The Money Laundering and Terrorist Financing Report 2022

In March 2022, the Financial Intelligence Center (FIC) published a report dealing with the assessment of the inherent money laundering and terrorist financing (MLTF) risks for legal practitioners.

The process to approval for extending a Sectional Title Units

Money laundering (ML) can be defined as the attempt to give funds derived from criminal activities the appearance of legitimacy.

Terrorist financing (TF) is the process by which individual terrorists or terrorist organisations obtain funds to commit acts of terrorism.

The legal profession is one of the non-financing sectors identified by the international anti-money laundering community as potentially highly vulnerable to MLTF. In dealing with international money laundering and the risks associated with legal practitioners, the report specifically mentions services provided by the legal industry. These include:

  • Advising on creating legal entities, including shell companies and trusts.
  • Property conveyancing services.
  • The provision of client accounts.
  • Establishing and managing charities.

The use of legal entities to recover fictitious debt has also been identified as a method to possibly move funds from one entity or person to another to give criminal proceeds the appearance of legitimacy. 

It is important to note that all legal practitioners have a reporting responsibility under the FIC Act. 

Statistics

During the five years from April 2016 to March 2021, legal practitioners filed a total of 11 966 cash threshold reports at an average of 2 393 per year. During the same period, the sector filed a total 1 160 suspicious and unusual transaction reports at an average of 232 per year. This volume of reporting can be regarded as very low considering that as of 31 March 2021 there were 16 059 legal practitioners, including branches, registered with the FIC. 

This limited number of reports could possibly be the result of a limited understanding of the risks in the sector.

As most reports filed in the legal sector relate to cash threshold, it can be assumed that cash is still being used and appears prevalent in the legal practitioner sector. This makes attorneys even more vulnerable to money laundering abuse. 

It is important that legal practitioners consider the following risk factors when conducting their daily business. The products and services legal practitioners provide that are internationally recognised as more likely to be abused by criminals in the money laundering process include:

  • Conveyancing: Legal practitioners who are conveyancers may knowingly or unwittingly assist criminals by falsifying documents, drafting documents with overstated or understated value of properties, facilitating the transfer of properties into third parties, and establishing complex loans and financial arrangements.
  • Business in a client account: Legal practitioners might be requested to assist with an investment that never takes place or where the funds eventually end up in a third-party account.
  • Formation and management of legal entities: Legal practitioners might be requested to create and assist in managing fictitious entities, complex legal structures, or shell companies that are aimed at hiding the true ownership of assets through different layers of legal structures. 

Client risk

Legal practitioners are required to assess their client risk profiles in accordance with their Risk Management and Compliance Programme. When dealing with their clients, legal practitioners should be aware of the following scenarios or behavior that could point to MLTF. 

  • Clients trying to conceal their identities.
  • Transactions inconsistent with stated income or occupation.
  • Clients using an unusual source of funds to transact.
  • Transactions that do not have a legitimate or economic reason.
  • Clients ceasing their business relationships on requests for customer due diligence (CDD) information. 

Transaction risk

Criminals will potentially use legal practitioners to act on their behalf, thereby giving an impression of legitimacy to transactions involving the proceeds of crime. It is therefore important to monitor the nature and purpose of client engagements. Examples of transactions that are potentially high risk for money laundering include:

  • The use of cash or crypto currencies in transactions.
  • The reversing of transactions with the request to repay funds already paid.
  • Transactions that do not make economic sense.
  • Prices of obtained or disposed assets that are not market related.
  • The use of cash in the buying, selling, and renting of properties.

In South Africa, cash is still used extensively, and this can be seen from the number of cash threshold reports filed in the legal environment. Legal practitioners must also be aware of instances where cash is paid into their business accounts and into the accounts of their clients.

Risks relating to delivery channels

Legal practitioners must be aware of the delivery channels they use to attract and deal with clients. Not onboarding clients in a face-to-face manner may increase the risk of the legal practitioner being abused by criminals to launder the proceeds of crime. 

Where an intermediary is used to onboard clients, a legal practitioner must do proper due diligence on the intermediary and its business and must be familiar with the risk mitigation process and procedures the intermediary might have in place.

