Krevania Pillay, Associate COMMON FINANCIAL CRIME TYPOLOGIES - - PowerPoint PPT Presentation

FINANCIAL CRIME IN SOUTH AFRICA : THE 2019 EDITION

Krevania Pillay, Associate

COMMON FINANCIAL CRIME TYPOLOGIES

OVERVIEW

• Emerging financial crime trends and typologies
• The hallmarks of an effective risk management and

compliance program

• The enhanced due diligence measures applicable to

PEPS

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FIC assesses information received from AIs & reporting institutions Produces reports on common methods for ML / TF ML/TF activity + similar methodology = Typology Reports intend to assist government / identified sectors to understand ML/ TF threats

FINANCIAL CRIME TRENDS TYPOLOGIES

Typology theory:

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FINANCIAL CRIME TRENDS TYPOLOGIES

Typologies of Financial Crime:

419 Scam Fraudulent company scams / change of banking details fraud Account hijacking/ use of 3rd party account Duplicate payments

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FINANCIAL CRIME TRENDS TYPOLOGIES

419 Scam:

Worlds lds most most commo mmon sca scam Ad Advan vance fee fr fraud Persua suades s recipien ipient to advan vance mon money y to fr frau audst dster er Co Continuo inuous s request sts s for mon money y / / extortion ion

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FINANCIAL CRIME TRENDS TYPOLOGIES

• Unknown sources of money & unrealistic value of funds presented
• Communications contain grammatical errors
• Communications contain request for banking details

Red flags

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FINANCIAL CRIME TRENDS TYPOLOGIES

Duplicate payments:

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FINANCIAL CRIME TRENDS TYPOLOGIES

• Duplication of payments from a single account
• Flow of funds inconsistent with normal service provider profile
• Purchase of high value assets / lifestyle changes by the fraudster

Red flags

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FINANCIAL CRIME TRENDS TYPOLOGIES

Fraudulent company scams:

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FINANCIAL CRIME TRENDS TYPOLOGIES

Change of bank details fraud:

Fraudulent change of bank account details Request for funds to be paid into fraudulent account Commonly perpetrated using phishing Usually change of banking details of established business

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FINANCIAL CRIME TRENDS TYPOLOGIES

Red flags:

• Using fraudulent documentation to open bank accounts for companies with

confusingly similar names to existing entities

• Change of banking details of established business
• Change of banking details unexpectedly / mid contract / when payment is expected /

requested

• Entities receive money without any corresponding commercial activity
• New accounts receive large credits followed by immediate withdrawal

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FINANCIAL CRIME TRENDS TYPOLOGIES

Unemployed / low income earners are targeted Paid to open bank account for 3rd party / Agrees Hijacker is able to move money undetected Accompanied by identity theft

Account hijacking / use of 3rd party account:

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FINANCIAL CRIME TRENDS TYPOLOGIES

Red flags:

• Multiple monthly deposits beyond the scope of salary payments from an employer
• Unexplained deposits into bank account of unemployed spouse / minor
• Purchasing assets in the name of 3rd parties such as siblings, spouses & minors
• Attorneys trust account receiving numerous unexplained payments from clients

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HAVING AN EFFECTIVE RMCP

2 October 2017 - various provisions introduced in FICA Amendment Act enacted Strengthens South African financial system against abuse through money laundering and financing of terrorism Applies to Accountable institutions (“AI’s”) - Often used as vehicles to launder money or proceeds

• f criminal activities

HAVING AN EFFECTIVE RMCP

Financial Intelligence Centre Act No 38 of 2001 (“FICA”):

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HAVING AN EFFECTIVE RMCP

Section 42 of FICA:

AI’s 2 April 2019 Adopt & implement an RMCP

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:

• AI’s - develop, document, maintain and implement programme for

AML and CFT risk management and compliance

• RMCP must enable AI to identify, assess, monitor, mitigate and

manage risk arising from AI’s products / services or ML, TF & related activities

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HAVING AN EFFECTIVE RMCP

Section 42 of FICA:

AI’s 2 April 2019 Adopt & implement an RMCP

HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:

• AI’s - develop, document, maintain and implement programme for

AML and CFT risk management and compliance

• RMCP must enable AI to identify, assess, monitor, mitigate and

manage risk arising from AI’s products / services or ML, TF & related activities

HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:

• Provide for manner in which AI:

 determines if person is prospective client in process of establishing business relationship / entering into single transaction or has already done so  complies with s20A of FICA: Prohibition on establishing business relationship / concluding single transaction with anonymous client / client with apparent false name  establishes & verifies identity of persons

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:  determines whether future transactions consistent with institution’s knowledge of prospective client  conducts additional due diligence measures in respect of legal persons, trusts & partnerships  conducts ongoing due diligence & account monitoring in respect

• f business relationships

 examines complex / unusually large transactions & unusual patterns of transactions & keeps written findings of the above

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:  confirms information relating to client when it has doubts about veracity of information received  performs customer due diligence requirements when it suspects that transaction / activity is suspicious  terminates existing business relationships  determines whether prospective client is foreign prominent public official or domestic prominent influential person

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:  conducts enhanced due diligence for higher-risk business relationships & when simplified customer due diligence might be permitted in institution  maintains records as required by FICA

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:

• RMCP must:

 enable AI to determine when transaction / activity reportable in terms of AI’s reporting obligations & provide process for reporting information  provide for its implementation in AI’s branches, subsidiaries or foreign

• perations & processes relating to implementation

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HAVING AN EFFECTIVE RMCP

Risk Management & Compliance Programme:

• AI required to indicate whether any of above requirements not applicable - if so,

reasons?

