Officer ‘MLRO’
  8. Internal Rules
  9. Duty to Identify & Verify Clients
  10. Acceptable KYC procedures for face-to-face verification
  11. Acceptable KYC procedures for non-face-to-face verification
  12. Risk Profiling of clients and Enhanced Due Diligence (EDD)
  13. Over and above KYC procedures
  14. Status of ‘faxed copies’
  15. Does an Accountable Institution need to KYC the client & premium payer, if the premium payer is different from the client?
  16. Alternative means of verification if ID has been lost or stolen
  17. Alternative means of verification of residential address of natural persons
  18. Politically Exposed Persons (PEPs)
  19. General Exemptions
  20. Transactions Exempted
  21. Duty to keep records
  22. Duty to report suspicious & unusual transactions
  23. Terrorism financing and the POCDATARA Act
  24. Cash Threshold Reporting
  25. Training
  26. FICA Contact Centre
  27. Reader Declaration

ANNEXURE A

List of Accountable Institutions

ANNEXURE B

Risk Indicators

ANNEXURE C

Summary of Offences in terms of FICA

ANNEXURE D

Reporting of Suspicious and Cash Transactions- Reporting Lines

ANNEXURE E

Protection of Constitutional Democracy against Terrorist and Related Activities Act, Act 33 of 2004 ("POCDATARA")

ANNEXURE F

Policy- Risk Rating of Clients

1. GLOSSARY

AML – Anti-Money Laundering

CFT – Combating the Financing of Terrorist Activities

FAIS – Financial Advisory & Intermediary Services Act, 37 of 2002

FATF – Financial Action Task Force

FICA – Financial Intelligence Centre Act, 38 of 2001

FIC – Financial Intelligence Centre (The Centre)

FSB – Financial Services Board

FSP – Financial Services Provider

KYC – Know Your Client

MLRO (Money Laundering Reporting Officer) – Section 43 Compliance Officer

PEP – Politically Exposed Person

POCA – Prevention of Organised Crime Act 121 of 1998

POCDATARA - Protection of Constitutional Democracy against Terrorist and Related Activities Act, 33 of 2004

STR – Suspicious Transaction Report

TPR – Terrorist Property Report

2. RESPONSIBLE COMPLIANCE PERSONS

MLRO(s 43 Compliance Officer)

{INSERT NAME} (“the MLRO”)is the person appointed in terms of Section 43 (b) of FICA who is responsible to ensure compliance by (i) the employees of {INSERT COMPANY NAME} with provisions of FICA and the internal rules applicable to them (ii) {INSERT COMPANY NAME} with its obligations under FICA. {INSERT NAME} (“the MLRO”) is contactable on {INSERT PHONE NUMBER} and/or {INSERT EMAIL}.

FAIS Compliance Officer

The person responsible for monitoring FAIS compliance in terms of Section 17 of the Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS”) at {INSERT COMPANY NAME} is{INSERT NAME} (“The FAIS Compliance Officer”) who is contactable on {INSERT PHONE NUMBER} and/or {INSERT EMAIL}.

Please note that an externally appointed FAIS Compliance Officer cannot also have the role of a MLRO.

3. MONEY LAUNDERING OVERVIEW

Anti-money laundering legislation makes it a crime to commit money laundering or to assist anyone else to do so.

Introduction

The objective of many criminal acts is to generate funds for use and enjoyment by the perpetrators of the original crime. Money laundering is the processing of criminal proceeds to disguise their original source and may be defined as the use of a complex series of transactions to conceal the ultimate source of money holdings. It seeks to introduce the proceeds of criminal activity into the formal or legitimate financial system. If the money laundering process is successful, criminals are able to maintain control over their illicit gains and provide a legitimate cover for the source of their illegally obtained funds.

The Phases of Money Laundering

The money laundering activity is known to take place in three phases - placement, layering and integration, as laid out below:

  • Placement

This phase of the money laundering activity entails the physical disposal of the funds generated from illegal activities by depositing it with financial or other institutions such as companies, insurance houses and casinos etc.

  • Layering

During this phase attempts are made to complicate the audit trail and to disguise the true nature of the funds by using numerous layers of financial transactions such as annuity policies, transfers between business entities and purchase and negotiation of bearer instruments.

  • Integration

The third phase of the activity is characterised by the introduction of the proceeds into the economy, seemingly as funds from a legitimate business activity.

Why is money laundering a hot topic at the moment?

The main global policy making body for anti-money laundering controls frameworks and controls is the Financial Action Task Force (‘FATF’). FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. It works to generate the necessary political will to bring about legislative and regulatory reforms in these areas.

FATF has published 40 Recommendations + 9 Special Recommendations on Terrorist Financing in order to meet this objective. The 40 recommendations were reviewed and updated in 2003 (previously updated in 1996) to make them more relevant and reflect the increasing sophistication of the launderers and therefore increased requirements of the financial system to combat them. The 40 recommendations are now much more stringent than most legislative requirements in the developed world and almost without exception, those in developing economies.

