“Money laundering is giving oxygen to organised crime.” Enrique Peña Nieto, President of Mexico
Introduction
Money laundering is the processing of dishonest earnings to disguise their illegal origin, a process which empowers criminals to enjoy profits without exposing their source. The individuals or groups involved use workable methods to control the funds without inviting attention to the original activity.
Money laundering related activities include the drug trade, illegal arms deals, smuggling, human trafficking, illegal diamond dealings, insider -trading, embezzlement, bribery, computer fraud, real estate, shell companies and cash-intensive businesses such as a car wash, restaurants, strip clubs and casinos.
Stages in money laundering
The three stages of distributing laundered money create confusion in the money trail, thus making it difficult for investigators to track the flow of money. This is one of the reasons why the arrests and prosecution of money launders proves to be challenging.
The initial stage of money laundering is Placement, which occurs when the launderer moves their illegal profits into the financial system.
The second stage, known as Layering, occurs when the illicit money is blended with legitimate money or placed in continuous flow from one account to another, which then makes it difficult to detect the money laundering.
Having successfully produced criminal profits through the first two stages, in the third and final stage money launderers integrate the cash into the legitimate economy.
Impact of money laundering
The impact of money laundering is great. Below are some of the common consequences of money laundering.
- As emerging markets open their economies and financial sectors, they are becoming increasingly appropriate targets for money laundering activities which creates unpredictable changes in money demand, along with causing large fluctuations in international capital flows and exchange rates (Santion Scanner, 2021).
- Most financial institutions are unaware of the extent to which the world financial markets and banking system are being used to process illegal monies (Heymans, 2021).
- A bank that receives the benefits of crimes faces prosecution if it fails to respect FICA’s money laundering control duties, such as the filing of a suspicious transaction report.
- Income produced by black money earnings is not taxed. This results in reductions in tax revenues which may force developing economies to borrow money and increase taxes to repay the loan while the struggling economy generates more unemployed people.
- The South African Government (SAG) estimates that between $2 and $8 billion is laundered each year through South African financial institutions (Temenos & NetGuardians, 2019).
- Witnesses of money laundering are afraid to ‘whistle blow’ for the fear of losing their jobs or being harmed by the corrupt offenders that have too much influence and power.
Money laundering regulations
There are three key pieces of legislation to bear in mind when dealing with money laundering in South Africa. These Acts form the backbone of South Africa’s anti-money laundering regime which all financial institutions should know well to proactively combat money laundering and to increase the arrest and prosecution of offenders.
The Prevention of Organized Crime Act (POCA) No 121 of 1998. The purpose of POCA is, amongst others, to:
- introduce measures to combat organised crime such as money laundering and racketeering activities,
- provide for the recovery of the proceeds of unlawful activity,
- provide for the civil forfeiture of property that has been used to commit an offence, and
- prescribe penalties for those found guilty of committing offences in terms of the Act (Pillay, 2018).
The Financial Intelligence Centre Act (FICA) No 38 of 2000. The purpose of this Act is as follows:
- to combat money laundering activities and the financing of terrorist and related activities,
- to ensure that money laundering is controlled,
- to identify suspicious transactions so that people who engage in money laundering activities can consequently be charged under POCA,
- to obligate people to report suspicious transactions to FICA,
- to hold institutions accountable to comply with legal duties in order to combat money laundering, and
- to establish the Money Laundering Advisory Council.
The Protection Of Constitutional Democracy Against Terrorism And Related Activities (POCDATARA) Act of 2004 was established to prevent money laundering by terrorist organisations to South Africa and requires the reporting of any crime linked to terrorist activities, including terrorist financing.
Conclusion
To combat financial corruption, KYC regulation requires financial institutions to know and keep records on the essential facts of each customer, together with identifying each person who has authority or power of attorney to act on the consumer’s behalf. This will prevent financial institutions such as banks from being used by criminal elements for illegal money activities.
The South African legal system is in place to identify, arrest and prosecute money launderers.
‘You get to a point where it gets very complex, where you have money laundering activities, drug related activities, and terrorist support activities converging at certain points and becoming one,’ Sibel Edmonds.
References
- De Rebus (2021). Washing money: The different forms of money laundering (online), [Accessed on 20 April 2021]
- Heymans, K. (2021). Presentation 21/04/21 Money laundering, Beta Professional Training (Pty) Ltd
- Mlambo, S. (2021). Hawks arrest Eastern Cape municipal clerk for fraud, money laundering (online) [Accessed on 24 April 2021]
- Naidoo, M. (2021). KZN man a kingpin in Free State asbestos tender scam, State alleges (online) [Accessed on 24 April 2021]
- Pillay, K. (2018). The Station Wagon, The Heroin and the Preservation of Property Order: Section 38of the Prevention of Organised Crime Act, No 121 of 1998 (online) [Accessed on 24 April 2021]
- Sanctionscanner.com (2021). Negative Effects of Money Laundering on The Economy (online) [Accessed on 24 April 2021]
- sanews.gov.za (2021). Attorney arrested in SAPS branding case (online) [Accessed on 24 April 2021]
- Temenos & NetGuardians (2019). A-Z of Financial Crime in Africa (online) [Accessed on 24 April 2021]
- Worthington, R. (2019). South Africa Publishes More About Money Laundering Vulnerabilities (online) [Accessed on 20 April 2021]