ASPECTS OF MONEY LAUNDERING IN SOUTH AFRICAN LAW

by

IZELDE LOUISE VAN JAARSVELD

submitted in accordance with the requirements

for the degree of

DOCTOR OF LAWS

at the

UNIVERSITY OF SOUTH AFRICA

SUPERVISOR: PROF J T PRETORIUS

APRIL 2011

Student Number: 3362-407-0

I declare that ASPECTS OF MONEY LAUNDERING IN SOUTH AFRICAN LAW is myown work and that all sources that I have used or quoted have been indicated and acknowledgedby means of complete references.

Izelde Louise van Jaarsveld 3 April 2011

(MS IL VAN JAARSVELD) Date

ii

SYNOPSIS

Money laundering involves activities which are aimed at concealing benefits that were acquired

through criminal means for the purpose of making them appear legitimately acquired. Money

laundering promotes criminal activities in South Africa because it allows criminals to keep the

benefits that they acquired through their criminal activities. It takes place through a variety of

schemes which include the use of banks. In this sense money laundering control is based on the

premise that banks must be protected from providing criminals with the means to launder the

benefits of their criminal activities.

The Financial Intelligence Centre Act 38 of 2001 (‘FICA’) in aggregate with the

Prevention of Organised Crime Act 121 of 1998 (‘POCA’) form the backbone of South Africa’s

anti-money laundering regime. Like its international counterparts FICA imposes onerous duties

on banks seeing that they are most often used by criminals as conduits to launder the benefits of

crime. In turn, POCA criminalises activities in relation to the benefits of crime and delineates

civil proceedings aimed at forfeiting the benefits of crime to the state. This study identifies the

idiosyncrasies of the South African anti-money laundering regime and forwards

recommendations aimed at improving its structure.

To this end nine issues in relation to money laundering control and banks are investigated.

The investigation fundamentally reveals that money laundering control holds unforeseen

consequences for banks. In particular, a bank that receives the benefits of crimes such as fraud

or theft faces prosecution if it fails to heed FICA’s money laundering control duties, for example,

the filing of a suspicious transaction report. However, if the bank files a suspicious transaction

report, it may be sued in civil court by the customer for breach of contract. In addition, if the bank

parted with the benefits of fraud or theft whilst suspecting that the account holder may not be

entitled to payment thereof, it may be sued by the victim of fraud or theft who seeks to recover

loss suffered at the hand of the fraudster or thief from the bank.

Ultimately, this study illustrates that amendment of some of the provisions of South

Africa’s anti-money laundering legislation should enable banks to manage the aforementioned

and other unforeseen consequences of money laundering control whilst at the same time

contribute to the South African anti-money laundering effort.

KEY TERMS – Money laundering control; banks; Financial Intelligence Centre Act of 2001;

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Prevention of Organised Crime Act of 1998; Money Laundering and Terrorist Financing Control

Regulations of 2002; globalisation of criminal activity; money; bank-customer relationship; bank

confidentiality; safe-harbour provisions; ownership of deposited money; proceeds of crime; Basel

Committee on Banking Regulations and Supervisory Practices; Statement of Principles; Financial

Action Task Force on Money Laundering; Forty Recommendations; Council of Europe; Third

Anti-Money Laundering Directive; KYC Standard; customer due diligence; Vienna Convention;

Strasbourg Convention; Proceeds of Crime Act 2002; Bank Secrecy Act; Patriot Act; Financial

Crimes Enforcement Network; common-law ownership remedies; constructive trust; tracing; rei

vindicatio; quasi-vindictory action; actio Pauliana; interdicts; unjust enrichment condictiones;

civil forfeiture; innocent owner defence

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ACKNOWLEDGEMENTS

Soli Deo Gloria

I would like to thank various people who have been involved with, in at least one way or another,in the preparation of this study. First and foremost, I would like to thank Jesus Christ, mysaviour, for granting me the opportunity and perseverance to undertake and complete this study.

In addition, I would like to thank Professor Jopie Pretorius for allowing me to study under him,and for his guidance, assistance and insight that made this study possible. His reviews andcomments on the drafts of this study were invaluable. During the many periods of ill health thatmarked this study for me, his patience and support became indispensable, and I will always begrateful.

I further owe a great debt of gratitude to the University of South Africa and the Centre forBusiness Law at the Department of Mercantile Law for extending to me the necessary funds toundertake research at the University of Leuven in Belgium, Southern Methodist University inDallas, Texas, University of Columbia in New York, the Institute for Advanced Legal Studiesin London and the University of Western Ontario in Canada.

I am grateful to Professor Muthu Sigwadi, Chair of the Department of Mercantile Law, whoallowed my to work at home during the final months of this study. I will always be indebted tomy colleague, Professor Heinrich Schulze, for his support and advice during the last months ofcompleting the study - his quiet assistance and support did not go unnoticed.

Throughout the development of this study, my family took an interest and supported my work.I would like to say thank you. In this respect, a very special thanks to my father, Fanie vanJaarsveld, for his enthusiasm and sound advice. He is the perfect example of kindness and ahumble spirit. Thanks also to my twin, Marlize, for the example you set, the input, thoughts andunwavering support. I am privileged.

Thank you to Dirk and Ingrid, Fanie and Ilze who over the years were willing to put up with myworking on the subjects contained in what follows. Your support saw me through. George, Laraand Liza-Byrd allowed lots of cuddles.

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THESIS PLAN

Aspects of Money Laundering in South African Law

CHAPTER 1 CHAPTER 2 CHAPTER 3Introduction Concepts of Money Bank-Customer RelationshipProblem Statement Benefits of Crime Bank as Owner of Deposited

Benefits of Crime

CHAPTER 4Definition of Money Laundering

Money Laundering Process Consequences of Money Laundering

INTERNATIONAL POSITION

CHAPTER 5 CHAPTER 6 CHAPTER 7International Institutions EU Position US Position Basel Committee 2005 Directive Bank Secrecy Act FATF Civil Remedies Money Laundering Control Act United Nations Patriot Act

Industry Measures English Position IMF & World Bank Proceeds of Crime Act Wolfsberg Principles * Egmont Group

Civil Remedies Civil Remedies

*Constructive TrustTracingCivil Forfeiture

SOUTH AFRICAN POSITION

CHAPTER 8

AML Legislation Civil Remedies Financial Intelligence Centre Act Rei Vindicatio, Quasi-Vindictory Action, Actio Prevention of Organised Crime Act Pauliana, Interdict

Unjust Enrichment Condictiones Civil Forfeiture

CHAPTER 9Conclusions and Recommendations

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LIST OF ACRONYMS

ALI American Law Institute

AML Anti-Money Laundering

BIS Bank for International Settlements

CFR Code of Federal Regulations (USA)

CHIPS Clearing House Interbank Payment System

CTR Currency Transaction Report

EC European Commission

EFT Electronic Fund Transfer

EU Countries on the European Continent that are subject to EU Law

FATF Financial Action Task Force on Money Laundering

FICA Financial Intelligence Centre Act of 2001 (South Africa)

FIC Financial Intelligence Centre

FIU Financial Intelligence Unit

IMF International Monetary Fund

KYC Know Your Customer

MVT Money Value Transfer

NDPP National Director of Public Prosecutions

PCA Proceeds of Crime Act 2002 (England)