In response, most governments in the developed world (who are members of FATF) are enhancing or overhauling their existing legislative and regulatory requirements to conform to the requirements of the FATF 40 recommendations. South Africa is one of the member countries & must strive to conform to the FATF 40 recommendations.

4. LEGISLATIVE HISTORY – PRE FICA

Initially South Africa’s anti-money laundering legislation comprised the Drugs and Drug Trafficking Act, 1992. This legislation dealt with the laundering of proceeds generated exclusively by the drug trade. Internationally, anti-money laundering regulations no longer apply only to organised crime, i.e. drug and terrorist related activities. They cover the illegal proceeds of all criminal conduct (“all crimes”) including theft, fraud, tax evasion, terrorism and prostitution.

In 1996 the Proceeds of Crime Act was introduced in South Africa, and the fight was on against the money laundering of proceeds generated by all crimes as the Proceeds of Crime Act not only dealt with laundering of drugs’ proceeds, but also laundering of the proceeds of any crime.

Both the Drugs and Drug Trafficking Act and the Proceeds of Crime Act were repealed. The amended provisions of the Proceeds of Crime Act were re-enacted in 1998 in the Prevention of Organised Crime Act (POCA).

POCA defines the punishable offences relating to the proceeds of unlawful activities and provides for the confiscation and forfeiture of assets. The offences are grouped into:

  • Money laundering
  • Assisting another to benefit from the proceeds of unlawful activities
  • Acquisition, possession or use of proceeds of unlawful activities

5. FINANCIAL INTELLIGENCE CENTRE ACT “FICA”

In 2001 FICA was passed by the South African parliament. The legislation covers the illicit proceeds of all criminal conduct or “all crimes” including theft, fraud, tax evasion and prostitution. FICA complements and works together with the POCA. FICA was introduced in phases. The requirement to report suspicious activity has been in place since February 2003, while the requirement to identify and verify clients came into being as from 30 June 2003.

FICA establishes a regulatory anti-money laundering system that “is intended to break the cycle used by organised criminal groups to benefit from illegitimate profits” and maintain the integrity of the financial system.

In 2004 the Protection of Constitutional Democracy Against Terrorist and Related Activities Act, 33 of 2004 was enacted (“POCDATARA”). POCDATARA has amended Section 29 of FICA to extend the reporting of suspicious and unusual transactions to also cover “property which is connected with an offence relating to the financing of terrorist and related activities.”

Key FICA Obligations (in terms of Chapter 3 of the FIC Act)

FICA imposes the following obligations on those institutions designated as accountable in terms of Schedule 1 of FICA:

  • “Know your client” obligations (various identification and verification requirements must be met before a business relationship is formed or transaction entered into with a client.
  • Record keeping obligations
  • Reporting obligations (to the Financial Intelligence Centre)
  • Development and implementation of internal rules to aid compliance with these obligations which is to contain adequate procedures for
  • Client identification and verification
  • Retention of client verification records
  • Procedures for reporting suspicious activity
  • Summary of the act
  • Training of staff to ensure staff are aware of
  • Their legal obligations under the Act, e.g. duty to report.
  • The Accountable Institution’s rules and procedures related to complying with the Act.
  • How to recognise suspicious or unusual transactions.
  • The steps to be taken when a transaction is considered suspicious.

FSPs should appoint a senior person within the organisation as the “MLRO” (“Section 43 Compliance Officer”). The individual must be free to act on his/her own authority, and must be informed of any knowledge or suspicion related to money laundering activity.

What is meant by a “transaction” is pivotal to FICA. A 2004 Guideline from FIC defines a transaction as “Any instruction or request by a client to an accountable institution to perform some act to give effect to the business relationship between them can be regarded as a transaction.”

A key requirement of the money laundering regulations is that not even ONE single transaction may be concluded unless certain steps have been taken to identify the client.

Closing of an account amounts to a transaction

Section 21 prohibits accountable institutions from establishing business relationships or entering into single transactions with their clients unless they have established and verified the identities of their clients, or established and verified the identities of persons representing their clients. A transaction is defined in the FIC Act as a transaction concluded between a client and an accountable institution in accordance with the type of business carried on by that institution.

The closing of an account is an action which terminates a business relationship. This is inherently linked to the existence of a business relationship and is performed in the course of that business relationship.

Hence the termination of a business relationship in accordance with the nature of an accountable institution’s business, such as the closing of an account by an accountable institution which provides account-based services to its clients, amounts to a transaction in the course of that business relationship.

It is the FIC’s view that the closing of a client’s account by an accountable institution and the transferring of the remaining balance to the client amounts to the conclusion of a transaction with a client in the course of a business relationship.

An accountable institution may not conduct a transaction in the course of a business relationship unless it has complied with Part 1 and Part 2 of Chapter 3 of the FIC Act as well as the relevant Regulations.

The failure of institutions to register with the FIC constitutes a contravention of the IC Act, which carries a maximum fine of R10 million or 5 years in prison, or an administrative sanction. This sanction may include, but is not limited to, a reprimand, restriction of business activities or a financial penalty not exceeding R10 million for natural persons and R50 million in respect of any legal person.

