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• Identifying Issues
• Introduction Of Regulatory Measures
• Financial Intelligence Units
• Enforcement
• Cost

CHAPTER 3

IDENTIFYING ISSUES

3.1. If the principle that laundering of all proceeds of crime should give rise to criminal liability is accepted, it follows that administrative measures to combat money laundering should not only apply in respect of certain offences. The problem in our law is, however, that a comprehensive legislative scheme comprising regulatory measures to combat money laundering is lacking. The issues that have to be discussed here are therefore whether such a legislative scheme should be introduced in our law and if so what components it should comprise. This chapter is restricted to the identification of the apparent issues. In the next chapter the options in relation to each issue are considered.

Introduction of regulatory measures

3.2. The brief description of the stages in a typical money-laundering scheme given earlier shows the importance of the institutions of the business community to the money launderer. These institutions are used to gain access to the financial system and to move the illegally derived proceeds through the system. The point of entry into the financial system is often referred to as the “splash down zone” because it is at this point where large amounts of cash enter the financial system that a money-laundering scheme is most noticeable.^[8] Further along the route there are other instances where a scheme may also be detected, such as international funds transfers. Another important factor in this respect is that most, if not all, activities performed within the financial system can potentially leave a so-called audit trail to be followed.

3.3. The mere criminalisation of money laundering will not provide an effective measure with which to combat this phenomenon. In order to benefit from the fact that a money-laundering scheme needs to involve the financial system to accomplish its objective,^[9] certain administrative measures that will apply to the institutions of the business community must be introduced. Such measures should facilitate the prevention, identification, investigation and prosecution of money-laundering activities. To accomplish this, a legislative framework comprising regulatory measures must be introduced.

3.4. The regulatory instruments that apply to the various institutions of the financial sector such as the Banks Act, 1990, the Stock Exchanges Control Act, 1985, the Insurance Act, 1943, the Companies Act, 1973, and the Currencies and Exchanges Act, 1933, were not designed with a view to combatting money laundering and can therefore not be relied upon for this purpose.

3.5. Examples of regulatory measures that are applied in jurisdictions where regulatory schemes are in place, are the reporting of information on certain transactions, record keeping of particulars of clients and transactions, the conducting of business in accordance with guidelines aimed at minimising the opportunity for money laundering, the establishment of a body that can record and manage the information obtained through the reporting system and the laying down of criteria for participation in the financial sector that will ensure the integrity of intermediaries.

3.6. If one is to combat money laundering effectively, an anti money-laundering policy should be developed. Such a policy should not only be aimed at punishing offenders, but should include mechanisms that are directed at the persons who are in a position to identify and prevent money-laundering practises.

3.8. In respect of the reporting of information there are several issues to be discussed. The first is what should be reported. If it is accepted that the aim of money-laundering schemes is to conceal the illegal origin of the proceeds of crime, it follows that such schemes will make use of transactions involving such proceeds. This means that the reporting of information on such transactions can be an effective weapon in detecting, not only the money-laundering scheme, but also the primary offence from which the proceeds had originated. A regulatory framework must therefore include the reporting of information on transactions that involve the proceeds of crime.

3.9. Another important issue is the protection of the person or body reporting the required information. The statutory obligation to report the relevant information under the Drugs Act overrides a financial institution's obligation to treat the client's affairs as confidential.^[10] Compliance with the statutory obligation will therefore serve as a defence against a claim based on a breach of the confidential relationship between a financial institution and its client.

3.10. The scope of the protection under the Drugs Act is restricted by the phrase "any obligation incurred by virtue of the provisions of subsections (2) or (3)". Subsections (2) and (3) refer to the proceeds of a "defined crime"^[11] which means that it is only in cases of suspicions that property is the proceeds of a "defined crime" that section 10(4) will offer protection against a breach of confidentiality towards a client. In the majority of cases, however, an official of a financial institution may form a suspicion that property has a criminal origin but will not be in a position to identify the specific offence. Financial institutions, therefore, follow a cautious approach and do not report suspicions unless it is absolutely clear that the property forms the proceeds of a drug offence. This is shown by figures for 1994 given at a money-laundering seminar in July 1995:

Bank a reported 2 cases under the Drugs Act;

Bank B - nil;

Bank C - 64 of which 54 were proven to be drug-related; and

Bank D - 6.^[12]

3.11. One of the problems with the current legislation on reporting information seems therefore to be that it does not offer adequate protection to the body making the report.