Various forms of technology are used to advertise services and to conduct business. Legal practitioners who advertise their services on social media platforms, or who are considering conducting business with clients via social media platforms, must be aware of the higher potential risks associated with the less stringent verification requirements of social media. 

Where social media platforms are used to share information on products or services or to onboard clients, a legal practitioner must ensure that these clients are properly identified and verified and that all the relevant information pertaining to the risks posed by these clients is obtained. 

Third-party service providers that introduce clients to the practice must be properly identified and verified to ensure they are above board. The payment of funds through a third party could be done to disguise the source of funds or certain assets. The legal practitioner must always ensure that he or she fully understands the source of funds and the reason for constructing the transaction in this way.

A typical example of risk associated with delivery channels is where a legal practitioner is introduced to a client through an estate agent. In this instance, the risk associated with the use of an intermediary can be mitigated by the verification of the agent’s fidelity fund certificate. (This is already a requirement of the Property Practitioners Act and is therefore not a good example of risk mitigation.)

Geographic risk

Some foreign jurisdictions pose a higher risk for money laundering, and clients from these jurisdictions may therefore also pose a risk. The fact that transactions can take place electronically across national jurisdictions increases the risk associated with this type of foreign jurisdiction.

Geographic location and services provided will also be a risk factor. International and domestic experience indicates that criminals are attracted to high-value immovable property located in exclusive or seaboard areas of South Africa. Legal practitioners should be especially vigilant in these areas.

Potential high risk is posed by clients from countries with the following characteristics:

  • Countries subject to a travel ban.
  • Countries which the Financial Action Task Force regards as having high ML risk.
  • High-secrecy jurisdictions.
  • Tax havens.
  • Countries known to have high levels of organised crime and corruption, or where terrorist organisations are known to operate.

Terrorist financing risk

Legal practitioners providing services to NPOs and NGOs should ensure that the funds are used in accordance with the stated objectives of these organisations. Legal practitioners must further be aware of the screening process to ensure that clients are not on the United Nations sanctions list.

Indicators of money laundering and terrorist financing activity for the legal sector

The following could be regarded as MLTF vulnerabilities and risks associated with legal practitioners:

  • The use of cash for payment of services or payments into trust accounts.
  • Clients with a high level of anonymity.
  • Transactions that are complex in nature for which legal advice is provided.
  • New payment technologies e.g. cryptocurrencies.
  • Lack of MLTF awareness by legal practitioners.
  • Trusts, shell companies, and other legal constructions with the potential to conceal the true identity of the ultimate beneficial owners.
  • International payments received from clients.
  • High-risk clients from high-risk jurisdictions.
  • Clients linked to institutions or jurisdictions on the United Nations sanctions list.
  • Foreign Prominent Public Officials, Domestic Prominent Influential Persons, and high-net-worth individuals, who are internationally regarded as high risk.
  • Clients involved in organised crime and who can use legal practitioners to: 
    • obscure ownership through complex layers and structures of legal entities.
    • avoid paying tax.
    • work around  financial regulatory controls.
    • create a veneer of legitimacy.
    • create distance between the regional entities and their illicit income.
    • avoid detection and confiscation of assets. 
    • hinder law enforcement investigations.
  • Clients who offer to or pay extraordinary fees for services that do not warrant such fees.
  • Payments from non-associated or unknown third parties or payment in cash where the practice is not typical.
  • A request to effect transfer of immovable property in an unreasonably short period of time, thereby hindering the know-your-client process and contributing to concealing the beneficial ownership of the client or other parties to the transaction.
  • Funds received from or sent to a foreign country when there is no apparent connection between the country and the client.
  • The use of multiple bank accounts or foreign accounts without good reason.
  • The entity structure or relationships of the client make it difficult to identify its official owner or controlling interest.
  • Instances where clients, for no apparent reason, change the way transactions are concluded or change their instructions to the legal practitioner on short notice or in a manner that does not make economic sense.

In conclusion, the report found that the number of regulatory reports received from legal practitioners is very low. This is concerning as it points to a possible lack of compliance awareness among legal practitioner firms and their staff. Overall, the report found that the inherent risk of money laundering for the legal practitioner sector in South Africa is classified as high and the inherent terrorist financing risk is regarded as low.

