Client identification and money laundering control : perspectives on the Financial Intelligence Centre Act 38 of 2001

The Financial Intelligence Centre Act 38 of 2001 (FICA) compels certain persons and institutions (defined as "accountable institutions'') to identify and verify the identity of a new client before any transaction may be concluded or any business relationship is established.1 Accountable institutions are listed in schedule ¹ to FICA and include banks, brokers, financial advisers, insurance companies, attorneys and estate agents. This duty to identify new clients came into effect on 30 June 2003. However, FICA also requires a similar procedure to be followed in respect of all current clients. Current clients are those with whom an accountable institution had business relationships on 30 June 2003.² After 30 June 2004 an institution may not conclude a transaction in the course of its business relationship with an unidentified current client, until it has established and verified that client's identity as prescribed. An institution that concludes any transaction in contravention of this prohibition, commits an offence and is liable to a fine not exceeding R10 million or to imprisonment of up to 15 years.³

The majority of accountable institutions and their clients failed to meet the June 2004 current client identification deadline.4 This failure posed serious economic and legal risks. With a few days to spare, the minister of finance granted a partial and temporary exemption in respect of these requirements. This article explores the statutory scheme for identification and re-identification of clients and some of the practical problems that were encountered. The June 2004 exemptions from these requirements are also considered and proposals for law reform are made.

The discussion of the FICA identification scheme necessitates the following brief overview of the international and South African money laundering control framework.

1 s 21(1) of FICA.
2 s 21(2) of FICA. See also s 82(2)(b).
3 s 46(2) of FICA read with s 68(1) of FICA.

Money laundering trends in South Africa

Reports a study by the Centre for the Study of Economic Crime at Rand Afrikaans University into the characteristics of money laundering schemes in South Africa; these were discussed at a workshop on December 5 2001. Outlines the 1998 Proceeds of Crime Act (POCA), the 1992 Drugs and Drug Trafficking Act and their general money laundering provisions, including negligence and intent, defence and penalties; also the racketeering provisions of POCA. Moves on to the reporting of suspicious transactions, where the POCA provisions will be repealed by the new Financial Intelligence Centre Act (FICA); this covers general obligations, secrecy and confidentiality, penalties, preventing tipping-off, and reporting statistics. Gives examples of the schemes themselves, which fall into broad themes: purchase of goods and properties, abuse of businesses and financial institutions, cash and currency, and the informal sector; case studies include S v Dustigar, Motsepe v Commissioner of Inland Revenue, S v Van Zyl, S v Caswell, and Director of Public Prosecutions: Cape of Good Hope v Bathgate.

Money laundering : of watchdogs, bloodhounds and guide dogs

June 2003 was a very important month from the perspective of money laundering control. The main administrative money laundering control duties took effect on 30 June 2003, thereby changing many of the business practices that were part of the South African business landscape. In the same month, South Africa gained membership of the Financial Action Task Force (FATF) which is the main international standard-setting body in respect of money laundering control. At the meeting where South Africa’s membership was endorsed, the FATF also adopted a new and more stringent set of money laundering control standards that all countries will have to meet. As South Africa is implementing its money laundering control legislation, thought must therefore be given to amendments that may be required to comply with the new set of international standards. In this state of flux, accountants and auditors have a very important role to play. Not only do they have to comply with the legislation but they will also be required to provide guidance to those clients who are bewildered by the new requirements. Obviously auditors will also have to consider non-compliance with these laws when planning and carrying out an audit.

Revisiting the US money demand function: an application of the Lagrange multiplier structural break unit root test and the bounds test for a long-run relationship

In this article, we examine the issue of a levels relationship and stability of the US money demand function over the period 1959:01 to 2004:02. We use the Lagrange multiplier structural break unit root test and the bounds testing approach to a long-run relationship in levels of the variables, namely real money demand, nominal interest rate and real income. We find greater evidence for a long-run relationship in levels and stability of the US money demand function when we use M2 as a proxy for money demand. However, we find little evidence for a long-run relationship between M1 and M2 with their determinants for the recent period, spanning the last decade or so.

Estimating the demand for money in an unstable open economy : the case of the Fiji Islands

In this paper, we estimate Fiji's money demand function for the period 1971-2002 based on the bounds testing approach to cointegration, which is applicable irrespective of whether or not the underlying variables are non-stationary. We estimate models with and without a time trend and for lag lengths ranging from 1-3, but fail to find any evidence for a long-run relationship. Moreover, our structural break analysis suggests that the unstable nature of Fiji's money demand may be due to atypical events, such as coups; the implementation of policies, such as devaluations and value added tax; and the onset of trade liberalisation policies over the last two decades.

