All legal practitioners practising for their own account are required, in terms of
s 84 of the Legal Practice Act 28 of 2014, to hold a valid Fidelity Fund Certificate (FFC). In support of an application for the FFC by a legal practitioner, the legal practitioner’s annual statement on trust accounts is required to be submitted to the Legal Practice Council by the legal practitioners of a legal practice.  In terms of this statement clause 2 deals with attorney’s compliance requirements, with sub-clauses 2(i) – (n) specifically dealing with the Financial Intelligence Centre Act 38 of 2001 (FICA) requirements.

The Financial Intelligence Centre (FIC) is South Africa’s national centre for the receipt of financial data, analysis and dissemination of financial intelligence to the competent authorities (www.fic.gov.za, accessed 16-8-2019). The FIC was established by FICA and has the mandate to identify the proceeds of crime, combat money laundering and terror financing. It does this by seeking to:

• ‘Supervise and enforce compliance with the FIC Act;
• Facilitate effective supervision and enforcement by supervisory bodies;
• Receive financial data from accountable and reporting institutions;
• Share information with law enforcement authorities, intelligence services, the South African Revenue Service, international counterparts and supervisory bodies;
• Formulate policy regarding money laundering and the financing of terrorism;
• Provide policy advice to the Minister of Finance; and
• Uphold the international obligations and commitments required by the country in respect of anti-money laundering and combating financing of terrorism’.

This article seeks to address the salient requirements imposed on the legal practice as an accountable institution and on a legal practitioner as a person who carries on a business or oversees or manages a business or is employed by a business. The FIC has issued several guidelines dealing with the reporting requirements of the accountable institutions, and these can be accessed from www.fic.gov.za. It is not the intention of this article to go into detail on what is contained in those guidelines, but all readers are encouraged to read this article together with those guidelines to obtain benefit. I will now consider the specific sections of FICA as contained in the statement.

Section 43B of FICA

This section requires a legal practice to register with the FIC as an accountable institution. Schedule 1 to FICA lists accountable institutions, and legal practitioners are included on the list. On registration with the FIC utilising the FIC’s registration and reporting platform, the legal practice is issued with a unique registration number.

Section 21 of FICA

This section requires the accountable institutions to establish and verify the identity of their clients, whether for a single transaction or for a business relationship. In addition to the requirements of this section, other specific requirements are as follows:

• Section 21A requires of the accountable institution – when establishing a business relationship with a prospective client – to obtain information to reasonably enable the accountable institution to determine whether future transactions, which will be performed during the course of the business relationship concerned are consistent with the institution’s knowledge of that prospective client.
• Section 21B of FICA deals with additional due diligence measures relating to legal persons, trusts and partnerships. The section requires an accountable institution to, in addition to the requirements of ss 21 and 21A, establish the nature of the client’s business and the ownership and control of the client. Beneficial ownership of the client becomes the most crucial element of this section. Readers should note that beneficial ownership can only refer to an individual, so irrespective of the number of entities that may be involved in terms of structures formed, there is an ultimate individual who benefits, and accountable institutions must establish that individual.
• Section 21C requires an ongoing due diligence of the client in respect of a business relationship by the accountable institution.
• Section 21D empowers the accountable institution to repeat the steps contained in ss 21 and 21B should there be doubts about the veracity of previously obtained information.
• Section 21E deals with the inability by an accountable institution to perform the steps contemplated under ss 21, 21A, 21B and 21C and states under s 21E ‘[i]f an accountable institution is unable to –

(a)        …

(b)        …

(c) conduct ongoing due diligence as contemplated in section 21C, the institution –

(i) may not establish a business relationship or conclude a single transaction with a client;

(ii) may not conclude a transaction in the course of a business relationship, or perform any act to give effect to a single transaction; or

(iii) must terminate, in accordance with its Risk Management and Compliance Programme, an existing business relationship with a client, as the case may be, and consider making a report under section 29 of the Act.’

• Sections 21F and 21G address how to deal with a prospective client established to be a foreign public official or a domestic public official respectively.
• Section 21H deals with family members and close associates of clients determined under ss 21F and G.

Section 42 of FICA

At this point I direct the attention of the readers to s 42 of FICA, dealing with the requirement for an accountable institution to prepare and maintain a Risk Management and Compliance Programme. Subsection 42(2) details various things to be achieved by the Risk Management and Compliance Programme.

With the understanding of the requirements of ss 21 and 42 that has been established in the foregoing paragraphs, I now focus on the reporting requirements of an accountable institution.

Section 28 of FICA

The section imposes a duty on the accountable institution to report to the FIC, within the prescribed period. Cash paid by or received by an accountable institution to/from the client, a person acting on behalf of the client, or a person on whose behalf the client is acting in excess of the threshold. The threshold is currently set at R 24 999,99 with any amount above that reportable to the FIC in terms of FICA, and is not limited to cash transactions at the office of the legal practice but includes cash transactions where cash is paid directly into the bank account held with a financial institution in the name of the accountable institution. In this regard, both the financial institution at which the bank account is held, and the accountable institution have the duty to report the cash transaction to the FIC.

