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How estate agents can combat fraud and money laundering risks

13 Jul 2020

The property sector is often misused by criminals, as it presents options in which to hide the source, disposal and use of their illicit proceeds.

This can pose serious threats to South Africa’s financial system. Due to the nature of the industry, estate agents are identified as being vulnerable to abuse by criminals for purposes of money laundering and terrorist financing, says the Financial Intelligence Centre (FIC), which is calling on Estate Agents to continue to adopt a risk based approach, and to report any suspicious concerns, as require. 

"Estate agents can help mitigate the risk of being misused by criminals by fulfilling their FIC Act obligations while at the same time, strengthening their sector. In compliance with these obligations, estate agents must gather sufficient information regarding their clients and their transactions, and where required, report certain information to the FIC."

Legal requirements/duties for accountable institutions

In an effort to introduce greater transparency and accountability within the South African financial services industry, the Financial Intelligence Centre Act 38 was introduced in 2001 (“FICA”).

Money laundering is regulated by FICA and the Prevention of Organised Crime Act, 1998 (“POCA”). POCA sets out the money laundering (ML) offences, while FICA primarily provides the administrative framework for regulating anti-money laundering. FICA refers to accountable institutions. An “accountable institution” is any person defined in schedule 1 of the Act and includes attorneys, trustees, executors and estate agents.

Under FICA, all accountable institutions must comply with:

  • The duty to identify clients (this is found under Part 1 of FICA and is also commonly referred to as “know your client” or customer due diligence).
  • The duty to keep records (this is found under Part 2 of FICA).
  • Reporting duties and access to information (found under Part 3 of FICA); and
  • Measures to promote compliance (Part 4 of FICA: this refers to activities such as compiling a risk management and compliance programme and training of staff members).

In 2017, FICA was amended to include a risk-based approach to money laundering, allowing institutions greater flexibility in the customer verification measures they adopt. 

Compliance obligations for estate agent

As per the FIC Act, Estate agents are required to apply a risk-based approach (RBA) when implementing controls to combat money laundering and terrorist financing (ML/TF). The RBA requires estate agents to determine the ML/TF risks their clients pose to their businesses through the products that they offer.

"The estate agent needs to adopt controls that are adequate and proportionate to mitigate these potential risks. Where a service or product presents a higher ML/TF risk, the estate agent must apply stricter control measures, adds FIC.

"When applying an RBA, an estate agent would for example have to determine the different levels of risk between renting and selling property from a ML/TF perspective, and put in place controls that are proportionate to the different levels of the risk presented by the different services.

"Estate agents must apply their minds and expertise when assessing risks based on the merits of each business relationship and/or single transaction, considering the client types, services offered, delivery channel, geographical region and any other relevant factor. Estate agents can refer to Guidance Note 7 for a detailed discussion in this regard."

Customer due diligence as set out by the FIC

  • When taking on clients, accountable institutions must identify and verify the identity of their clients. The FIC Act requires that accountable institutions must as part of their customer due diligence request information regarding the nature and intended purposes of the business relationship.
  • When after assessing the ML/TF risk, it is found that a client presents a higher ML/TF risk, the estate agent must adopt stricter verification controls which is referred to as enhanced due diligence.
  • In addition to identifying and verifying clients, the estate agent must determine the source of the client’s funds for the payment of the product or service.
  • Where the client is a legal person, i.e. a company, trust and/or partnership, the estate agent must determine the beneficial owners. The customer due diligence requirements are aimed at the estate agent knowing and understanding their clients.
  • An estate agent may not deal with anonymous clients.
  • By fulfilling their compliance obligations, estate agents do not only safeguard the integrity of the property sector but help in the fight against financial crime.

Scrutinise client information against the sanctions list

FIC adds that no person may provide financing to any person listed on a targeted financial sanctions list. It is therefore vital that estate agents scrutinise the information concerning their clients in order to determine if their client is a person or entity mentioned in the targeted financial sanctions lists as published in terms of section 26A of the FIC Act, and section 25 of the Protection of Constitutional Democracy Against Terrorist and Related Activity Act, 2004 (Act 33 of 2004). The FIC published PCC 44 which provides guidance on the different sanction regimes in South Africa.

Registering and reporting to the FIC

As an accountable institutions FIC Act compliance obligations, estate agents are required to register with and report to the FIC. To assist with registration, the FIC has developed easy to use guides on its website.

