Estate agents and FIC Act compliance
WHO IS THE FIC
The Financial Intelligence Centre (FIC) is the administrator of the Financial Intelligence Centre Act, 2001 (Act 38 of 2001), which is central to South Africa’s legislative framework on anti-money laundering and counter the financing of terrorism.
The FIC Act established the FIC as the country’s national centre for gathering and analysing financial data. The FIC is mandated to identify funds generated from criminal acts, to combat money laundering and terrorist financing. The FIC Act imposes certain obligations on sectors deemed vulnerable to money laundering and terrorist financing and compels these sectors to report to the FIC.
Using the information provided by these sectors, the FIC develops financial intelligence reports for domestic competent authorities such as the South African Police Service and the South African Revenue Service, as well as international partners and peers. This information gathering and report development is therefore largely reliant on the compliance of institutions and the submission of reports from the identified sectors.
Being the only entity authorised to gather and analyse transaction and financial data places the FIC at a pivotal point for assisting tax authorities, law enforcement, investigating agencies and other competent authorities with necessary information to help identify, disrupt and bring criminals to justice.
WHAT IS MONEY LAUNDERING
Money laundering refers to an activity which has or is likely to have the effect of concealing or disguising the nature, source, location, the disposing or movement of the proceeds of unlawful activities. Criminals who have generated an income from their criminal activities commonly follow three stages in laundering their money. The first stage is commonly referred to as ‘placement’. This is when criminals introduce their illegally derived proceeds into legitimate financial systems. An example of this would be splitting a large portion of cash into smaller sums and thereafter depositing the smaller amounts into a bank account, or purchasing a series of monetary instruments (cheques, money orders, etc.) with the smaller amounts.
The second stage is called ‘layering’. During this stage the launderer engages in a series of transactions, conversions or movements of the funds in order to cloud the trail of the funds and separate them from their illegitimate source. The funds may be channelled via instruments such as, for example; the purchase and sale of property, or other investments. Alternatively, the launderer may simply wire the funds through a series of accounts to various banks across the globe. The third stage is ‘integration’. This generally occurs after the successful stages of placement and layering. The launderer at this stage causes the funds to re-enter the economy and appear to be legitimate. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
FIC ACT AND ESTATE AGENTS
The FIC Act lists estate agents – referred to in the FIC Act as an estate agency as defined in the Estate Agency Affairs Act, 1976 (Act 112 of 1976) – as accountable institutions and requires them to be fully compliant with the FIC Act.
Why are estate agents listed in the Act as accountable institutions?
The property sector has been identified as being at risk for being abused by money launderers. This sector has been used to hide funds and as a vehicle to help criminals introduce their proceeds into the financial system.
The property space allows for potential criminals to put into practice all three aspects of typical money laundering activity: placement, laying and integration. Furthermore, they are able to clean or hide large amounts of money in a single transaction. The purchase of a dwelling, plot or building for a large sum of money may not raise too many alarm bells, for example. For these reasons, estate agents can become easy targets for criminals wishing to launder their illicit funds through estate agents.
Given that estate agents are familiar with their industry, their clients’ behaviour and habits these industry experts are also best suited to identify when certain behaviour is suspicious or unusual.
Central to being listed under Schedule 1 of the FIC Act as accountable institutions, estate agents are required to fulfil seven obligations to achieve compliance with the FIC Act.
Among other aspects, these compliance obligations ensure that the institution is known to the FIC (via the registration obligation); that the institution’s own rules regarding application of FIC Act are understood by its staff (through the training obligation); that the institution submits reports to the FIC (registration with FIC is required for reporting to commence).
RISK-BASED APPROACH
In October 2017 the FIC Act was amended, to create greater transparency in the financial system and advance the fight against money laundering and the financing of terrorism. As part of the amendments, one of the changes brought about was the adoption of a risk-based approach to establishing the identity of a client. The risk-based approach allows institutions greater flexibility in the customer verification measures they need to adopt for their various customers, based on the customer risk profile against the institution’s product and service offering. This is also a more cost-effective alternative for institutions and a less burdensome approach for the customer. Furthermore, it is less prescriptive than the previous know your customer regime.
What does the risk-based approach mean for estate agents?
This requires estate agents (as well as all other accountable institutions listed under Schedule 1 of the FIC Act), to identify and assess the risk of doing business with their customers with a view to deciding how best to manage that risk.
The estate agency would be expected to rate their clients in terms of risk for money laundering and terrorist financing against specific product or service offerings and other factors. In this way, estate agents will be able to allocate their resources more efficiently using the riskbased approach. Where money laundering or terrorist financing risks are amplified stronger controls, and therefore more resources, will be needed. On the other hand, where there is a low level of risk, fewer or reduced amounts of controls will be needed.
As part of the implementation of their risk-based approach, estate agencies need to know and practice the following: Their institutional risk framework needs to be in writing i.e. a risk management compliance programme is required
• Their institutional risk framework needs to be in writing i.e. they are required to write a risk management compliance programme (RMCP)
• The estate agency’s RMCP needs to be updated regularly •When doing client profiles in regard to money laundering and terrorist financing risks, consider these scenarios as high risk: o Type of client – politically exposed persons, legal entities, non-face to face clients o Product type – high value properties o Geographical location – countries listed on terrorist and sanctions lists of governments and international organisations and non-members of the Financial Action Task Force (FATF) .
RISK MANAGEMENT AND COMPLIANCE PROGRAMME
A new focus of compliance obligations introduced with the amendments to the FIC Act in October 2017, was the requirement for all accountable institutions, including estate agents, to put in place a risk management and compliance programme (RMCP).
This requirement works hand in glove with the risk-based approach which was also introduced with the 2017 amendment to the FIC Act. For estate agents, the RMCP means that they need to develop a thorough understanding of the risks associated with their business and how they plan to manage this across their client base. Estate
agents must develop this understanding, document it and implement the programme. Also, the document must be keep updated. How the RMCP ties in with the riskbased approach is that in order for institutions to know to what extent they are vulnerable to money laundering and terrorist financing, and what they need to do mitigate these risks in terms of their customer engagement, they need to conduct risk assessments. This in turn, will help them determine the extent of resources they require to mitigate that risk.
It is important that board members and senior management fully understand and endorse the content of the institution’s RMCP. They will need to actively lead the process to understand money laundering and terrorist financing risks that the organisation needs to take into account. South Africa is a member of the Financial Action Task Force, an international policy development and standard setting body for combating money laundering and the financing of terrorism. FATF has 37 member countries, associate and observer members. The organisation’s objectives are to set standards and promote measures – FATF Recommendations – which protect the international financial system. Member countries are required to implement these Recommendations. From time to time, member countries undergo reviews by their peers on their implementation of the Recommendations.