Section 28A deals with reporting property associated with terrorist and related activities and financial sanctions pursuant to Resolutions of United Nations Security Council.

Section 29 of FICA

This section imposes a duty on the accountable institution to report suspicious or unusual transactions and activities to the FIC within the prescribed period. Suspicious or unusual activity deals with circumstances where a transaction is not concluded, but there has been an attempt or anticipation for a transaction to take place; whereas suspicious or unusual transaction suggest that a transaction has been concluded and can be traced.

A draft guidance notes, Guidance Note 4A, by the FIC defines:

• Suspicious activity reporting as referring to ‘a suspicious or unusual activity report submitted in terms of section 29(1) or 29(2) of the FIC Act in respect of the proceeds of unlawful activities or money laundering where the report relates to an activity which does not involve a transaction between two or more parties or in respect of a transaction or a series of transactions about which enquiries are made, but which has not been concluded, respectively.’
• Suspicious transaction reporting as referring to ‘a suspicious or unusual transaction report submitted in terms of section 29(1) of the FIC Act in respect of the proceeds of unlawful activities or money laundering where the report relates to a transaction or a series of transactions between two or more parties.’

Scenario 1 – illustration of a suspicious activity

A representative of a prospective client approaches a legal practice for a business relationship. The accountable institution employs the requirements of s 21 to the prospective client. The prospective client fails to satisfy the requirements, by failing to disclose to the legal practice the nature of business that the prospective client engages in and the beneficial ownership of the client despite requests by the legal practice for the information. The legal practice then declines to enter the business relationship with the prospective client as required by s 21E.

In this illustration, no transaction has been concluded, purely an activity has taken place. The accountable institution is, therefore, required in terms of s 29 of FICA to file a suspicious activity report with the FIC.

Scenario 2 – illustration of a suspicious transaction

On 23 April a prospective client of a legal practice approaches the legal practice and advises that he would like to purchase a property in future, but wishes to make a deposit into the trust account of the legal practice while identifying the property as he would like the legal practice to be involved with the transfer of the property. After deliberations with the legal practitioner at the legal practice, the parties reach an agreement in terms of which the amount paid in by the client would be invested by the legal practice pending the purchase of a property, and subsequently the client deposits an amount of R 2,5 million into the trust account of the legal practice as follows:

• On 24 April the client deposits a cash amount of R 500 000 into the legal practice’s trust bank account held with one of the financial institutions within South Africa (SA) – ss 28 and 29(1) reporting by both the financial institution and the legal practice.
• On 24 April the client transfers an amount of R 800 000 from an investment account held with a financial institution within the SA.
• On 26 April an amount of R 600 000 is received into the trust account of the legal practice from a financial institution outside SA.
• On 29 April the client walks into the offices of the legal practice with a bag full of cash to the amount of R 450 000. Sections 28 and 29(1) reporting by both the financial institution and the legal practice.
• On 30 April around 10:00 am a cash amount of R 24 000 is received into the trust bank account of the legal practice, a further R 24 000 is received into the trust bank account of the legal practice around 15:15 pm on the same day. This is an attempt at splitting the amount to fall below the R 24 999,99 threshold. Because the total cash amount of R 48 000 happened within a 24-hour period from each other, the amount is reportable in terms of s 28.
• On 30 April another amount of R 102 000 is received via an electronic funds transfer into the trust bank account of the legal practice.
• On 22 May, the representative of the client approaches the legal practice and advises that the client no longer wishes to continue with the purchase of a property and would, therefore, wish to withdraw the amounts paid into the trust account of the legal practice. The representative provides a bank account into which the refund should be paid. Section 29(1) reporting by the legal practice.

In this entire scenario, indications are that there is potentially an attempt to conceal the proceeds of unlawful activities, and to launder the money using the trust account of a legal practice.

Conclusion

Legal practitioners are cautioned of ways in which they may find themselves being party to money laundering activities and to protect themselves and their legal practices from such. It is in the best interest of every legal practice to prepare and maintain a Risk Management and Compliance Programme, which guides and protects the legal practice from falling foul of such attempts by potentially corrupt clients. If in doubt regarding a business relationship, terminate that relationship and report your suspicions to the FIC.

• See also Nkateko Nkhwashu ‘Do trust account advocates need a mind shift to deal with FICA?’ on p 13.

Simthandile Kholelwa Myemane BCom Dip Advanced Business Management (UJ) Cert Forensic and Investigative Auditing (Unisa) Certified Control Self Assessor (Institute of Internal Auditors) is the Practitioner Support Manager at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2019 (October) DR 6.