What is money laundering and financing of terrorism?
Money laundering refers to any act that disguises the criminal nature or the location of the proceeds of a crime. If a person commits an act or enters into a transaction knowing or reasonably expected to have known that the money or property is the proceeds of a crime, the person would have committed a money laundering offence.
In South Africa this concept is extended to almost every act or transaction that involves the proceeds of a crime, including the spending of any funds that were acquired illegally – it is not confined to acts in connection with the proceeds of drugs or other serious offences, but extends to the proceeds of all types of offences, including tax offences and corruption.
Financing of terrorism refers to the direct or indirect provision of financial or economic benefit to support terrorism or related activity or any person or group engaging in such activity. A financing of terrorism offence is committed if a person knowingly engages in such an act or ought reasonably to have known or suspected that the act will result in support for such activities or such persons.
What does legislation have to say on this?
The following laws criminalise transactions involving proceeds of unlawful activities or that is aimed at financing terrorist and related activity and create compliance obligations for businesses and their employees:
- Financial Intelligence Centre Act, Act 38 of 2001 (FIC Act);
- Prevention of Organised Crime Act, Act 121 of 1998 (POCA);
- Protection of Constitutional Democracy against Terrorist and Related Activities Act, Act 33 of 2004 (POCDATARA); and
- Prevention and Combating of Corrupt Activities Act, Act 12 of 2004 (PRECCA).
The FIC Act differentiates between accountable institutions and reporting institutions, with different obligations imposed on each of these types of institutions.
One of the reporting obligations applicable to all persons and institutions are to report any suspicious transactions in terms of Section 29 of the FIC Act whenever a person knows or ought reasonably to have known or suspected that a transaction meets the section 29 reporting requirements.
What should auditors do about this?
Registered auditors must, as part of performing their audits, consider whether their clients meet all of these compliance obligations in terms of the FIC Act and related legislation and have reported all suspicious transactions as required. The auditor should assess this in the following areas of an audit:
- Acceptance of appointment as auditor: consider possibility of client involvement in money laundering or financing of terrorism
- Understanding the entity and its environment and assessing the risks of material misstatement: consider the sector or industry and its susceptibility of the client to fraud and possible money laundering / financing of terrorsm
- Going concern: consider impact of non-compliance and possible fines in terms thereof
- Fraud considerations: consider for identified fraud risk factors the possibility of a breach of law relating to money laundering in addition to fraud
- Laws and regulations: consider compliance with all FIC Act requirements applicable to the entity
The auditor must specifically consider factors which may indicate that money laundering is occurring and perform further procedures where possible money laundering is discovered – Annexure C of the IRBA Guide provides examples where money laundering may occur where the client may be involved and where the client may be unknowingly a party to money laundering. This may include the auditor filing a reportable irregularity with the IRBA if the client fails to file a report as required under the FIC Act or POCDATARA.
In addition, registered auditors may also be seen as accountable institutions, requiring the appointment of a money laundering compliance officer and ensuring their own compliance with these laws – be on the lookout for new pronouncements on the accountable institution definition, because it has been under revision recently and the scope may be expanded to all auditors. The IRBA is a supervisory body under the FIC Act, and to fulfil this function the IRBA requests all registered auditors annually to inform it whether they are accountable institutions or not and provide information about meeting their compliance obligations under the FIC Act.
Where can I find more information on this?
The IRBA issued a guide for registered auditors in January 2011 on combating money laundering and financing of terrorism. This guide is currently being revised based on the FIC Amendment Act and other matters, but still contains valuable practical considerations on this topic.
Additionally, the website of the Financial Intelligence Centre contains various articles, documents and frequently asked questions to explain compliance and reporting duties in terms of the FIC Act.
Auditors must consider FIC Act compliance and money laundering when performing their duties, with re-performable evidence of their audit considerations clearly recorded in the audit working papers.
- IRBA: Guide for registered auditors: Combating money laundering and financing of terrorism, 2011