POCA Prevention of Organised Crime Act of 1998 (South Africa)

NPA National Prosecuting Authority

STR Suspicious Transaction Report

SWIFT Society for Worldwide Interbank Financial Telecommunication

UCC Uniform Commercial Code

UN United Nations

US United States of America

USC United States Code

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TABLE OF CONTENTS

Page

Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Thesis Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

List of Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi

Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

CHAPTER 1: GENERAL INTRODUCTION

A. INTRODUCTION

1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Money Laundering Control Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3. Dilemma of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

B. PROBLEM STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

C. RESEARCH METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

D. OVERVIEW OF STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

CHAPTER 2: CONCEPTS OF MONEY

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

1. Money as Chattel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2. Money as Medium of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3. Money as Legal Tender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

B. HISTORICAL DEVELOPMENT OF MONEY

1. The Origin of Banknotes and Coins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

2. Electronic Banking

2.1 Electronic Banking as Part of E-Commerce . . . . . . . . . . . . . . . . . . . 51

2.2 Specific Problems of Electronic Banking . . . . . . . . . . . . . . . . . . . . . 51

2.3 Electronic Transfers

2.3.1 Overview and Primary Concepts . . . . . . . . . . . . . . . . . . . . . 52

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2.3.2 Legal Nature of a Fund Transfer Instruction . . . . . . . . . . . . . 54

2.3.3 Legal Nature of Credit and Debit Transfers . . . . . . . . . . . . . 55

2.3.4 Internet Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

2.3.5 Completion of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

2.4 Electronic Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

C. MODERN CONCEPTUALISATION OF MONEY

1. Theoretical Approach

1.1 State Theory of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

1.2 Societal Theory of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

1.3 Res Corporalis and Res Fungibililes . . . . . . . . . . . . . . . . . . . . . . . . . 65

2. Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

3. Proposed Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

4. Commingled Money

4.1 Criterion of Mixing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

4.2 Money in a Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

5. Concept of ‘Benefits of Crime’

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

5.2 Historical Aspects

5.2.1 Drugs and Organised Crime . . . . . . . . . . . . . . . . . . . . . . . . . . 77

5.2.2 Organised Crime and the Benefits of Crime . . . . . . . . . . . . . . 78

5.3 Different Notions of the Concept ‘Benefits of Crime’

5.3.1 Criminal Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

5.3.2 Tainted Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

5.3.3 Alley Cat Clothing v De Lisle Weare Racing . . . . . . . . . . . . . . 82

D. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . 84

CHAPTER 3: ASPECTS OF THE BANK-CUSTOMER RELATIONSHIP

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

B. BANK-CUSTOMER RELATIONSHIP

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

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2. Legal Framework

2.1 Relationship of Debtor and Creditor

2.1.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

2.1.2 Bank’s Receipt of the Benefits of Fraud or Theft

2.1.2.1 Right to Terminate Contractual Relationship

Voidable Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Bredenkamp and others v Standard Bank of South

Africa and another . . . . . . . . . . . . . . . . . . . . . . . . . . 97

2.1.2.2 Right to Refuse Payment of Deposited Moneys

General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Intention of Account Holder . . . . . . . . . . . . . . . . . . . . 102

2.2 Bank’s Duty of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

2.3 Bank’s Duty of Confidentiality

2.3.1 Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

2.3.2 Common-Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

2.3.3 Statutory Law

2.3.3.1 General Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . 122

2.3.3.2 Anti-Money Laundering Legislation . . . . . . . . . . . . . 123

2.3.4 Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

3. Legal Nature of Current Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

C. BANK AS OWNER OF DEPOSITED MONEYS

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

2. Concept of Ownership

2.1 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

2.2 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

3. Ownership of Money in Account

3.1 Meaning of Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

3.2 Receipt for Own Use and Benefit

3.2.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

3.2.2 Joint Stock Varvarinskoye v Absa Bank Ltd

3.2.2.1 Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

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3.2.2.2 Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

3.2.2.3 Discussion: Money for Own Use . . . . . . . . . . . . . . . 141

3.3 Receipt as Reduction of Overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . 143

D. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 148

CHAPTER 4: THE JURISPRUDENCE OF MONEY LAUNDERING

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

B. WHAT IS MONEY LAUNDERING?

1. Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

2. Historical Development of Money Laundering

2.1 Historical Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

2.2 Development of Anti-Money Laundering Legislation - Moral Panic 162

3. Scale of Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

4. Stages in Money Laundering Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

C. HOW DOES MONEY LAUNDERING WORK?

1. Misuse of the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

2. Misuse of Legal Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

3. Misuse of Certain Professional Groups: Attorneys . . . . . . . . . . . . . . . . . . . . 175

4. Integration of Benefits of Crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

D. EMPLOYING THE BANKING SYSTEM

1. General Banking Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

2. Correspondent Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

3. Private Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

4. Electronic Banking Services

4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

4.2 Anonymity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

4.3 Internet as Platform for Money Laundering Activities

4.3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

4.3.2 Money Laundering Methods over the Internet . . . . . . . . . . . 185

4.3.3 The Virtual Money Laundering Process . . . . . . . . . . . . . . . . 188

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4.3.4 International Aspects

4.3.4.1 The European Convention on Cybercrime . . . . . . . . 188

4.3.4.2 Recommendations of the Financial Action Task

Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

E. CONSEQUENCES OF MONEY LAUNDERING

1. Why Combat Money Laundering? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

2. Undermining of Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

3. Corruption of Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

4. Harm to the Banking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

5. Costs of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

F. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 200

CHAPTER 5: INTERNATIONAL CODES, CONVENTIONS AND PROPOSALS

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

B. MONEY LAUNDERING CONTROL

1. Objective Model of Money Laundering Control . . . . . . . . . . . . . . . . . . . 205

2. Subjective Model of Money Laundering Control . . . . . . . . . . . . . . . . . . . . . 207

3. The Know Your Customer (KYC) Standard

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

3.2 Basel Committee on Banking Regulations and Supervisory Practices

3.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

3.2.2 Statement of Principles (1988) . . . . . . . . . . . . . . . . . . . . . . . 213

3.2.3 Basel Core Principles (1997) . . . . . . . . . . . . . . . . . . . . . . . . 215

3.2.4 Basel Core Methodology (1999) . . . . . . . . . . . . . . . . . . . . . . 217

3.2.5 Client Due Diligence (2001) . . . . . . . . . . . . . . . . . . . . . . . . . 219

3.2.6 General Guide to Account Opening (2003) . . . . . . . . . . . . . 221

3.3 Financial Action Task Force

3.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

3.3.2 Forty Recommendations (1990) . . . . . . . . . . . . . . . . . . . . . . 224

3.3.3 Eight Special Recommendations on Terrorist Financing

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(2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