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The Money Laundering and Terrorist Financing Report 2022

In March 2022, the Financial Intelligence Center (FIC) published a report dealing with the assessment of the inherent money laundering and terrorist financing (MLTF) risks for legal practitioners.

The process to approval for extending a Sectional Title Units

Money laundering (ML) can be defined as the attempt to give funds derived from criminal activities the appearance of legitimacy.

Terrorist financing (TF) is the process by which individual terrorists or terrorist organisations obtain funds to commit acts of terrorism.

The legal profession is one of the non-financing sectors identified by the international anti-money laundering community as potentially highly vulnerable to MLTF. In dealing with international money laundering and the risks associated with legal practitioners, the report specifically mentions services provided by the legal industry. These include:

  • Advising on creating legal entities, including shell companies and trusts.
  • Property conveyancing services.
  • The provision of client accounts.
  • Establishing and managing charities.

The use of legal entities to recover fictitious debt has also been identified as a method to possibly move funds from one entity or person to another to give criminal proceeds the appearance of legitimacy. 

It is important to note that all legal practitioners have a reporting responsibility under the FIC Act. 

Statistics

During the five years from April 2016 to March 2021, legal practitioners filed a total of 11 966 cash threshold reports at an average of 2 393 per year. During the same period, the sector filed a total 1 160 suspicious and unusual transaction reports at an average of 232 per year. This volume of reporting can be regarded as very low considering that as of 31 March 2021 there were 16 059 legal practitioners, including branches, registered with the FIC. 

This limited number of reports could possibly be the result of a limited understanding of the risks in the sector.

As most reports filed in the legal sector relate to cash threshold, it can be assumed that cash is still being used and appears prevalent in the legal practitioner sector. This makes attorneys even more vulnerable to money laundering abuse. 

It is important that legal practitioners consider the following risk factors when conducting their daily business. The products and services legal practitioners provide that are internationally recognised as more likely to be abused by criminals in the money laundering process include:

  • Conveyancing: Legal practitioners who are conveyancers may knowingly or unwittingly assist criminals by falsifying documents, drafting documents with overstated or understated value of properties, facilitating the transfer of properties into third parties, and establishing complex loans and financial arrangements.
  • Business in a client account: Legal practitioners might be requested to assist with an investment that never takes place or where the funds eventually end up in a third-party account.
  • Formation and management of legal entities: Legal practitioners might be requested to create and assist in managing fictitious entities, complex legal structures, or shell companies that are aimed at hiding the true ownership of assets through different layers of legal structures. 

Client risk

Legal practitioners are required to assess their client risk profiles in accordance with their Risk Management and Compliance Programme. When dealing with their clients, legal practitioners should be aware of the following scenarios or behavior that could point to MLTF. 

  • Clients trying to conceal their identities.
  • Transactions inconsistent with stated income or occupation.
  • Clients using an unusual source of funds to transact.
  • Transactions that do not have a legitimate or economic reason.
  • Clients ceasing their business relationships on requests for customer due diligence (CDD) information. 

Transaction risk

Criminals will potentially use legal practitioners to act on their behalf, thereby giving an impression of legitimacy to transactions involving the proceeds of crime. It is therefore important to monitor the nature and purpose of client engagements. Examples of transactions that are potentially high risk for money laundering include:

  • The use of cash or crypto currencies in transactions.
  • The reversing of transactions with the request to repay funds already paid.
  • Transactions that do not make economic sense.
  • Prices of obtained or disposed assets that are not market related.
  • The use of cash in the buying, selling, and renting of properties.

In South Africa, cash is still used extensively, and this can be seen from the number of cash threshold reports filed in the legal environment. Legal practitioners must also be aware of instances where cash is paid into their business accounts and into the accounts of their clients.

Risks relating to delivery channels

Legal practitioners must be aware of the delivery channels they use to attract and deal with clients. Not onboarding clients in a face-to-face manner may increase the risk of the legal practitioner being abused by criminals to launder the proceeds of crime. 

Where an intermediary is used to onboard clients, a legal practitioner must do proper due diligence on the intermediary and its business and must be familiar with the risk mitigation process and procedures the intermediary might have in place.

