CHAPTER 2

2 THE PROBLEM

(a) Money laundering defined

2.1 Money laundering can be described as the manipulation of illegally acquired wealth in order to obscure its true source or nature.^[2] This is achieved by performing a number of transactions with the proceeds of criminal activities that, if successful, will leave the illegally derived proceeds appearing as the product of legitimate investments or transactions.

2.2 The money-laundering process can generally be divided in at least three discernible stages namely the placement stage, the layering stage and the integration stage. During the placement stage the proceeds of criminal conduct, usually in the form of cash, are moved away from the location where it was obtained and placed in the financial system. Entry into the financial system is usually gained through financial institutions.

2.3 In the second stage the money, which is now in the form of electronic funds, is distributed through the financial system. This done by layering one transaction involving these funds on top of another by means of electronic transfers, shell companies, false invoices, etc. The result of these transactions is that the laundered money becomes indistinguishable from "legitimate" money.

2.4 In the integration stage the money that was diffused into the commercial sphere is collected and made available to the offender under the guise of being legitimate earnings. This description of the money-laundering process illustrates the vital importance of the financial system to the money launderer. It is used as a device to transfer his or her proceeds of crime and to alter the appearance of such proceeds.

(b) Current legal position

2.5 The offence of "conversion of the proceeds of drug trafficking" under the Drugs and Drug Trafficking Act, 1992, (hereinafter referred to as the "Drugs Act")^[3]is the only instance in the South African law where the issue of money laundering is addressed. Our law does at present not recognise the manipulation of the proceeds of crime in general as an offence. Consequently in cases where the Drugs Act does not apply, no offence will be committed unless the methods used to bring about the misrepresentation as to the origin or nature of the illegal proceeds constitute another offence such as fraud.

2.6 In respect of regulatory measures the Drugs Act creates a statutory obligation to report certain information relating to the proceeds of drug trafficking.^[4] This obligation applies to any director, manager or executive officer of a financial institution, and compels such persons to report any suspicion that property acquired by the institution in the normal course of business is the proceeds of a crime to an officer of the Narcotics Bureau. The Drugs Act places a similar obligation on stock brokers and traders in financial instruments.^[5] A failure to report such information is punishable by imprisonment for up to 15 years, or any fine that the court deems fit, or both such imprisonment and fine.^[6]

2.7 As regards obligations of secrecy the Drugs Act provides that no such obligation will affect a person's obligation under the Act to report his or her suspicion.^[7] The statutory obligation to report the relevant information under the Drugs Act therefore overrides a financial institution's obligation to treat the client's affairs as confidential.^[8] Compliance with the statutory obligation will serve as a defence against a claim based on a breach of the confidential relationship between a financial institution and its client. The scope of the protection under the Drugs Act is, however, 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"^[9] 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. 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.

2.8 Apart from these provisions, our law does not contain any measures by which money laundering can be controlled and combatted.

[2] Rider 1996 Journal of Financial Crime 238.

[3] Section 14(b) read with section 1(1) and section 7 of the Drugs Act.

[4] Section 10(2) read with section 1(1) of the Drugs Act.

[5] Section 10(3) of the Drugs Act.

[6] Section 17(d) read with section 15(1) and section 10(2) and (3) of the Drugs Act.

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

[8] Ibid.

[9] In terms of section 1(1) read with section 13 and section 5 of the Drugs Act a “defined crime” includes dealing in dangerous and undesirable dependance producing substances and conversion of the proceeds of such dealing.

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