3.3.4 Revised Recommendations (2003) . . . . . . . . . . . . . . . . . . . . 229

3.4 Essential Requirements of the KYC Standard

3.4.1 Customer Acceptance Policy . . . . . . . . . . . . . . . . . . . . . . . . 232

3.4.2 Know Your Customer Principle 1 - Identification . . . . . . . . 233

3.4.3 Know Your Customer Principle 2 - Reporting . . . . . . . . . . . 233

3.4.4 Know Your Customer Principle 3 - Record Keeping . . . . . . 235

3.4.5 Know Your Customer Principle 4 - Training . . . . . . . . . . . . 236

3.5 Value of the KYC Standard for Banks . . . . . . . . . . . . . . . . . . . . . . . 236

C. UNITED NATIONS

1. UN Convention Against the Illicit Traffic in Narcotic Drugs (1988)

1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

1.2 Anti-Money Laundering Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 239

2. Mutual Legal Assistance Treaties in Criminal Matters

2.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

2.2 Role in Preventing Money Laundering . . . . . . . . . . . . . . . . . . . . . . . 241

3. UN Convention Against Transnational Organised Crime (2000)

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

3.2 Anti-Money Laundering Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 243

D. AUXILIARY INTERNATIONAL ANTI-MONEY LAUNDERING MEASURES

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

2. International Monetary Fund and the World Bank . . . . . . . . . . . . . . . . . . . . 245

3. Interpol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

4. Wolfsberg Anti-Money Laundering Principles . . . . . . . . . . . . . . . . . . . . . . . 248

5. Egmont Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

E. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 251

CHAPTER 6: COMPARATIVE POSITION RE MONEY LAUNDERING I

- THE EUROPEAN PERSPECTIVE

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

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B. EUROPEAN UNION

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

2. Bank-Customer Relationship

2.1 Debtor and Creditor Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

2.2 Bank Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

3. Anti-Money Laundering Legislation

3.1 Council of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

3.2 Strasbourg Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

3.3 Convention on Mutual Assistance in Criminal Matters . . . . . . . . . . 267

3.4 First Anti-Money Laundering Directive (1991) . . . . . . . . . . . . . . . . . 269

3.5 Second Anti-Money Laundering Directive (2001) . . . . . . . . . . . . . . 272

3.6 Third Anti-Money Laundering Directive (2005) . . . . . . . . . . . . . . . . 273

4. Civil Remedies

4.1 EU Legislation

4.1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

4.1.2 Brussels Convention (1968) . . . . . . . . . . . . . . . . . . . . . . . . . . 278

4.1.3 Brussels Regulation (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . 279

4.1.4 Rome Convention (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281

4.1.5 Rome II Regulation (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . 282

4.2 Civil Forfeiture

4.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

4.2.2 Strasbourg Convention (1990) . . . . . . . . . . . . . . . . . . . . . . . . 285

4.2.3 Schengen Agreement (1990) . . . . . . . . . . . . . . . . . . . . . . . . . 287

5. Individualised Anti-Money Laundering Measures

5.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

5.2 Europol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

5.3 Action Plan to Combat Organised Crime . . . . . . . . . . . . . . . . . . . . . 290

6. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292

C. ENGLAND

1. Introduction

1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

xiv

1.2 EU Law in England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

2. Bank-Customer Relationship

2.1 Debtor and Creditor Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

2.2 Bank Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

2.3 Bank as Owner of Deposited Moneys . . . . . . . . . . . . . . . . . . . . . . . . 304

3. Anti-Money Laundering Legislation

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

3.2 Criminal Justice Act (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

3.3 Drug Trafficking Act (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

3.4 Proceeds of Crime Act (2002)

3.4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

3.4.2 Principal Money Laundering Offences

3.4.2.1 Concealing Criminal Property . . . . . . . . . . . . . . . . . 311

3.4.2.2 Involvement in Money Laundering . . . . . . . . . . . . . . 311

3.4.2.3 Acquiring, Using or Possessing Criminal Property . 312

3.4.3 Auxiliary Money Laundering Offences

3.4.3.1 Failure to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . 312

3.4.3.2 Invalid Permission to Execute Transaction . . . . . . . . 313

3.4.3.3 Tipping-Off Offence . . . . . . . . . . . . . . . . . . . . . . . . . 314

3.4.3.4 Prejudicing an Investigation . . . . . . . . . . . . . . . . . . . 316

3.5 Anti-Money Laundering Regulations . . . . . . . . . . . . . . . . . . . . . . . . 317

4. Civil Remedies

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

4.2 Constructive Trust

4.2.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

4.2.2 Concept of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

4.2.3 Knowing Receipt

4.2.3.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

4.2.3.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328

4.2.4 Dishonest Assistance

4.2.4.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

4.2.4.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332

xv

4.3 Tracing

4.3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332

4.3.2 Common-Law Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335

4.3.3 Tracing in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337

4.3.4 Foskett v McKeown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338

4.3.5 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

4.3.6 Defences to Restitution Claims . . . . . . . . . . . . . . . . . . . . . . . 342

4.4 Civil Forfeiture

4.4.1 Action in Rem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

4.4.2 Proceeds of Crime Act (2002)

4.4.2.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 348

4.4.2.2 Civil Recovery Proceedings . . . . . . . . . . . . . . . . . . . 349

4.4.2.3 Cash Forfeiture Proceedings . . . . . . . . . . . . . . . . . . . 350

4.4.3 Innocent Owner Defence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

4.4.4 Interim Recovery Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352

5. Individualised Anti-Money Laundering Measures

5.1 Financial Services Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355

5.2 Joint Money Laundering Steering Group . . . . . . . . . . . . . . . . . . . . . 356

5.3 Money Laundering Advisory Committee . . . . . . . . . . . . . . . . . . . . . 357

D. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 358

CHAPTER 7: COMPARATIVE POSITION RE MONEY LAUNDERING II

- THE UNITED STATES OF AMERICA

A. INTRODUCTION

1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362

2. Legal System of the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364

B. BANK-CUSTOMER RELATIONSHIP

1. Debtor and Creditor Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365

2. Bank Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371

3. Bank as Owner of Deposited Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378

xvi

C. ANTI-MONEY LAUNDERING LEGISLATION

1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380

2. Bank Secrecy Act (1970)

2.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382

2.2 Primary Anti-Money Laundering Provisions (31 U.S.C

Sections 5311–5316) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382

2.3 Currency Transaction Reports (31 C.F.R Section 103) . . . . . . . . . . 384

2.4 Suspicious Transaction Reports (31 C.F.R Section 103) . . . . . . . . . 385

3. Money Laundering Control Act (1986)

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386

3.2 Money Laundering Offences

3.2.1. 18 U.S.C Section 1956 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387

3.2.2 18 U.S.C Section 1957 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392

