It is estimated that South African businesses launder between R16 billion and R64 billion annually and it is critical for businesses, in particular those who deal in high-value goods, to understand how they can be used and abused in this process – in particular with regard to moving value rather than money.
“I think there is an assumption when it comes to money laundering that it’s cash only, but if you look at the typology and the ways people are laundering money, or getting money to fund terrorism, they are being pretty innovative – and they have to be,” says Hawken McEwan Director of Risk & Compliance, nCino KYC Africa (previously DocFox).
A number of South African legislations have been passed in the fight against money laundering and terrorist and proliferation financing including the Financial Intelligence Centre (“FIC”) Amendment Act (FICA). The categories of Accountable Institutions (AIs) required to adhere with the FIC Act (FICA) were, in December 2022, extended to include High-Value Goods Dealers (HVGDs), and (as per the threshold set by the FIC), a business is classified as an HVGD if it sells individual items that are valued at R100 000 or more. Following the inclusion into the categories of AIs, there are several obligations that these businesses must fulfil to ensure complete adherence to FICA regulations and a failure to comply could see companies facing penalties and fines of up to R15 million.
While incidents of criminals purchasing high value goods using illicit cash have been widely reported, there is a growing trend amongst criminals to use the goods to launder money. nCino KYC Africa recently hosted a FICA Compliance breakfast “Unpacking How Criminals Use HVGDs to Launder Money – how FICA can help protect your business”, at the Durbanville Hills Winery in Cape Town, where McEwan and Murray Collier, Business Development Executive for nCino offered valuable insights into how criminals are exploiting HVGDs to launder money, as well as some practical strategies that can protect these businesses from becoming targets.
“The sophistication of these operations is alarming, as anything that holds value can be leverage,” says McEwan. “Your business could unwittingly be implicated, it is therefore critical to recognise the red flags and to have a system in place that deals with the requisite FICA compliance, to ensure that you are protecting your business and reputation.”
How could your company be used to move value, rather than money?
- Placement: illicit funds from drugs, prostitution, extortion, corruption, sex trafficking etc. are placed into the financial system.
- Layering: Funds, that are now in the financial system, are changed and moved to confuse the original source.
- Integration: The funds are used without suspicion.
How can assets be leveraged?
- over / under invoicing
- renting / leasing to avoid seizure
- value in another form
- straw buyers (using representatives)
- moving assets across jurisdictions
- high value fixtures and fittings
McEwan presented a number of scenarios for context, including one where a Tanzanian national purchased a D777 truck which was modified to conceal drugs and cash, sealed, and successfully moved cross-border. A more common scenario sees criminals purchasing properties from developers using various payment methods and, during the housebuilding process installing top of the range fixtures and fittings as a means of storing value. When the house is sold, including all the fixtures and fittings that have been paid for in cash, the value is realised back to “legitimate” money. Similarly, with a factory build, one can bolt on very expensive plant and then sell the factory as a whole.
“Ask yourself if it makes sense, and don’t ignore your gut feeling, as it is the responsibility of every employee to report suspicions to their compliance officer,” says McEwan. Some of the red flags that should raise the alarm bells include:
- high value cash payments
- unusual sale / purchase activity
- cost of the item appears outside of the standing of the client
- payments/clients/delivery from high-risk jurisdictions
- involves someone who is politically exposed
- Assets purchased /sold far away from residential area
- Overpayment asking for a refund
- Behaviour, tone and approach
The importance of knowing your client (KYC)
The process of knowing your client (KYC) and doing your due diligence includes, amongst others, screening family and known associates, researching adverse media, making sure entities and trusts are not front companies, assessing the risk of the client, ongoing monitoring and record keeping. Meeting FICA requirements can seem quite onerous. The nCino KYC Africa solution helps prevent a number of common failures (highlighted in yellow) that companies face in their FICA compliance efforts, thereby simplifying and strengthening their compliance processes. “All HVGDs are required to FICA their clients to ensure the source of the companies funds that are flowing through into the dealers account is legitimate,” says McEwan, “and we are here to help”.