• Board of directors, senior management / other persons exercising highest level of

authority in AI must approve RMCP

• AI must review RMCP at regular intervals - ensure it remains relevant to AI’s
• perations & compliance with FICA
• AI must, on request, make copy of documentation describing RMCP available to FIC /

relevant supervisory institutions

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HAVING AN EFFECTIVE RMCP

Section 42A of FICA:

Employee compliance Dedicated Compliance function Compliance with RMCP

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HAVING AN EFFECTIVE RMCP

Section 42B of FICA:

FIC’s

• bligations

Draft Guidance Consider submission

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HAVING AN EFFECTIVE RMCP

Section 43 of FICA:

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WHAT IS PEP RISK?

“PEP risk is the very real possibility that over breakfast tomorrow morning, you will read that your bank holds the accounts of one of the world’s most corrupt leaders – and you had no idea, and you are being held responsible. It’s the risk of the bank’s shares dropping because of this news. It’s the risk of a court case filed by the major shareholders against the bank’s management for incompetence and failure to comply with legislation. It’s the risk of losing clients, losing millions of dollars, paying crippling fines and having all your correspondent banking relationships terminated.” White paper produced by World-Check. World-Check provides risk intelligence to more than 2,700 financial institutions and government agencies in 153 countries.

• Politically exposed person (“PEP”) defined by Financial Action Task Force (“FATF”) as

individual who is / has been entrusted with prominent public function

• Recognised that many PEPs in positions that can potentially be abused for purpose of:
• committing money laundering (“ML”) offences
• conducting activity related to terrorist financing (“TF”)
• Potential risks associated with PEPs - justify application of additional anti-money

laundering / counter-terrorist financing (“AML/CFT”) preventive measures in respect of business relationships with PEPs

WHO IS A PEP?

FATF’S 5 CATEGORIES OF PEPS

Foreign PEPs Family Members Close Associates International Organisation PEPs Domestic PEPs

PROMINENT INFLUENTIAL PERSONS (“PIPS”)

Accountable institutions required to apply a higher standard of CDD to PIPs Such persons likely to be exposed to corruption, on a larger monetary scale, in their day to day business dealings Individuals, both domestic and foreign, who

• ccupy prominent

positions in public and private sector

SECTION 21F & 21G OF FICA

Section

• n 21

21G & 21 21F: Domestic PIPs Ps / Foreign gn Promi minent nent Publ blic Official als (“PPOs”)

• if accountable institutions determine that a prospective client whom it engages to

establish a business relationship

• r the beneficial owner of that prospective client
• is a domestic PIP or foreign PPO
• and according to its Risk Management and Compliance Programme
• the prospective business relationship / single transaction entails higher risk it

must:

SECTION 21F & 21G OF FICA

Obtain senior management approval for establishing business relationship Take reasonable measures to establish source of wealth & source of funds Conduct enhanced

• n-going

monitoring of business relationship

EDD APPLICABLE TO PIPS

Accountable institutions required to scrutinize transactions throughout business relationship with customer, ensure consistency with accountable institution's knowledge of customer EDD measures congruent with FATF’s recommendation 12 Most obvious effect enhance accountable institution's ability to detect unusual transaction concerning customer

SECTION 21H OF FICA

Family members ers and and known close assoc

• ciat

ates es Sections 21F and 21G apply to immediate fam family me members mbers & known nown clos

• se

assoc

• ciat

ates es of person in foreign or domestic prominent position, as case may be

SECTION 21H OF FICA

FOREIGN PPOS

Kassel v Thompson Reuters (Markets) SA (16/34227) [2018] ZAGPJHC 413 (12 June 2018)

• Case concerned agreed / accepted method for determining period to declassify

PEP once individual has exited office which gave rise to initial classification

• Kassel argued that his continued listing as PEP, long after his exit from office

which gave rise to initial classification was defamatory

• High Court reasoned that political exposure attached to individuals by reason
• f occupancy of high office does not itself imply that such individuals have

abused office / are otherwise corrupt

• No presumption that merely listing person as PEP renders them suspect

RECENT CASE LAW

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RED FLAGS AND SUSPICIOUS BEHAVIOUR

Hesitant to provide information relating to source of wealth and source of funds Provides inaccurate / incomplete information Makes use of services of FI

• r DNFBP that would

normally not cater to high value clients Funds repeatedly moved to & from countries to which PEP does not have ties Denied entry to country (Visa denial)

31 October 2018 41

ATTEMPTS BY PEPS TO SHIELD IDENTITY

Use of family members / close associates as legal owner Use of intermediaries Use of corporate vehicle without valid business reason Use of corporate vehicles to obscure ultimate beneficial ownership

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Substantial authority over / access to state assets and funds, policies and operations Control over regulatory approvals, including awarding licences and concessions Formal or informal ability to control mechanisms established to prevent and detect ML/TF Does not reveal all positions (including those that are ex

• fficio)

PEPS INVOLVEMENT IN BUSINESS

Contact Krevania Pillay, Associate Corporate Investigations Sector (Cliffe Dekker Hofmeyr) T: +27 11 562 1317 M: +27 72 764 7424 E: Krevania.Pillay@cdhlegal.com