3.12. Other issues in respect of a reporting requirement are how to identify the transactions to be reported, the types of transactions that should be reported and what information in respect of a transaction should be reported.

3.13. Once a transaction has occurred through which the proceeds of an offence have been laundered, the only effective way of identifying the transaction and those involved in it is to follow the so-called audit trail. This means that by identifying the nature of the transaction and the true participants in that transaction, not merely their agents, the money-laundering scheme can be exposed. This will only be possible if sufficient records have been kept by the institution at which the transaction had occurred. Mechanisms ensuring effective record keeping must therefore be an essential part of a regulatory scheme.

3.14. Responsible business conduct aimed at diminishing the risk of money laundering will require all institutions concerned to formulate internal policies to guard against being abused for the purpose of money laundering. Such policies should be based on sound business practice. They can, on the one hand, be employed to protect institutions from being infiltrated with the proceeds of illegal activities, and on the other hand to enable institutions to co-operate with law enforcement agencies in the detection and investigation of money-laundering schemes.

Financial intelligence units

3.15. The tendency in other jurisdictions has been to set up a central institution to which all reports are made. Such an institution is referred to as a financial intelligence unit as its task is to gather intelligence for investigating authorities to base their investigations on. It receives and analyses reported information through the reporting structure and disseminates it to the investigating authorities concerned. A financial intelligence unit is an important part of a regulatory scheme as it enhances the communication between the persons or institutions reporting certain information and the authority whose responsibility it is to use that information in the course of the investigation of money laundering and other criminal activities.

3.16. An important issue to consider in this respect is the question of where the responsibility for the functioning of a financial intelligence unit should lie. The form and function of a financial intelligence unit will be the determining factor in deciding where its place in the reporting structure should be. The main concern in respect of the positioning of a financial intelligence unit should be its effectiveness, both in receiving reported information and in communicating the relevant information to the investigating authorities concerned.

Criteria for establishing and carrying on certain business forms

3.17. Criteria to determine who may establish and carry on the types of businesses that will fall within the scope of a regulatory framework should be laid down. The objective of such criteria must be to prevent the institutions of the business community from falling under the control of persons whose aim is to abuse those institutions for the purpose of money laundering. These measures are therefore aimed at protecting the integrity of the financial system.

Enforcement

3.18. A regulatory system must be enforced. This means that offences and administrative sanctions for the failure to comply with the provisions of the system will have to be introduced. The responsibility for applying these enforcement measures must also be determined.

3.19 Apart from this, a compliance culture must also be established among the persons and institutions to which the regulatory framework will apply. International experience has shown that the higher the level of co-operation between the relevant authorities and the institutions of the business community the less need there is for strong enforcement measures.

Cost

3.20. Implementing a regulatory framework can be expected to be costly, both to the state and to the institutions of the financial community. The point of departure in this respect should be that the financial burden on the business community should be kept at a minimum. It must be accepted that combatting money laundering is in the national interest of the Republic as it is one of the measures that can be implemented to combat large scale crime, and should therefore be one of the government’s responsibilities. However, making the South African financial system as unattractive as possible to criminals as a mechanism to process their ill-gotten gains is also in the interest of protecting the integrity of the business community.

3.21. The success of a regulatory framework is dependent on the co-operation of all interested parties at all levels. Ignorance of the risk of money laundering will cause apathy towards the implementation of an administrative framework. Therefore general awareness of money laundering and all that is associated with it is important to the success of such a framework. Public awareness must also be promoted in order to justify spending state revenue on any effort to combat money laundering. The issue as to responsibility for the creation of such an awareness will have to be considered

[8] Rider 1996 Journal of financial crime 239.

[9] Namely to cause the proceeds of crime appear as legitimate earnings.

[10] Section 10(4) of the Drugs Act.

[11] Under section 1(1) read with section 13 and section 5 of the Drugs Act a defined crime includes dealing in dangerous and undesirable dependence producing substances and conversion of the proceeds of such dealing.

[12] Toms Banks's concerns regarding measures in South Africa to combat money laundering at 5.