4. Racketeering Influence Corrupt Organisation Act (1970) . . . . . . . . . . . . . . . 395

5. Annunzio-Wylie Anti-Money Laundering Act (1992) . . . . . . . . . . . . . . . . . 396

6. Money Laundering Suppression Act (1994) . . . . . . . . . . . . . . . . . . . . . . . . . 398

7. International Counter-Money Laundering and Foreign Anti-Corruption Act

(2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399

8. Patriot Act (2001)

8.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

8.2 Money Laundering Offences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402

8.3 Special Measures of the Patriot Act

8.3.1 Measures Pertaining to Banks Operating Outside the

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404

8.3.2 Measures Pertaining to International Financial Transactions

and Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405

9. Anti-Money Laundering Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407

D. CIVIL REMEDIES

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408

2. Constructive Trust

2.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412

xvii

2.2 Establishing Liability

2.2.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414

2.2.2 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416

2.2.3 Identifiability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417

2.3 Concept of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419

2.4 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421

3. Tracing

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423

3.2 Common-Law Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424

3.3 General Tracing Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424

3.4 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431

3.5 Replevin Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431

3.6 Defences to Restitution Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432

4. Civil Forfeiture

4.1 Action in Rem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436

4.2 Civil Forfeiture Legislation

4.2.1 Racketeering Influence Corrupt Organisation Statute (1970) 439

4.2.2 Money Laundering Control Act (1986) . . . . . . . . . . . . . . . . . 440

4.2.3 Civil Asset Forfeiture Reform Act (2000) . . . . . . . . . . . . . . . 443

4.2.4 Patriot Act (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444

4.3 Innocent Owner Defence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445

4.4 Interim Recovery Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

E. INDIVIDUALISED ANTI-MONEY LAUNDERING MEASURES

1. Financial Crimes Enforcement Network . . . . . . . . . . . . . . . . . . . . . . . . . 451

2. Federal Banking Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453

3. Bank Secrecy Act Advisory Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453

F. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 454

CHAPTER 8: MONEY LAUNDERING CONTROL FRAMEWORK

OF SOUTH AFRICA

xviii

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458

B. HISTORICAL DEVELOPMENT

1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461

2. South African Law Commission Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462

C. ANTI-MONEY LAUNDERING LEGISLATION

1. Drugs and Drug Trafficking Act (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . 463

2. Proceeds of Crime Act (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464

3. Prevention of Organised Crime Act (1998)

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466

3.2 Money Laundering Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467

4. Financial Intelligence Centre Act (2001)

4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472

4.2 Key Provisions

4.2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474

4.2.2 Knowledge Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

4.2.3 KYC Standard Provisions

4.2.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478

4.2.3.2 Identification Obligation . . . . . . . . . . . . . . . . . . . . . . 479

Three Identification Levels . . . . . . . . . . . . . . . . . . . 480

Reasonableness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482

Risk-Based Approach . . . . . . . . . . . . . . . . . . . . . . . . 484

When to Trace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487

4.2.3.3 Suspicious Transaction Reporting Obligation . . . . . 488

Accountable Institutions . . . . . . . . . . . . . . . . . . . . . . 489

Knowledge or Suspicion . . . . . . . . . . . . . . . . . . . . . . 492

Tipping-Off Offence . . . . . . . . . . . . . . . . . . . . . . . . . 497

Defences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497

Internal Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499

4.2.3.4 Record-Keeping Obligation . . . . . . . . . . . . . . . . . . . 500

4.2.3.5 Training Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . 500

4.3 Auxiliary Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502

xix

5. Money Laundering and Terrorist Financing Control Regulations . . . . . . . . 504

D. CIVIL REMEDIES

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505

2. Common-Law Remedies for Protection of Ownership

2.1 Rei Vindicatio

2.1.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508

2.1.2 Quasi-Vindictory Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512

2.1.3 Evaluation

2.1.3.1 Bank Exercises Control over Benefits of

or Theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513

2.1.3.2 Bank Paid Benefits of Fraud or Theft to

Fraudster or Thief . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518

2.2 Actio Pauliana

2.2.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518

2.2.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521

2.3 Interdict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524

3. Aspects of Unjust Enrichment Liability

3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530

3.2 Establishing Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531

3.3 The Condictiones

3.3.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534

3.3.2 Condictio Sine Causa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535

3.3.3 Condictio Indebiti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539

3.3.4 Condictio ob Turpem vel Injustam Causa . . . . . . . . . . . . . . 541

3.4 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547

4. Civil Forfeiture

4.1 Action in Rem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555

4.2 Prevention of Organised Crime Act (1998)

4.2.1 Key Provisions

4.2.1.1 Property Subject to Civil Forfeiture . . . . . . . . . . . . . 558

4.2.1.2 Unlawful Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 559

xx

4.2.1.3 Proceeds of Unlawful Activities . . . . . . . . . . . . . . . . 561

‘In Connection with’ Requirement . . . . . . . . . . . . . . 561

4.2.1.4 Instrumentality of an Offence . . . . . . . . . . . . . . . . . . 563

‘Which is Concerned in’ Requirement . . . . . . . . . . . 564

4.3 Innocent Owner Defence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568

4.4 International Cooperation in Criminal Matters Act (1996) . . . . . . . 572

4.5 Interim Recovery Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573

E. INDIVIDUALISED ANTI-MONEY LAUNDERING MEASURES

1. Financial Intelligence Centre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577

2. Counter-Money Laundering Advisory Council . . . . . . . . . . . . . . . . . . . . . . 579

3. Eastern and Southern Africa Anti-Money Laundering Group . . . . . . . . . . . 580

F. CHAPTER COMMENTARY AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 583

CHAPTER 9: RESEARCH CONCLUSIONS AND RECOMMENDATIONS

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595

B. RESEARCH OBJECTIVES AND SYNTHESES REVISITED

1 Concepts of Money

1.1 Functions of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597

1.2 Historical Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597

1.3 Electronic Banking

1.3.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597

1.3.2 Electronic Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598

1.3.3 Electronic Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598

1.4 Modern Conceptualisation of Money

1.4.1 Theoretical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599

1.4.2 Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599

1.4.3 Corporeal Money versus Fungible Money . . . . . . . . . . . . . . . . . . . . . 600

1.4.4 Recommended Definition of Money . . . . . . . . . . . . . . . . . . . . . . . . . 600

1.4.5 Commingled Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600

1.5 Concept of Benefits of Crime

xxi

1.5.1 Impact of Organised Crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601

1.5.2 Tainted Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601

1.5.3 Suggested Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602

1.6 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604

2. Bank-Customer Relationship and Money Laundering

2.1 Nature of Relationship

2.1.1 European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605

2.1.2 England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605

2.1.3 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606

2.1.4 South Africa

2.1.4.1 General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606

2.1.4.2 Bank’s Receipt of the Benefits of Fraud or Theft . . . . . . . . 607

2.1.4.3 Bank’s Duty of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608

2.2 Bank Confidentiality

2.2.1 International Community

2.2.1.1 Basel Committee on Banking Regulations and

Supervisory Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608

2.2.1.2 Financial Action Task Force on Money Laundering . . . . . . . 609

2.2.1.3 Other Organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610

2.2.2 European Union

2.2.2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611

2.2.2.2 England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611

2.2.3 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612

2.2.4 South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613

2.2.5 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614

2.3 Ownership of Benefits of Crime Deposited with a Bank

2.3.1 England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

2.3.2 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

2.3.3 South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

2.3.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618

3. Jurisprudence of Money Laundering

xxii

3.1 Nature of Money Laundering

3.1.1 Historical Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619

3.1.2 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619

3.1.3 Scale of Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620

3.1.4 Stages in Money Laundering Process . . . . . . . . . . . . . . . . . . . . . . . . 620

