Several articles have been written around risk management, internal controls and due diligence, as well as ‘know-your-client’ as required in terms of the Financial Intelligence Centre Act 38 of 2001 (FICA). This is a subject that one can never claim to have exhausted because there is a particular risk that one faces daily, and so do businesses, including trust legal practices. Believing that you have exhausted all avenues around managing the risks in your business, is a risk on its own because you close-off from seeing potential events that can negatively affect your operations and deciding on your responses to those potential events.

Reality is that while you run your trust legal practice, someone is running another business, which may ultimately destroy what you are busy building. Even if you call it a ‘black-market business’ that they are running, it still is a business with strategic objectives, which its strategic partners are growing and putting every effort into, while protecting its discovery by law enforcement agencies. Participants in this market will stop at nothing to see their objectives achieved, and that is to reap significant profits from conducting illicit businesses.

Many definitions are given to black-market by various text. According to the Market Business News, ‘Black market – definition and meaning’ (https://marketbusinessnews.com, accessed 13-1-2022): ‘The black market, underground market, or underground economy is a market where people buy and sell products illegally. The term refers to the business activity rather than the products themselves’ (my italics).

What does this mean for a trust legal practice?

Let us recap on previously published articles, which readers are encouraged to read together with this article. We already established that trust legal practices are accountable institutions as determined under sch 1 of the FICA. This we dealt with in the article, ‘How FICA affects you and your legal practice’ 2019 (Oct) DR 6. We further established the requirements posed on trust legal practices and relating to customer due diligence and risk management and compliance programme. This is covered in the article, ‘Customer due diligence and risk management and compliance programme’ 2019 (Dec) DR 6.

It is mandatory for an accountable institution to conduct due diligence on their potential clients and to know their clients. Conducting a due diligence involves doing background checks and other forms of screening of a potential client for purposes of assessing the risk that the potential client would be bringing to the accountable institution and using the outcomes of that due diligence to decide on whether to accept the potential client or not. If this process is not done, or not done thoroughly, the accountable institution could find itself onboarding unwanted risk that it may fail to manage.

A further requirement on trust legal practices is premised on knowing their clients. Both customer diligence and knowing a client are not and cannot be a once-off activity. At the time of accepting a client, certain representations may have been made by the client to the trust legal practice. However, it remains a test if those representations hold throughout the period of the client remaining the client of the trust legal practice. Due diligence conducted may have revealed certain information about the potential client, which information may have been true and relevant at the time of conducting the due diligence and yielded certain risk levels that the trust legal practice acted on. Things do change as time passes, and certain things may change the risk assessment outcomes of the client if checked on. After accepting a new client, there could be indications that the client is involved in suspicious activities. If the trust legal practice does not on a continuous basis conduct customer diligence (best referred to as ‘ongoing due diligence’) and ‘know your client exercises’, the client can easily use the trust legal practice as a conduit to advance the objective of their illegal activities.

Money laundering and the financing of terrorist activities are some of the illegal activities that the world continues to battle with and requires the involvement of everyone to combat. In the past, authorities focused on solving crimes, but now also use deterrents in the fight of crime. Money that criminals launder is obtained from illegal activities, such as human trafficking, drug trafficking, corruption, extortion, etcetera. It threatens the legitimate economy and integrity of financial institutions with unwanted effects on the economic power and may corrupt society. Some of the areas that fighting money laundering may assist in are societal importance, identification of tax and other financial crimes, location and confiscation of criminal assets, and the legal context. Readers are encouraged to read more on the topic in Money Laundering and Terrorist Financing Awareness Handbook for Tax Examiners and Tax Auditors (Paris: OECD 2019).

We now look at the practical examples of what a trust legal practice may potentially be faced with in an effort by the criminals to conceal the origins of the money. One way in which money launderers operate is to create complex transactions that are confusing and, in that complexity, ensuring that some elements are not traceable or not easy to trace.