Modeling the relationship between budget deficits, money supply and inflation in Fiji

For Fiji, which has been suffering persistent deficits since independence, determining the relationships between inflation, budget deficits, money supply, output, and import prices is essential. We find that inflation, deficits and money supply are cointegrated when inflation is the endogenous variable, and the long-run elasticities confirm that money supply and deficits induce inflation. While there is a short-run, unidirectional causality running from money supply to inflation and a bi-directional causality between money supply and budget deficits, in the long run both money supply and deficits ?Granger-cause? inflation.

Are youth mentoring programs good value-for-money? An evaluation of the Big Brothers Big Sisters Melbourne program

Background : The Big Brothers Big Sisters (BBBS) program matches vulnerable young people with a trained, supervised adult volunteer as mentor. The young people are typically seriously disadvantaged, with multiple psychosocial problems.

Methods : Threshold analysis was undertaken to determine whether investment in the program was a worthwhile use of limited public funds. The potential cost savings were based on US estimates of life-time costs associated with high-risk youth who drop out-of-school and become adult criminals. The intervention was modelled for children aged 10–14 years residing in Melbourne in 2004.

Results : If the program serviced 2,208 of the most vulnerable young people, it would cost AUD 39.5 M. Assuming 50% were high-risk, the associated costs of their adult criminality would be AUD 3.3 billion. To break even, the program would need to avert high-risk behaviours in only 1.3% (14/1,104) of participants.

Conclusion : This indicative evaluation suggests that the BBBS program represents excellent 'value for money'.

The money laundering risk posed by low-risk financial products in South Africa : findings and guidelines

Purpose – The purpose of this paper is to investigate the level and nature of criminal abuse of financial products that are classified as posing a low anti-money laundering/combating of financing of terrorists (AML/CFT) risk in South Africa to determine the effectiveness of the simplified due diligence measures that apply to these products.

Design/methodology/approach – The paper presents empirical research on the views of bank officials and law enforcement officials regarding the criminal abuse of South African financial products that are subject to simplified customer due diligence controls.

Findings – South Africa's AML/CFT laws allow certain deposit-taking institutions and money remitters to implement simplified customer due diligence measures in relation to specific low-risk products that are mainly designed to allow previously unbanked persons to access financial services. The paper finds that the products have been abused by criminals but that the incidence of such abuse and the amounts involved are low. The paper investigates possible weaknesses in the current system that allow limited criminal abuse to occur. It concludes with a number of guidelines that emerge from the study and are of value to regulators that wish to implement a similar system.

Originality/value – The South African AML/CFT scheme in relation to low-risk products is of interest to many international regulators that are grappling with the interplay between effective AML/CFT controls and the impact of strict controls on the ability of socially and economically excluded persons to access appropriate financial services. This paper provides evidence that appropriately designed controls can facilitate financial inclusion while limiting the risk of criminal abuse.

Identifying and managing low money laundering risk : perspectives on FATF's risk-based guidance

Purpose – The purpose of this paper is to investigate Financial Action Task Force (FATF)'s risk-based guidance to combat money laundering and terrorist financing to determine its approach to the identification and management of low-risk providers, products and transactions.

Design/methodology/approach – The paper analyses the relevant FATF recommendations and its guidance notes and reflects on key questions for regulators and financial institutions.

Findings – FATF has not defined “risk” for purposes of the risk-based approach. The absence of a clear definition complicates the identification of low-risk products. FATF do provide an example of a risk matrix that can be used to identify low-risk banks, but the example is based on assumptions and generalisations that are not sustainable. In addition, it identifies certain low-value transactions as “low risk” transactions. The paper reflects on the role of value as an indicator of risk and concludes with a number of suggestions to clarify the conceptual framework.

Originality/value – Low-risk products and transactions are often overlooked because the risk-based approach focuses attention on high-risk matters. Low-risk products are however crucial to the efforts to increase financial inclusion. The paper identifies gaps in the current conceptual framework and indicates ways in which they can be addressed.

Modelling money demand for a panel of eight transitional economies

In this article, we estimate money demand functions for a panel of eight transitional economies, using quarterly data for the period 1995:01 1995 to 2005:03. We find that real M1 and real M2 and their determinants, namely real income and short-term domestic interest rate, are cointegrated, both for individual countries as well as for the panel. Long-run elasticities suggest that consistent with theory, real income positively and nominal interest rate negatively impact real money demand. Our test for panel Granger causality suggests short-run bidirectional causality between M1 and M2 and their determinants. Finally, our tests for stability of the money demand functions reveal more cases of unstable money demand functions when M2 is used as a proxy for money demand.