3.2 Money Laundering Techniques

3.2.1 Use of Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621

3.2.2 Legal Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621

3.2.3 Professional Groups: Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622

3.2.4 Use of Banking Institutions

3.2.4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622

3.2.4.2 Correspondent Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622

3.2.4.3 Private Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623

3.2.4.4 Electronic Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623

3.3 Consequences of Money Laundering

3.3.1 Undermining of Financial System . . . . . . . . . . . . . . . . . . . . . . . . . 624

3.3.2 Corruption of Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625

3.3.3 Harm to Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625

3.3.4 Costs of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626

3.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626

4. Money Laundering Control Measures

4.1 International Community

4.1.1 Two Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627

4.1.2 Know Your Customer Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628

4.1.3 Basel Committee on Banking Regulations and

Supervisory Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628

4.1.4 Financial Action Task Force on Money Laundering . . . . . . . . . . . . . 629

4.1.5 United Nations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630

4.1.6 Auxiliary International AML Measures . . . . . . . . . . . . . . . . . . . . . . 630

4.2. European Union

4.2.1 General

4.2.1.1 Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631

xxiii

4.2.1.2 Directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632

4.2.2 England

4.2.2.1 Proceeds of Crime Act (2002) . . . . . . . . . . . . . . . . . . . . . . . 633

4.2.2.2 Anti-Money Laundering Regulations . . . . . . . . . . . . . . . . . . 633

4.3 United States

4.3.1 Anti-Money Laundering Legislation . . . . . . . . . . . . . . . . . . . . . . . . . 633

4.3.2 Anti-Money Laundering Regulations . . . . . . . . . . . . . . . . . . . . . . . . 635

4.4 South Africa

4.4.1 Anti-Money Laundering Legislation

4.4.1.1 Prevention of Organised Crime Act (1998) . . . . . . . . . . . . . 635

4.4.1.2 Financial Intelligence Centre Act (2001) . . . . . . . . . . . . . . . 636

Identification Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637

Suspicious Transaction Reporting Obligation . . . . . . . . . . . 638

Record-Keeping Obligation . . . . . . . . . . . . . . . . . . . . . . . . . 640

Training Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640

4.4.2 Anti-Money Laundering Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 640

4.5 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641

5 Individualised Anti-Money Laundering Measures

5.1 European Union

5.1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648

5.1.2 England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648

5.2 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649

5.3 South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649

5.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651

6 Civil Remedies and Banks

6.1 European Union

6.1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652

6.1.2 England

6.1.2.1 Constructive Trust

General Principles of Liability . . . . . . . . . . . . . . . . . . . . . . . 653

Knowing Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655

Dishonest Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 657

xxiv

6.1.2.2 Tracing

Common-Law Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659

Equitable Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

6.1.2.3 Defences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661

6.2 United States

6.2.1 Constructive Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663

6.2.2 Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664

6.2.3 Replevin Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665

6.2.4 Defences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665

6.3 South Africa

6.3.1 Ownership Remedies

6.3.1.1 Rei Vindicatio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666

6.3.1.2 Quasi-Vindictory Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666

6.3.1.3 Actio Pauliana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667

6.3.1.4 Interdict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668

6.3.2 Unjust Enrichment Condictiones

6.3.2.1 Condictio Sine Causa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668

6.3.2.2 Condictio Indebiti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669

6.3.2.3 Condictio ob Turpem vel Injustam Causa . . . . . . . . . . . . . . . . . . . . 670

6.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671

7 Civil Forfeiture

7.1 European Union

7.1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676

7.12 England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676

7.2 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678

7.3 South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679

7.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680

C. SUMMARY OF RECOMMENDED AMENDMENTS TO FICA,

POCA AND THE AML REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681

D. CONTRIBUTION OF THIS STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684

E. FINAL CONCLUSION AND SUGGESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 685

xxv

ADDENDUM - BIBLIOGRAPHY

A. REFERENCE TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688

B. TABLE OF BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688

C. TABLE OF JOURNALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 736

D. TABLE OF CASES

1. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762

2. European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765

3. South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765

4. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771

E. TABLE OF LEGISLATION

1. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774

2. European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775

3. International Organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776

4. South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776

5. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 777

F. LISTS OF REPORTS, PROPOSALS AND WORKING PAPERS . . . . . . . . . 778

G. LISTS OF INTERNET REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 791

1

Which is any type of illegal activity that results in a financial loss (see ch 4.B.1).1

See ch 2.C.5.2.1; ch 4.B.2.1 as regards globalisation’s role in promoting money2

laundering.

CHAPTER 1

INTRODUCTION

At all times Chess has the will, the intent, the meaning of picturing a war between two parties: a war ofextinction, conducted according to rules, laws in a cultured manner, yet without clemency. This becomes

evident from the rules of the game almost at first sight. LASKER Chess 1–2

___________________________________________________________________________SYNOPSIS Page

A. INTRODUCTION1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. Money Laundering Control Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83. Dilemma of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

B. PROBLEM STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15C. RESEARCH METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24D. OVERVIEW OF STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

___________________________________________________________________________

A. INTRODUCTION

1. Background

The last three decades witnessed the changing face of banking. Not only has banking been

affected by technological advancement, but globalisation further left its mark on the banking

industry. In the current era of globalisation where financial transactions are often conducted across

borders, relevant banking laws should mirror international regulatory trends as well. South Africa

as a developing country must be internationally competitive and should stay abreast of global

trends. Unfortunately, this means that South Africa needs to address one of the dire consequences

of globalisation, namely, the growth of financial crime and one of its byproducts, money1

laundering. 2

Money laundering involves activities which are aimed at concealing illegally acquired

2 Introduction

Section 1(xvi) of the Prevention of Organised Crime Act 121 of 1998, as amended3

(‘POCA’), defines ‘property’ as ‘money or any other movable, immovable, corporeal orincorporeal thing and includes any rights, privileges, claims and securities and interestthereon and all proceeds thereof ’. The ‘proceeds’ of unlawful activities are defined as ‘anyproperty or any service, advantage, benefit or reward which was derived, received or retained,directly or indirectly, in connection with or as a result of any unlawful activity carried on byany person’(section 1(xv)). Of note, an ‘unlawful activity’ is any criminal conduct whether itoccurred in the Republic or abroad (section 1(xv)(a)–(b) of POCA).

See ch 4.B.1 as regards the functional definition of money laundering. For the4

various legal definitions of the concept, see ch 6.B.3.6, par C.3.4; ch 7.C.2–3; ch 8.C.4.2,paras D.4.2.1–4.2.2.

See ch 4.B.2; ch 5.C.1, ch 6.B.3.4, par C.3.3; ch 8.C.1–2.5

Davis Council of Europe 2007 2.6

38 of 2001, as amended (‘FICA’), whose sections came into operation on various7

dates as announced in the government gazette.

property for the purpose of making it appear legitimately obtained. Although money laundering3 4

was historically associated solely with the proceeds of drug trafficking, currently the need to5

legitimise all types of property that was acquired through illegal means is common to all criminal

activities.

This study explores the consequences where criminals use banks as tool to launder money,

one of which is a potential civil claim against a bank filed by either a customer or a victim who

suffered loss as a result of financial crime such as fraud or theft. By way of introduction, the

following comment is significant because it encapsulates the reason for combating money

laundering:6

[n]o country can ever say that it is free from money laundering or that opportunities forterrorist financing have been eradicated. We are shooting at a moving target with newmethods, techniques and vehicles for money laundering ... being identified every day.That is why we need to remain vigilant ... I would like to remind everyone about what isat stake. Financial crime may appear to be discreet and non-violent, but appearances areoften deceptive. Money laundering ... [is] a direct threat to the values which ... [we]defend - democracy, human rights and the rule of law.