"The estate agent must monitor client transactions and activities to identify suspicious and unusual transactions that maybe linked to the proceeds of crime, as well as transactions that exceed the cash threshold of R24 999.99. In addition, they need to report property under their control, or which is known to be connected to the financing of terrorist activities."

Where the estate agent does identify any of these, they must file the appropriate report electronically to the FIC.

These report types include:

The estate agent must also keep records of customer due diligence conducted and transactional records.

Risk management and compliance programme

"All risk control measures including policies, processes and systems must be documented in the estate agent’s risk management and compliance programme (RMCP).

"An RMCP comprises of all the documents that incorporate the estate agent’s compliance controls. Section 42 of the FIC Act sets out what must be covered in the estate agent’s RMCP see Guidance Note 7 for more details.

Knowing the risks facing estate agents 

Non-compliance on the part of an estate agency can also result in serious consequences, such as disciplinary processes and significant fines, advises Dr Tarryn Bannister of HVR Attorneys.

Examples of how these risks could play out for estate agents include:

  • Being placed under pressure to circumvent or rush due diligence requirements to finalise transactions.
  • Being exposed to mortgage fraud
  • Having clients use shell companies to buy property
  • Working with politically exposed clients
  • Having clients pay for property with large sums of cash.
  • Receiving intercepted emails with criminals posing as solicitors
  • Having the purchase price paid by an unidentified third party

The need to undertake an updated risk assessment relating to COVID-19 risks is important as certain risks may intersect and reinforce one another in previously unforeseen ways. Accountable institutions are also advised to remain vigilant regarding financial crimes and ensure that they continue to comply with their reporting obligations in terms of FICA," says Bannister.

Counteractive measures include: 

  • Review the risks facing your organisation

Given that COVID-19 is changing business as we know it, it is necessary to undertake in-depth research and to consult with external experts where necessary in order to identify the operational, strategic, financial and reputational risks facing your organisation. Gather information from all employee levels and from a large cross-section of stakeholders (clients, employees, and vendors). These parties may be able to identify risks that you would not have considered. Ensure that you have avoided silos and that you have considered how different risks interact, such as how cyber security risks interact with data protection concerns and money laundering risks.

As emphasised in the FICA guidance note: “The process to manage money laundering risk is a continuous cycle. Accountable institutions should satisfy themselves that their risk management systems and controls remain adequate in view of changing circumstances relating to emerging threats and vulnerabilities.”

  • Ensure your staff is sufficiently trained

Often, the weakest link underlying cybercrimes, and even money laundering is human error. One staff member can derail an entire cyber crime policy or a risk management programme through clicking on a phishing email or failing to follow the proper procedure when dealing with politically exposed or foreign clients. Additionally, hastily activated remote working conditions have placed increased strain on the control environments of most organisations which are not always designed to be applied in home office situations. The lack of face-to-face communication also prevents employees from being able to confirm something with a colleague. It is therefore important to raise employee awareness with quality training. There are several training options available. Please feel free to contact HVR Attorneys if you would like assistance in this regard.

  • Communicate effectively

It is of the utmost importance to open the lines of communication with staff members, suppliers, and clients. Now is the ideal time to reach out to clients to demonstrate how you can assist them. Decision making and oversight processes need to be robust. If operating standards have been forced to change, compliance teams need to confirm that decisions are being properly documented and sound governance mechanisms are in place.

  • Consider the use of FinTech

The joint communication from the Authorities specifically encourages the use of technology, including Fintech, Regtech and Suptech to the fullest extent possible. ‘FinTech’ usually refers to innovative start-ups or underlying technologies such as blockchain, cloud computing, and machine learning. Focusing on an activity-based analysis conducted by the Financial Stability Board (FSB), the developing definition of ‘FinTech’ is technology-enabled innovation in financial services that results from ‘creative destruction’ or disruption. Regtech refers to the use of technology to assist with regulatory compliance, while Suptech refers to the use of technology to support supervisory bodies in conducting supervision.

"COVID-19 pandemic has clearly exacerbated several cyber security and money laundering risks. While the pandemic has presented some obstacles to compliance, accountable institutions, such as estate agents, are also faced with an opportunity to re-invent certain aspects of their business while solidifying their reputation as compliant and socially conscious organisations," says Bannister.

"Accountable institutions will need to examine these money laundering and cyber security risks in detail to determine the extent to which they impact their specific organisation. It is important to remember that we are not powerless in the face of these risks. Careful and strategic planning are, however, necessary. As emphasised by the World Economic Forum, never before has there been a more pressing need for a creative, collaborative and multi-stakeholder approach to shared global problems," says Bannister.

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