The Financial Intelligence Centre (FIC) has published, for comment, assessments of the money laundering and terrorism financing risks facing company service providers and dealers in precious metals and stones.
The risk assessment reports are intended to help accountable institutions understand their money laundering and terrorism financing risks and identify the measures they can introduce to mitigate and manage such risks.
The Schedule 1 of the Financial Intelligence Centre Act (FICA) took effect from 19 December 2022. Item 2 of Schedule 1 now includes, in addition to trust service providers, company service providers as accountable institutions. Any institution performing any of the activities listed under Item 2 is regarded as an accountable institution.
The amended Schedule 1 also includes the new category of high-value goods (HVG) dealers under Item 20. Motor vehicle dealers and Krugerrand dealers, which were previously included as reporting institutions with limited obligations under FICA, were also included as HVG dealers. The category of HVG dealers also includes dealers in precious metals and dealers in precious stones.
Risks facing company service providers
The draft risk assessment report for company service providers say it is internationally recognised that criminals use company structures to conceal the identity of the real beneficiaries of such institutions and to hide the proceeds of illicit activities through such structures. This can be done through the formation of companies that may be established for this specific purpose or by creating complex legal structures – often with a footprint in jurisdictions that are known or suspected to facilitate or enable tax evasion or money laundering.
Institutions providing the company services described in Item 2 of Schedule 1 are often involved in conducting research on business conditions, with finding investors, or generating start-up capital for the formation of companies or for other purposes such as providing trade finance or project finance. Other services include the provision of advisory and administrative services on complex legal structures, including in jurisdictions with a questionable regulatory regime, in the registration of shell companies and acting as a nominee for shareholders who wish to remain anonymous while exercising control over the nominee shareholders.
In its document “Money laundering using Trust and Company Service Providers” (TCSPs), published in October 2010, the Financial Action Task Force listed the scenarios below as possible indicators of money laundering:
- Transactions that require the use of complex and opaque legal entities and arrangements.
- The payment of “consultancy fees” to shell companies established in foreign jurisdictions or jurisdictions known to have a market in the formation of numerous shell companies.
- The transfer of funds in the form of “loans” to individuals from trusts and non-bank shell companies. These non-traditional “loans” then facilitate a system of regular transfers to these corporate vehicles from the “borrowing” individuals in the form of “loan repayments”.
- The use of TCSPs in jurisdictions that do not require TCSPs to capture, retain or submit to competent authorities’ information on the beneficial ownership of corporate structures formed by them.
- The use of legal persons and legal arrangements established in jurisdictions with weak or absent anti-money laundering/countering the financing of terrorism laws and/or poor record of supervision and monitoring of TCSPs.
- The use of legal persons or legal arrangements that operate in jurisdictions with secrecy laws.
- The use by prospective clients of nominee agreements to hide from the TCSP the beneficial ownership of client companies.
- The carrying out of multiple intercompany loan transactions and/or multijurisdictional wire transfers that have no apparent legal or commercial purpose.
- Clients who require the use of pre-constituted shell companies in jurisdictions that allow their use but do not require updating of ownership information.
- TCSPs that market themselves and/or their jurisdictions as facilitating anonymity and disguised asset ownership.
Risks facing dealers in precious metals and stones
Precious metals and precious stones can potentially be an attractive vehicle for money laundering, says the draft risk assessment report for dealers in precious metals and stones.
Criminals often target lucrative products in the precious metals industry to launder their illicit funds. Another factor that makes precious metals and precious stones highly attractive to potential money launderers is that of anonymity and, in some instances, a form of legal tender (in the case of Krugerrands). This makes it difficult to track the origin and to verify ownership of the commodities.
Precious metals and precious stones are small, high-value goods that are easy to move between different areas, across borders, and it is easy to change their shape and form. Together, these factors make precious metals and precious stones highly attractive and lucrative to criminals that intend to conceal, transfer, or invest their illicit proceeds.
Gold and precious metals are recognised as an attractive vehicle for money laundering. Gold is internationally considered a high risk for money laundering because it offers a sound investment, is cash intensive, is traded globally, often anonymously, and is a form of global currency. It is also regarded as a safe investment to have in times of unrest and uncertainty, which adds to its allure. These factors are also applicable to Krugerrands and other precious metals as a form in which gold is stored.
The report says the following scenarios can be regarded as potentially high risk for money laundering, and precious metals and precious stones dealers need to apply increased diligence when facing such scenarios:
- Significant cash withdrawals from bank accounts by participants within the gold trading sector.
- The transaction involves the use of front or shell companies where the client is an entity.
- The original source of the funds to buy precious metals and precious stones cannot be established.
- Transactions occur between domestic buyers and sellers and the proceeds are sent to unknown third parties in foreign jurisdictions.
- Unusual pattern of precious metals and precious stones transactions and the nature of the transactions are inconsistent with the customer profile.
- Established customers dramatically increasing the purchase of precious metals and precious stones for no apparent reason.
- Foreign nationals purchasing gold bullion through multiple transactions over a short period.
- Purchases for no apparent commercial or investment purpose, including a change in the purchasing behaviour of an existing client.
- Precious metals and precious stones are moved from or to a jurisdiction designated as high risk for money laundering activities.
- Illegal price-fixing schemes or attempts to inflate or deflate prices artificially.
- Precious metals or stones are sourced from regions known for armed conflict or human rights abuses.
- A lack of transparency in the supply chain, such as a lack of clarity on the origin of precious metals or stones, can raise concerns about illegal mining, smuggling, or unethical practices.
- Fraudulent grading reports or counterfeit certificates for diamonds and other gemstones, which may be because of illegal activities.
- A frequent turnover of employees in certain roles or positions may indicate potential internal theft or fraudulent activities within the company.
- The use of shell companies to disguise the origins or destinations of precious metals and stones, making it difficult to trace illegal activities.
Deadlines to comment
The deadlines to comment on the draft sector risk assessment reports are:
- Risk assessment for dealers in precious metals and stones: Friday, 1 December 2023.
- Risk assessment for company service providers: Thursday, 7 December 2023.
Comments must be sent to the FIC via consult@fic.gov.za.