Section 1 of the Financial Intelligence Centre Act, the primary money laundering control statute7

of South Africa, defines money laundering as:

[a]n activity which has or is likely to have the effect of concealing or disguising thenature, source, location, disposition or movement of the proceeds of unlawful activitiesor any interest which anyone has in such proceeds, and include any activity which

3 Introduction

Section 64 of FICA criminalises transactions conducted for the purpose of avoiding8

reporting obligations (see ch 8.C.4.2.3.3). The sections read as follows: ‘Money laundering9

4. Any person who knows or ought reasonably to have known that property is or forms part of theproceeds of unlawful activities and (a) enters into any agreement or engages in any arrangement ortransaction with anyone in connection with that property, whether such agreement, arrangement ortransaction is legally enforceable or not; or (b) performs any other act in connection with suchproperty, whether it is performed independently or in concert with any other person, which has or islikely to have the effect (I) of concealing or disguising the nature, source, location, disposition ormovement of the said property or its ownership or any interest which anyone may have in respectthereof; or (ii) of enabling or assisting any person who has committed or commits an offence,whether in the Republic or elsewhere— (aa) to avoid prosecution; or (bb) to remove or diminish anyproperty acquired directly, or indirectly, as a result of the commission of an offence, shall be guilty ofan offence. Assisting another to benefit from proceeds of unlawful activities5. Any person who knows or ought reasonably to have known that another person has obtained theproceeds of unlawful activities, and who enters into any agreement with anyone or engages in anyarrangement or transaction whereby— (a) the retention or the control by or on behalf of the said otherperson of the proceeds of unlawful activities is facilitated; or (b) the said proceeds of unlawfulactivities are used to make funds available to the said other person or to acquire property on his or herbehalf or to benefit him or her in any other way, shall be guilty of an offence. Acquisition, possession or use of proceeds of unlawful activities6. Any person who— (a) acquires; (b) uses; or (c)) has possession of, property and who knows orought reasonably to have known that it is or forms part of the proceeds of unlawful activities ofanother person, shall be guilty of an offence’.

Which references are made to POCA. The long title of POCA explains that the Act10

was enacted to introduce measures aimed at organised crime, prohibit activities relating toracketeering; criminalise money laundering and to provide for an obligation to report certaininformation, prohibit gang related activities, enable the recovery of the proceeds of unlawfulactivities, provide for civil forfeiture, cater for the creation of a Criminal Assets RecoveryAccount, amend the Drugs and Drug Trafficking Act of 1992 (see ch 8.C.1) and theInternational Cooperation in Criminal Matters Act of 1996 (see ch 8.D.4.4), repeal theProceeds of Crime Act of 1996 (see ch 8.C.2) and to provide for matters connected with theabove mentioned.

There is a wealth of material available which discusses the nature and purpose of11

the money laundering process. For a South African perspective, see in general De KokerABLU-2002 7–8; Itzikowitz (1999) THRHR 89; ICA AML Manual 73; Smit Clean Money 9;

constitutes an offence of section 64 of this Act or section 4, 5 or 6 of the Prevention8 9

Act.10

The aforementioned definition of money laundering is sufficiently wide that the acquisition, use

or possession of illegally acquired money is a money laundering offence. In simple terms, a

money laundering offence occurs where a person benefits from a criminal offence. Money

laundering occurs through deals and bank transfers until the source of the illegally acquired

money has been concealed and the money appears to be legally acquired. The conversion of11

4 Introduction

Goredema Overview of the Threat 1; De Koker (1997) J for Juridical S 18; Itzikowitz (1999)THRHR 89; Bourne (2002) SA Merc LJ 475–476; Itzikowitz (2000) J of Fin Crime 185; Smit(2001) Crime & Conflict 25; De Koker Money Laundering 2-8; Goredema & Montsi (2002)African Security R 8; Itzikowitz ABLU-2005 1; De Koker South Africa 97–110.

Which constitutes the first stage in the money laundering process known as12

‘placement’ (see ch 4.B.5). For example, in Gainsford NNO v Gulliver’s Travel (Bruma) Pty(Ltd) 07/5121 [2009] ZAGPJHC 20 (7 April 2009) a fraudster deposited the proceeds ofmisappropriated shares with a bank for money laundering purposes (see ch 3.B.2.1.2 for thefacts of the case; ch 4.C–D where various money laundering schemes are discussed).

Or ‘AML’.13

Goredema South Africa 86. For money laundering trends in South Africa, see De14

Koker ABLU-2002 29–44; Goredema Overview of the Threat 6, 11. Moodley SA Strategic Review 79. See also ch 4.E.1–5 where the negative15

consequences that money laundering has for a country are considered. See Moodley op cit 68–75; UNDCP Ten Laws; ch 4.E.1–5 as regards the dire16

consequences of money laundering.

illegally acquired money into seemingly legally acquired money can take place through a number

of schemes which include the use of banks.

A money laundering scheme may commence with a deposit into a bank account of

illegally acquired money. The funds can then be converted into monetary instruments through12

the use of banker’s drafts and money orders, or they can be withdrawn and used to buy expensive

items such as property and diamonds to make it difficult for the authorities to ascertain exactly

where the money came from in the first place. As a final stage in the money laundering process

the property or diamonds are sold and the proceeds are again deposited into a bank account where

they re-enter the economy as seemingly legally acquired funds. It follows that any effective anti-

money laundering regime should provide for an early warning system that includes efficient risk13

management and compliance to money laundering control laws which are aimed at preventing the

criminal use of the banking system as a whole. It was recently estimated that the value of

illegally acquired money laundered in South Africa may be as high as 80 billion rand annually.14

Money laundering promotes criminal activities in South Africa because it allows criminals to

profit from their illegal conduct. It further damages the integrity of society and undermines the15

rule of the law because it protects the benefits of crime against discovery. From a prevention16

point of view money laundering is the Achilles heel of criminal activities and, therefore, must be

combated. The idea is that by targeting the money laundering aspect of criminal activities,

criminals will be deprived of their illegally acquired benefits which will leave them profitless and

as a consequence, the criminal activity should cease.

5 Introduction

See the long title of POCA.15

Schedule 1 of FICA defines a bank in terms of section 1 of the Banks Act 94 of16

1990, as amended (‘Banks Act’). Section 1 of the Banks Act defines a bank in terms of twoconcepts, namely ‘deposit-taking’ and ‘business of a bank’, both which are delineated inmuch detail. The concept ‘business of a bank’ has different meanings for various purposesand in terms of different legislation (Malan & Pretorius Malan on Bills 254; ItzikowitzBanking 170; Malan Banking Law Influences 18–29; Itzikowitz (1992) SA Merc LJ 176;Schulze (2001) SA Merc LJ 79). In short, a person that receives money as a deposit isconducting the business of a bank (see ch 3.B.1).

See Schedule 1 of FICA for a list of designated persons to which the Act applies; ch17

8.C.4.1. It is important to emphasise that although this study is concerned solely with banks inrelation to money laundering control, FICA applies to various designated institutions. Itfollows that while the ambit of this study is restricted to banks the law is not so restricted.

