Religious bodies, AML/CFT-P in implementation challenges
Correspondent | Friday January 29, 2021 17:01
They provide comfort, support to the needy, hope and strength in the daily lives of many people. To survive, these institutions rely on donations from worshippers and supporters and income from investments or any business they operate.
Religious institutions though are prime targets for financial crime. Weak internal controls and a general lack of accountability by some to parishioners, offer managers of religious institutions ample opportunity to commit fraud or for fraud to be committed upon them by external parties. There are numerous examples of internal fraud being committed by religious leaders. For example, in 2019 a pastor of a church who was also a bank manager in South Carolina USA, was convicted of bank fraud and identity theft after he used his position to obtain loans and lines of credit for elderly customers. He laundered the money from his crimes through his church.
It is well known that some places of worship around the world have been used to finance terrorism and to store and move terrorist funds. But little is known in the general financial and non-financial communities about how places of worship, such as churches, mosques and temples are used to launder money. While this article will not canvas any of them in detail, the large number of places of worship representing every major religion in Botswana provides enormous opportunities for criminals to hide the proceeds of their crimes. Methods used range from each place of workshop being able to open many accounts with different financial institutions which are used to receive and move proceeds of crime to hiding illegal assets in the name of the religious institution. Some schemes are more complex for example criminals “gifting” assets to a trust controlled by a Church while continuing to enjoy their benefit. Or a place of worship knowingly accepting proceeds of crime which are recorded as anonymous cash donations and returning the funds to the criminals but described as investments, or welfare support, the latter involving the use of false identities.
To combat the abuse of places of worship and charities to launder proceeds of crime or raise terrorist funds, the Financial Intelligence Act and Financial Intelligence Regulations were enacted in 2019. In Botswana, places of worship are captured by the FI Act and Regulations if they are an accountable institution.
An accountable institution is defined as “any legal entity registered or incorporated under any law” and includes any associate, subsidiary, or any employee. Legal entities in Botswana captured by the definition include trusts and companies. If a religious body in Botswana operates as a trust or as a private company or a combination of a trust with a company as the trustee, then it is an accountable institution and must comply with the FI Act and regulations.
As an accountable institution, a religious body must comply with many obligations under the FI Act and regulations. The first step in achieving compliance by an accountable institution is undertaking an assessment of financial crime risks. While the assessment of risk applies to money laundering, financing of terrorism and prevention proliferation financing, the broad nature of the legislation means that it applies to preventing a place of workshop from dealing in the proceeds of any crime in Botswana. The need to complete a financial crime risk assessment should not be foreign to any organisation, because any successful professionally managed company or trust would undertake an assessment into all risks it might reasonably face including from crime. Unfortunately, many religious institutions we have consulted to, lack even basic internal controls and have never completed any assessment of the risks they might encounter, whether it be from injury sustained by worshipers, fire, internal or external fraud.
Following on from the risk assessment, the most controversial and challenging aspects of FI Act and regulation implementation is having to identify its customers. Who then is a customer of a place of worship? The FI Act defines a customer to include: a natural person, unincorporated body, legal arrangement, legal person or body corporate who has entered into or is in the process of entering into a business relationship; or single transaction, with a specified party or an accountable institution. A donation would constitute a single transaction. While a business relationship means any arrangement made between a customer and a specified party or accountable institution where the purpose or effect of the arrangement is to facilitate an occasional, frequent, habitual or regular course of dealing between the customer or legal arrangement and the specified party or accountable institution where payment to be made is not known or capable of being ascertained at the time of the conclusion of the arrangement. Therefore, an occasional or regular donation of cash or gifts to a religious institution would constitute a business relationship.
Once a place of worship has determined who its customers are, it must then undertake customer due diligence, which is a process of identifying and verify their identity. The FI Act provides that CDD only must be undertaken when carrying out a transaction with a customer equal to or above P10,000. This would normally exclude most donations and financial activity by a religious body with a customer.
However, the Act also prescribes that CDD must be undertaken when establishing a business relationship or concluding a transaction with a customer. A business relationship between a worshipper and a religious institution is created the moment they donated or purchase something for example a prayer book or prayer aid. No amount is prescribed when a business relationship is commenced, or a transaction is concluded. The latter provision therefore renders worthless the provision specifying a prescribed amount.
The FI Act and Regulations have introduced perhaps the broadest AML/CFT-P legislation in the world. Unlike most countries, the law applies to religious institutions. But it also goes further and includes a religious leader as a prominent influential person. A religious leader means a person who is a member of the governing body of any religious body registered with the Registrar of Societies or any member vested with decision making authority within the religious body. This definition introduces several practical difficulties. Before an accountable institution can engage a PIP as a customer, senior management approval must be obtained. But under the definition, any person who is a member of a governing body or vested with decision making authority in a religious body is a PIP. Therefore, who is going to approve the PIP as a customer, if that PIP worships at the place of worship they manage or deliver religious services at? Further, an accountable institution that is a religious body must appoint a compliance officer at a managerial level. They have decision making authority and therefore would be a classified as a PIP as well. Who is going to approve that person? Another PIP? The definition creates a chicken and the egg scenario. Other potential conflicts of interest would include when it comes to reporting suspicious behaviour, which is the responsibility of the AML/CFT-P Compliance Officer. That officer may find him or herself having to solve many ethical decisions when deciding on when and what transactions are suspicious and the impact reporting them will have if they relate to a religious leader.
Achieving compliance and preventing a religious body from being a victim or involved in a financial crime requires a thorough understanding of the legislation and practical experience in combating financial crime. Religious bodies should therefore be careful when choosing a firm to assist it with implementing financial crime mitigation measures.
*Article written by Merero Partners, a boutique advisory firm based in Botswana offering Corporate Finance, Management Consulting and Risk Advisory Services. Contact Merero via email enquiries@merero.co.bw for more information on AML/CFT training and consultancy services in Botswana