Various forms of technology are used to advertise services and to conduct business. Legal practitioners who advertise their services on social media platforms, or who are considering conducting business with clients via social media platforms, must be aware of the higher potential risks associated with the less stringent verification requirements of social media. 

Where social media platforms are used to share information on products or services or to onboard clients, a legal practitioner must ensure that these clients are properly identified and verified and that all the relevant information pertaining to the risks posed by these clients is obtained. 

Third-party service providers that introduce clients to the practice must be properly identified and verified to ensure they are above board. The payment of funds through a third party could be done to disguise the source of funds or certain assets. The legal practitioner must always ensure that he or she fully understands the source of funds and the reason for constructing the transaction in this way.

A typical example of risk associated with delivery channels is where a legal practitioner is introduced to a client through an estate agent. In this instance, the risk associated with the use of an intermediary can be mitigated by the verification of the agent’s fidelity fund certificate. (This is already a requirement of the Property Practitioners Act and is therefore not a good example of risk mitigation.)

Geographic risk

Some foreign jurisdictions pose a higher risk for money laundering, and clients from these jurisdictions may therefore also pose a risk. The fact that transactions can take place electronically across national jurisdictions increases the risk associated with this type of foreign jurisdiction.

Geographic location and services provided will also be a risk factor. International and domestic experience indicates that criminals are attracted to high-value immovable property located in exclusive or seaboard areas of South Africa. Legal practitioners should be especially vigilant in these areas.

Potential high risk is posed by clients from countries with the following characteristics:

  • Countries subject to a travel ban.
  • Countries which the Financial Action Task Force regards as having high ML risk.
  • High-secrecy jurisdictions.
  • Tax havens.
  • Countries known to have high levels of organised crime and corruption, or where terrorist organisations are known to operate.

Terrorist financing risk

Legal practitioners providing services to NPOs and NGOs should ensure that the funds are used in accordance with the stated objectives of these organisations. Legal practitioners must further be aware of the screening process to ensure that clients are not on the United Nations sanctions list.

Indicators of money laundering and terrorist financing activity for the legal sector

The following could be regarded as MLTF vulnerabilities and risks associated with legal practitioners:

  • The use of cash for payment of services or payments into trust accounts.
  • Clients with a high level of anonymity.
  • Transactions that are complex in nature for which legal advice is provided.
  • New payment technologies e.g. cryptocurrencies.
  • Lack of MLTF awareness by legal practitioners.
  • Trusts, shell companies, and other legal constructions with the potential to conceal the true identity of the ultimate beneficial owners.
  • International payments received from clients.
  • High-risk clients from high-risk jurisdictions.
  • Clients linked to institutions or jurisdictions on the United Nations sanctions list.
  • Foreign Prominent Public Officials, Domestic Prominent Influential Persons, and high-net-worth individuals, who are internationally regarded as high risk.
  • Clients involved in organised crime and who can use legal practitioners to: 
    • obscure ownership through complex layers and structures of legal entities.
    • avoid paying tax.
    • work around  financial regulatory controls.
    • create a veneer of legitimacy.
    • create distance between the regional entities and their illicit income.
    • avoid detection and confiscation of assets. 
    • hinder law enforcement investigations.
  • Clients who offer to or pay extraordinary fees for services that do not warrant such fees.
  • Payments from non-associated or unknown third parties or payment in cash where the practice is not typical.
  • A request to effect transfer of immovable property in an unreasonably short period of time, thereby hindering the know-your-client process and contributing to concealing the beneficial ownership of the client or other parties to the transaction.
  • Funds received from or sent to a foreign country when there is no apparent connection between the country and the client.
  • The use of multiple bank accounts or foreign accounts without good reason.
  • The entity structure or relationships of the client make it difficult to identify its official owner or controlling interest.
  • Instances where clients, for no apparent reason, change the way transactions are concluded or change their instructions to the legal practitioner on short notice or in a manner that does not make economic sense.

In conclusion, the report found that the number of regulatory reports received from legal practitioners is very low. This is concerning as it points to a possible lack of compliance awareness among legal practitioner firms and their staff. Overall, the report found that the inherent risk of money laundering for the legal practitioner sector in South Africa is classified as high and the inherent terrorist financing risk is regarded as low.

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Follow Snymans on Facebook for more legal information, tips and news about property.