Which concept is used to denote countries, transnational bodies and forums that are18

involved in the fight against money laundering on a collective basis (see ch 5.B–D). For an analysis of the nexus between organised crime, the benefits of crime and19

money laundering, see ch 2.C.5. Or ‘BCCI’.20

The BCCI was a joint venture between the Bank of America and a Pakistani banker,21

Aga Hassan Abedi (Bosworth-Davies & Saltmarsh Money Laundering 102–103; UnitedStates v BCCI Holdings (Luxembourg), S.A. 69 F Supp 2d 36 (1999) 37–38 [BCCI]). It wasincorporated in both Luxemburg and the Cayman Islands to prevent nationalisation. Since itsmain office was situated in London, the bank was regulated nowhere and was a fraud fromthe beginning because it did not have legitimate capital (Blum Offshore Money 71–75). Withits corporate structures created to evade banking laws, the BCCI was used to fund, inter alia,

POCA is based on the premise that by combating money laundering criminals will be

prevented from using banks as tool to launder their illegal gains. If illegally acquired money can15

be easily processed through a bank because an employee either has been bribed or because it turns

a blind eye to the potential criminal nexus of the deposited money, the bank can become part of

the organised crime syndicate itself. Banks must therefore be protected from inadvertently

providing criminals with the means to launder the benefits of crime. To this end, FICA imposes

onerous duties on banks and other sectors of persons that may be used by criminals as tools16 17

to launder the benefits of crime. In turn, POCA criminalises activities in relation to the benefits

of crime and set-out proceedings aimed at forfeiting the benefits to the state.

Money laundering is further characterised by its international nature. In recent years the

international community has been confronted by the growing problem of preventing the growth18

in organised crime and money laundering. The failure of the Bank of Credit and Commerce19

International is a case in point. The BCCI was a bank that laundered money for both terrorists20

and intelligence agencies. More than one million US dollars were transferred by the BCCI from21

6 Introduction

the transfer of military nuclear technologies from Europe to Third World leaders (Hemraj(2005) J of Money LC 346–347). It also became a vehicle for about one billion US dollars ofIslamic deposits which were employed for commodity investments. Services provided by thebank included dishonest auditing for illegal businesses (i.e. fraud), money laundering andsecret transfers for terrorist organisations (Ehrenfeld Evil Money 183; Lilley Dirty Dealing 5;Hemraj op cit 348–350; BCCI 39). Documents were falsified and shell company transactionscreated to manipulate officials in different countries. By the time the BCCI was shut down in1991 it had 430 branches in 73 countries (Bosworth-Davies & Saltmarsh Money Laundering103 ev; Passas (1993) Crime, Law & Social Change 294–295).

Libyan companies incorporated in the United States. Subsequent investigations revealed that

massive fraud and rumours about money laundering, which led to a run on bank deposits,

contributed largely to the demise of the bank. In its wake followed unprecedented activity aimed

at combating criminal activity and money laundering within the banking industry. In essence, the

BCCI’s failure emphasises both the vulnerability of banks to criminal infiltration and the need for

stringent measures to combat money laundering.

In this study money laundering control is compared to a chess match. The enemies

combating each other on the chessboard are the police authorities and a criminal seeking to launder

the benefits of crime. The authorities are represented by White whilst a member of an organised

crime syndicate is represented by Black on the chessboard. The analogy can be illustrated as

follows:

7 Introduction

Figure 1.1

WHITE

ROOK

Bank- Cust.

Relation-

ship

KNIGHT

Internat.

AML

Efforts

BISHOP

AML

Statutes

QUEEN

KYC

Standard

KINGBanks

BISHOP

Civil

Forfeiture

KNIGHT

AML

Treaties

ROOK

Bank- Cust.

Relation-

ship

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Individual

AML

Measures

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

PAWN

Variety of

Schemes

ROOK

Internet

Banking

KNIGHT

Bank

Confiden-

tiality

BISHOP

Use of

Legal

Persons

QUEEN

Money

Launder-

ing

KINGBenefitsof Crime

BISHOP

Other

Money

Launder

Tools

KNIGHT

Electronic

Money

ROOK

Internet

Banking

BLACK

Black and White have equal power in the form of sixteen pieces until the pieces are captured. The

objective of the two players are similar: to defend the life of the King. The player who cannot save

his King is ‘checkmate’ and loses the match. Who wins the game is determined by the stealth and

foreseeability of the players.

For the police authorities the White King on the chess board signifies banks that must be

protected against criminal infiltration and money laundering. For the criminals the Black King

signifies the benefits of crime that must be protected from detection, identification, confiscation

and subsequent civil forfeiture. The other White pieces on the board represent various money

laundering control strategies aimed at identifying the benefits of crime whilst the Black pieces

represent elements that act in support of money laundering. Throughout this study the analogy of

a chess match between the police authorities and members of an organised crime syndicate is

referred to. Like a chess match the outcome of crime prevention through money laundering control

is fraught with uncertainty. Since strategies vary, the two players must outwit each other to attain

checkmate and win the match.

8 Introduction

Which liability is known as ‘facilitator liability’(Rider (1999) J of Money22

Laundering Control 208; Reid Civil Law and Money Laundering D2). The alternative is to keep the benefits of crime in the form of cash under a bed23

mattress as quipped by the court in Alley Cat Clothing v De Lisle Weare Racing [2002] 1 AllSA 123 (D) [Alley Cat] 131A. However, due to modern banking practices and the fact thatcash is seldom used in the place of electronic money (as to which, see ch 2.B.2) it is fair toassume that banks will always assume a key role in money laundering schemes.

Or ‘KYC standard’ (see ch 5.B.3).24

See ch 5.B.3, paras C–D; ch 6.B.3.4–3.6, par C.3.4; ch 7.C.2–3, par C.8.3.2.25

Ultimately, this study is an attempt to distal some general principles out of various money

laundering control issues in as far as they impact on banks. In particular, the study sets out to

establish that whilst compliance with statutory AML obligations may assist a bank to avoid

prosecution for a money laundering offence, it may also expose the bank to civil liability despite

the fact that its conduct may have been above reproach. 22

2. Money Laundering Control Legislation

Money laundering control legislation is part of the arsenal used by the police authorities to combat

criminal activities by keeping the benefits of crime out of the financial system. The idea is that an

effective money laundering control regime should render it impossible for criminals to use the

benefits of their criminal activities without fear of prosecution and, or civil forfeiture of the funds.

The reason for a bank’s inevitable participation in money laundering control is rooted in the reality

that regardless of the type of institution involved in executing a financial transaction, illegally

acquired money by and large ends-ups in a bank account from where the funds are dispersed as

part of the final stage of the money laundering process.23

Since the early 1990s, the Know Your Customer standard has been promoted by the24

international community as a crucial measure to identify both criminals and the benefits of crime

before the funds can enter the financial system. The KYC standard which is the crux of

international AML legislation comprises four key obligations, namely:25

1. customer identification;

2. suspicious transaction reporting;

3. record-keeping; and

4. training.