6. FINANCIAL INTELLIGENCE CENTRE (“The Centre”)

The Centre is created in terms of FICA and co-ordinates all suspicious transaction reports (STR’s), terrorist property reports (TPR’s) and Cash threshold reports (CTR’s) received from accountable institutions and refers intelligence to the appropriate authority at its discretion for investigation.

The Financial Intelligence Centre performs the following functions:

  • Monitoring of compliance with FICA
  • The provision of guidance to Accountable Institutions and Supervisory Bodies
  • The gathering and sharing of information on money laundering activities with investigating and law enforcement authorities
  • The synchronising of efforts to combat money laundering and the financing of terrorism and related activities.

7. MONITORING OF COMPLIANCE The Roleof the MLRO:

Section 43(b) of the FIC Act requires all accountable institutions to appoint a person (compliance officer or MLRO) with the responsibility to ensure compliance by the accountable institution and its employees with the obligations imposed by the provisions of the FIC Act.

The FIC Act does not list any specific fit and proper requirements to be appointed as a compliance officer ‘MLRO’ in terms of Section 43(b). However, it is recommended that a compliance officer has a thorough understanding of the institution and the application of the FIC Act to the institution.

The compliance officer ‘MLRO’ must have sufficient authority and seniority within the institution to be able to fulfil the responsibilities in terms of the FIC Act as well as sufficient independence to have access to all areas of the institution’s operations to effect corrective actions accordingly.

A compliance officer ‘MLRO’ should be formally appointed by the FSP and fully able to monitor compliance and implement corrective measures to ensure compliance with the FIC Act, and should preferably be at the management or executive level of an accountable institution. Given the differences in nature, size and complexity of businesses, management may be interpreted broadly to mean a person who undertakes the handling, direction or control of FIC Act compliance obligations within a particular accountable institution. This is particularly relevant where the accountable institution is a small business.

An accountable institution that fails to comply with the provisions of section 43 of the FIC Act is guilty of an offence and can be liable to imprisonment for a period not exceeding five years or to a fine not exceeding R10 Million.

  • The overall responsibility for money laundering prevention lies with senior management and controllers of an institution.
  • The MLROis responsible for the oversight of the institution’s anti-money laundering activities and is the key person in the implementation of the anti-money laundering strategy of the institution.
  • The MLROwill act as the “appropriate person” required to be appointed to receive and process internal and external suspicious transaction reports. The MLROwill also act as a central point of contact with the law enforcement agencies in order to handle the reported suspicions of their staff regarding money laundering.
  • The MLRO needs to be senior to be free to act on his/her own authority and to be informed of any relevant knowledge or suspicion in the institution. The type of person appointed as the MLROwill vary according to the size of the institution and the nature of its business, but he/she should be sufficiently senior to command the necessary authority. Larger institutions may choose to appoint a senior member of their compliance, internal audit or fraud departments. In small institutions it may be appropriate to designate the Operations Manager. When several subsidiaries operate closely together within a group, there is much to be said for designating a single MLROat group level.
  • Where an institution has branches or offices in other jurisdictions, the functions of the MLROmay be delegated to other persons within those branches or offices. Where such functions are delegated, the regulatory authorities will expect the MLRO to take ultimate responsibility for ensuring that the requirements of the AML requirements are applied to those operations.
  • A significant degree of responsibility is required by the MLRO, he is required "to determine" whether the information or other matters contained in the transaction report he has received gives rise to knowledge or suspicion that a customer is engaged in money laundering.
  • The MLRO must take steps to validate the suspicion in order to judge whether or not a report should be submitted to FIC. In making this judgment, he must consider all other relevant information available to him concerning the transaction or applicant to whom the report relates. This may require a review of other transaction patterns or business in the same name, the length of the business relationship and referral to identification records held. If after the review, he decides that there are no facts that would negate the suspicion, then he must disclose the information to the Centre. The MLROalso needs to pass onto the Centre, issues which he/she thinks appropriate and can be expected to liaise with the Centre on any questions of whether to proceed with a transaction in the circumstances.
  • The MLROmust have reasonable access to information that will enable him to undertake his responsibility. The MLROshould keep a written record of every matter reported to him, of whether or not the suggestion was negated or reported, and of his reasons for his decision.
  • The MLROshould ensure that the institution provides training for its employees to enable them to comply with the provisions of FICA and the FICA Internal Rules applicable to the institution.
  • The MLROwill be expected to act honestly and reasonably and to make his determinations in good faith. Provided the MLRO or an authorised deputy act in good faith in deciding not to pass on any suspicions report, there will be no liability for non-reporting if the judgment is later found to be wrong.
  • Care should be taken to guard against a report being submitted as a matter of routine to the Centre without undertaking reasonable internal enquiries to determine that all available information has been taken into account.

Internal Reporting Procedures and Records

Reporting lines:

Reporting lines should be as short as possible, with the minimum number of people between the person with the suspicion and the MLRO. This ensures speed, confidentiality and accessibility to the MLRO. However, in line with accepted practice, some financial sector businesses may choose to require that such unusual or suspicious transactions be drawn initially to the attention of supervisory management to ensure that there are no known facts that will negate the suspicion before further reporting to the MLROor an appointed deputy.