Report suspicious behaviour or face jail
Correspondent | Friday October 2, 2020 17:08
Specified parties include inter alia lawyers, accountants, real estate agents, motor vehicle dealers etc, and accountable institutions comprise incorporated or registered legal entities including major grocery stores, schools or medical centres.
The reporting of suspicious transactions via a Suspicious Transaction Report (STR) is just one obligation a specified party and an accountable institution must meet under Financial Intelligence Act 2019 (FI Act) and related Financial Intelligence Regulations.
A suspicious transaction is defined
in the FI Act to mean a transaction that:
- is inconsistent with a customer’s known legitimate business, personal activities or with the normal business for the type of account which the customer holds;
- gives rise to a reasonable suspicion that it may involve the commission of a financial offence;
- gives rise to a reasonable suspicion that it may involve property connected to the financing of an act of terrorism, or to be used to finance an act of terrorism or the financing of the proliferation of arms of war or NBC weapons (whether or not the property represents the proceeds of an offence);
- is made in circumstances of unusual or unjustified complexity;
l appears to have no economic justification or lawful objective;
l is made by or on behalf of a person whose identity has not been established to the satisfaction of the person with whom the transaction is made; or
- gives rise to suspicion for any other reason.
Transaction is also defined in the FI Act and in summary includes many financial events including the deposit, payment, transfer, or delivery of money, by whatever means effected. Transaction also includes non-monetary events, as the term includes “an arrangement between persons”. This would cover for example the provision of legal advice on a pro-bono basis by a lawyer.
While the FI Act uses the term suspicious transaction, we advise clients to rather think in terms of suspicious behaviour. There is a danger that staff engaged in monitoring of activity and customers might only think of it as monetary transactions, which is not the case. The broad definition of a suspicious transaction includes activity that could develop a suspicion before any payment is involved, for example the use of corporate structures, non-monetary property, and the personal behaviour of a customer, to name a few.
It is the last sentence in the definition that is the greatest catch-all provision: A transaction is suspicious if it “gives rise to suspicion for any other reason”. International experience teaches us that suspicion could develop without any monetary transaction occurring. For example, a person who enters a bank but does no banking and remains standing some distance away observing what other customers are doing. Or a potential client of a law firm inquires with staff if the firm would report his behaviour if it found it to be suspicious. Another example would be when a firm suspect a customer is seeking to establish trusts or company structures to launder money or evade tax.
There are numerous papers or what is known as “red flag indicators” to guide AML/CFT practitioners in how to identify a suspicious transaction. These red flag indicators have also been designed for higher risk entities such as banks, law firms, accountants, and investment advisors. There are so many different red flag indicator guides containing numerous examples of suspicious behaviour that it is almost impossible to keep on top of or remember all of them. Some are so broad that they relate to almost every conceivable legal action that can be undertaken with a professional body or industry, rendering them almost worthless as indicators of financial crime.
The interpretation of the suspicious transaction provisions outlined above requires the exercise of judgement. And when deciding to report or not to report, there will be inconsistency amongst specified parties when considering similar facts. For example, when considering a set of similar circumstances that might be unusual or have unjustified complexity, one organisation might regard it is suspicious (because it regards it as unusual or unjustifiably complex) while another specified party might not. And here therefore lies another issue. How are the decisions made by a specified party going to be viewed by the Financial Intelligence Agency (FIA)? Subjectively, from the perspective of the specified party or accountable institution which is influenced by personal opinions, biases, assumptions, interpretations, education and beliefs? Or objectively, from the standpoint of a hypothetical independent reasonable person who observes and where possible measures observable facts?
In New Zealand, the High Court held in the Ping An Finance case that the test of whether a transaction is “suspicious” in the context of that country’s AML/CFT law is objective, and not subjective. That case involved a money remitter who amongst many breaches of New Zealand’s AML/CFT law, also failed to report suspicious transactions.
The New Zealand High Court reported: “Reporting entities need to report any transaction that is objectively suspicious” and “Where an objective observer would conclude that reasonable grounds for suspicion were known to the reporting entity, it is no defence that the reporting entity did not actually consider the transaction to be suspicious”.
Because an objective approach is better suited to decision making, any assessment of information or a transaction regarded as unusual should be viewed objectively to determine if it is suspicious and therefore reportable. Taking an objective approach will not guarantee that a specified party or an accountable institution will make the right decision every single time, but international experience teaches us that it tends to make better decisions.
And if a specified party or accountable institution gets it wrong and does not file an STR, it could be liable to a fine of up to P5 000 000, a suspension or revocation of any licence or registration, or the imposition of both penalties. The worst penalty relates to individuals as any person who fails to make an STR is liable for a fine of up to P3 000 000 or imprisonment for a term not exceeding 20 years or to both. The prison sentence for a person who fails to report a suspicious transaction involving money laundering is the same for any person convicted of actually engaging in money laundering. This is an extraordinary penalty for a person whose responsibility is to identity and report suspicious transactions and who decides not to report based on their judgement of the facts.
The only defence open to any organisation and by default to an employee whose job is to monitor, identify and report an STR, is to report every single transaction it is involved into the FIA - whether it is regarded as suspicious or not.
Deciding on an unusual or suspicious transaction involves risk and given the extreme penalty involved for not reporting an STR, it is simply not worth any person taking the risk of going to jail for failing to report a transaction. Reporting everything is the best defence. This is known as ‘defensive’ reporting in other countries that impose penalties on individuals for failing to report. It could result in a financial intelligence unit receiving a large number of STRs it cannot handle, with most of them being of little practical intelligence value.
Specified parties and accountable institutions are the canary in the coal mine. They sound the alarm on potential financial crime occurring and are the eyes and ears of the FIA in the fight against financial crime, particularly money laundering, terrorism financing, and corruption. It makes no sense penalising individuals involved in the often-intense work of AML/CFT monitoring and reporting. If FIA wants an effective AML/CFT reporting system in Botswana it must seek the repeal of all penalty provisions for individuals who make a judgement call on a transaction which turns out to be incorrect.
MICHAELA POWELL-REES & CHRIS DOUGLAS*
*Michaela Powell-Rees & Chris Douglas, write on behalf of Merero Partners, a boutique advisory firm based in Botswana offering Corporate Finance, Management Consulting and Risk Advisory Services. Contact Merero via enquiries@merero.co.bw for more information on its AML/CFT training and consultancy services in Botswana