9 Introduction

See ch 8.C.4–5, par E.1.26

See ch 8.C.3, par D.4.27

Or ‘FIC’ whose objectives are considered elsewhere in the study (see ch 8.E.1).28

Sections 25, 43 of FICA (see ch 8.C.4.2.3.4–4.2.3.5).29

See section 1(xv) of POCA as referred to by section 1 of FICA.30

See ch 8.C.3.2, par D.4.2.1.2 for the 34 offences listed in Schedule 1 of POCA.31

Collectively the four obligations above are aimed at reducing the vulnerability of banks to criminal

infiltration and preventing their prosecution for money laundering offences as well. FICA follows

a path that was caved by international AML legislation. As a result, the KYC standard obligations

have been incorporated in full in the Act. 26

As mentioned above, POCA criminalises activities which are aimed at concealing the

nature, source, location, disposition or movement of the benefits of crime, and provides for the

confiscation and civil forfeiture thereof. In turn, FICA imposes stringent obligations on banks27

and creates money laundering offences when these obligations are neglected. For example, section

21 of FICA requires that a bank establishes the identity of customers whilst section 29 stipulates

that a bank reports suspicious or unusual account activity to the Financial Intelligence Centre.28

Banks must further keep records of their customers’ transactions and train employees to comply

with FICA and their internal AML measures. Failure to observe FICA’s provisions incriminates29

a bank and leads to its prosecution for a money laundering offence.

Two important points as regards the benefits of crime must be emphasised. First, both

FICA and POCA fail to distinguish between money as the object of crime and money as the

proceeds of crime. Instead, both Acts use the concept ‘proceeds of unlawful activities’ to denote

in general terms property that was acquired through criminal means. POCA further provides for30

the civil forfeiture of an ‘instrumentality of an offence’ which offences are listed in Schedule 1 of

the Act. By using some of the offences listed in Schedule 1 of POCA as examples the distinction31

between money as the object of criminal conduct and money as the proceeds of criminal conduct

can best be illustrated as follows:

10 Introduction

This is on account of the nemo plus iuris ad alium transfere potest, quam ipse32

haberet rule which provides that no one can transfer more rights in property to some otherthan the person himself has (as to which, see ch 3.C.2.2; ch 8.D.2.1.1)

Figure 1.2

Examples of Financial Crime

Money is the object of: v Money is the proceeds of:

Fraud, theft, robbery, corruption Drug t raff icking, i l legal gambling,extortion, fraud, forgery, offences relating tocoinage, smuggling, exchange controloffences

9 Benefits of crime

Money is the object of crimes such as fraud or theft where it was acquired from the victim through

criminal means. Consider the scenario where money was stolen by an employee of a consulting

firm. The money is the object of the theft and the firm’s clients remain the legal owners of the

funds. In contrast, money is the proceeds of criminal activities such as drug trafficking or illegal32

gambling because it was generated by the criminal activities. The criminal further acquires

ownership of the funds. In this study the concept ‘benefits of crime’ is used as an umbrella term

to denote both money as the object and money as the proceeds of crime.

In most instances where money is the proceeds of the criminal activities listed in Figure

1.2 above there are no obvious victims who have suffered loss. For example, when the proceeds

of drug trafficking or corruption are deposited into a bank account the funds legally belong to the

(criminal) account holder. The state may also instigate civil forfeiture proceedings against the

account holder pursuant to POCA’s provisions.

However, sometimes depending on the nature of the criminal activity money can either be

the object of a crime or the proceeds of a crime, for example, where it was acquired through fraud.

Illegally acquired money constitutes the object of fraud where a person, for example, was

fraudulently induced to pay money to secure an interest in property which never existed. But

illegally acquired money can also constitute the proceeds of fraud where an investor, for example,

was fraudulently induced to invest in property which was subsequently sold to a third-party

without the investor’s knowledge. In the latter case the profits made from selling the property

11 Introduction

For the causa of the claim, see par B below; ch 8.D.1.33

This is due to a report by the Financial Action Task Force on Money Laundering34

(see par B below) which recognised fraud and theft as major profit-generating crimes in SouthAfrica (FATF SA Report-2009 3).

This is because drug trafficking presents a tremendous problem for the South35

African police authorities (ibid).

constitute the proceeds of fraud as opposed to the object of fraud. However, regardless of whether

the benefits acquired by the fraudster are the object or the proceeds of fraud in both examples there

is a victim of fraud who seeks to recover his loss. The position can best be illustrated as follows:

Figure 1.3

Examples of Financial Crimes

Obvious victim: No identifiable victim:

Theft, robbery, Drug trafficking, corruption, smuggling, offences

fraud, forgery, extortion relating to coinage or exchange control

Remedies

9 9Civil claim by the victim Civil forfeiture proceedings by the state

against the account holder against the account holder

Where the benefits of crime were acquired through theft, robbery, extortion, forgery or certain

types of fraud a money laundering investigation may point the way to locate the funds and restore

them to the victims. The victim of the aforementioned crimes may further be able to follow his loss

to a bank account where the illegally acquired money was deposited. If the funds were not

withdrawn by the criminal account holder the victim can claim from him. However, the victim33

will be left out of pocket if the funds were withdrawn by the criminal who either absconded with

the money or who proves to be a proverbial man of straw. In this study fraud and theft are used as

examples of criminal activity which left a victim who suffered loss and is seeking to recover it.34

In turn, drug trafficking is used in this study as an example of criminal activity which left no

obvious victim who suffered loss. 35

Secondly, the distinction between money as the object of crime and money as the proceeds

of crime is important in relation to civil forfeiture proceedings. The running argument is that only

the proceeds of drug trafficking which left no obvious victims should be forfeited to the state

12 Introduction

See above.36

See ch 8.D.4.2.1, par D.4.3.37

See ch 3.C.3.1 as regards the purpose of banking.38

See Lambiris (Restitution 2–3) who denotes a cause of action as ‘the legal ground39

which entitles a plaintiff to ask a court for relief or to avail himself of relief.’

See ch 3.B.2.3; ch 6.B.2.2, par C.2.2; ch 7.B.2.40

Chambost Bank Accounts 3.41

See Schedule 1 of FICA; ch 8.C.4.1.42

otherwise a victim of fraud or theft may be left out of pocket where fraudulently acquired or stolen

money is the subject of a civil forfeiture application. Consider again the scenario above where an

employee stole money from a consultancy firm and deposited it with a bank. The clients followed

the money to the bank account of the thieving employee only to discover that although the money

was not withdrawn by the thief, the account is the subject of civil forfeiture proceedings. In this

case the court should not grant the state a civil forfeiture order without having to establish first that

there are no persons with a valid claim to the money in the account. The reason is that the

employee, who is a thief, did not obtain a legal title to the stolen money. Therefore, the clients36

of the consulting firm should be allowed first to recover that part of the funds in the account which

represents the amount that was stolen from them before the court can grant the state’s civil

forfeiture application in respect of the money.

This study shows that POCA fails to recognise this distinction. Instead, it sanctions civil

forfeiture of all the benefits of crime to the state irrespective of whether the funds belong to a

victim of crime who has a valid claim to the money. 37

3. Dilemma of Banks

A bank may become embroiled in civil litigation due to the fact that it receives deposits from the

public. There are two potential causes of action against a bank as recipient of the benefits of38 39

crime. First, the bank may be sued by a customer for breach of bank confidentiality. The concept

‘bank confidentiality’ refers to a bank’s common-law duty to observe the confidentiality of

customers in relation to their bank affairs. Bank confidentiality is dated back to the Code of40

Hammourabi. A bank as an accountable institution must heed FICA’s provisions in order to41