• There are instances where legal persons that become clients of trust legal practices, change ownerships, forms of business, etcetera. The changes taking place may bring about complications in that they may attract the application of certain legislation that may not have been applicable before or eliminate legislation that was previously applicable and may even have their registration in regions where there is little or no legislation for them to be unveiled. This would possibly be because the beneficial owners continue to research ways of beating the system and the best ways to conceal their activities. These are some of the changes that the accountable institution needs to concern itself with and conduct a thorough due diligence, and carefully follow questioning the changes. The frequency of changes to these aspects, if too often, including if they occur while the client is engaged with the trust legal practice, should be reason enough for the accountable institution to conduct further due diligence on the client to determine the real reasons for the frequent changes. It may be nothing untoward, but it could well be something that the trust legal practice should in fact concern itself with for purposes of determining whether ongoing relationship should be maintained and/or if filing a suspicious activity and/or transaction report to the Financial Intelligence Centre (the FIC) is required. Regions with little or no legislation require that legal practitioners are on the know-how of such regions as they are often published, and not be naïve to that information.
• With the understanding that trust legal practices act on the instructions of their trust creditors, clients with ulterior motives may use this to their advantage. Clients aiming to use trust legal practices to pursue their illegal objectives study the way the institutions operate, understand the legislation surrounding them, and identify areas in the system that they can use to their advantage. While reallocation of funds between two or more accounts is permissible and legal, such journal entries can also be abused by individuals seeking to create complex transaction trails for purposes of pursuing their own ill-thought objectives. For example, a client accepted by a trust legal practice may later introduce other matters or clients to the trust legal practice and start authorising journal entries reallocating funds from one account to another. This the client will not do overnight following acceptance as a client but will first develop a rapport with the trust legal practice and once comfortable that this is achieved start introducing methods to pursue their hidden objectives. They rely on ‘trust’ to manipulate the trust legal practice and the system. They may authorise a reallocation of funds between accounts and later reverse the instruction and do this between various accounts ensuring that they cause as much confusion as they possibly can. This can be one of the indications of potentially laundering money and ongoing due diligence should highlight concerns around such and if the concerns are very strong, suspicious activity and/or transactions should be reported to the FIC for further investigation.

When developing a risk management and compliance programme for the trust legal practice, these are some of the areas that the programme should not ignore. The programme should consider various potential developments that the trust legal practice may confront and address how such should be dealt with when they occur. The examples cited in the foregoing paragraphs should be covered in the programme in terms of how and what to do when they occur and that should be applied without exception, irrespective of who the client in question is. Staff at the trust legal practice should be trained to always apply the required actions to similar circumstances. This ensures the effectiveness of the measure that the trust legal practice employs. Failure to do so should be punishable and that can serve as a deterrent for staff to do the right thing, all the time, without fail.

Conclusion

In conclusion, trust legal practices should always be on guard for clients who may abuse them and use them for further advancement of their illegal practices. Where suspicion occurs, trust legal practices have an obligation to report such suspicion and not ignore it. They also cannot only terminate the relationship between themselves and the suspicious client but must report their suspicion to the FIC as required in terms of FICA. Failure to report suspicion to the FIC could suggest conspiracy and amounts to failure by the trust legal practice to assist other authorities in the fight against crime. All accountable institutions are expected to become part of the chain for combating crime, irrespective of its origination.

Do not be dissuaded from acting as expected and from being a trusted accountable institution and comply with the requirements of all legislation surrounding your operations.

No matter how much mutual trust you have with your clients due to the established rapport with them, never relax your internal controls and always keep your guard up. This may not only keep you in business but also positively contribute to the combating of illicit activities.

Simthandile Kholelwa Myemane BCom Dip Advanced Business Management (UJ) Cert Forensic and Investigative Auditing (Unisa) Certified Control Self Assessor (Institute of Internal Auditors) Cert in Management and Investigation of Cyber and Electronic Crimes Cert in Fraud Risk Management Cert in Law for Commercial Forensic Practitioners Cert in Investigation of Financial Crimes Cert in Investigation and Detection of Money Laundering Cert in Economic Crime Schemes (Enterprises University of Pretoria) is the Practitioner Support Manager at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2022 (March) DR 7.