Managing inherent, operational, and other types of risk at a company is a complex process that’s difficult to handle for a single person or department. That’s why many businesses use a multi-layered approach to risk management called the Three Lines of Defence.

This model delegates different aspects of the compliance risk management process to specific employees and divisions within the organization. That allows for a more coordinated risk management approach: it clearly defines three groups of roles and responsibilities, as well as how they are to support each other.

What are the Three Lines of Defence?

The Three Lines of Defence (3LOD) is a governance model aimed at optimizing an organization’s risk management strategy. It seeks to clarify roles for actors inside (and sometimes outside) the organization – as well as define their responsibilities – as they relate to risk management.

The lines of defence are as follows:

• Management: Owns risk & compliance and develops controls for an organization’s day-to-day risk management operations.
• Risk & Compliance: Identifies emerging risks to an organization and develops systems to deal with them, including complying with applicable laws and regulations.
• Assurance: Independently conducts internal and external audits to assess how effectively the organization’s overall risk management program is working.

Question 1

1.1 In the context of the scenario, create an example of an operational compliance risk from an anti-money laundering perspective. Explain why you would regard this risk as an operational compliance risk. Also, state the regulatory requirement where the example was derived from. (5)
1.2 Conduct independent research and

• Explain five risks in implementing three lines of defence (3LoD) within a business. Also give an example of the risks that you identified.
• Explain five challenges a company can experience in
implementing the 3LoD and also provide possible solutions on how to overcome these challenges. (10 + 10)

Note: You need to reference your answer – refer to the Milpark reference guide. Please note that noncompliance with the reference guide may result in disciplinary action.

1.3 In the scenario, it is stated that management owns risk and compliance and that management develops controls for the day-to-day operations.

Discuss whether it is best practice for management to:

• own risk and compliance relating to Money Laundering (ML)/ Terrorist Financing (TF) and Proliferation Financing (PF).
• and to develop controls to mitigate ML/ TF/ PF risks?

Provide reasons for your answer. (5)

SECTION B – COMPLIANCE RESEARCH (10 MARKS)

Read the information provided below and answer the question that follows.

You have been appointed as the Group Compliance Officer for Nedbank Limited. Obtain Guidance Note 4B (Reporting Suspicious and Unusual Transactions and Activities to the FIC) and create a memo to Senior Management in which you summarise the Guidance note in ten bullet points.
SECTION C – CASE STUDY (30 MARKS)

Read the case study below and answer the questions that follow.

In early 2018 torrents of hot money suddenly started coursing through Habib Overseas Bank, a tiny financial institution based in the Johannesburg suburb of Fordsburg.

Within a year a total of R1.2 billion moved through only two Habib accounts – more or less the total size of the bank’s balance sheet, which is to say equal to all its loans and cash at the time.
Huge rapid-fire deposits were followed by almost daily outward payments, mostly to an enigmatic offshore entity also allegedly implicated in massive laundering via Sasfin Bank, illicit gold trading and the apparent laundering of cash through Namibia, as previously reported by amaBhungane.

That offshore entity is Aulion Global Trading, a Dubai-registered company which crops up repeatedly in this tale and is owned by one Howard Jon Baker, also previously identified by amaBhungane to be an alleged player in the illicit gold business.

Importantly, Baker is also considered the right-hand man of tobacco mogul Simon Rudland, himself tied to alleged money laundering through Sasfin.

Both Rudland and Baker have previously through their lawyer denied any illegal conduct.

In addition, the second member of Aulion is none other than Andries Greyvensteyn, a notorious figure in the illicit gold sector convicted for illegal possession of the metal last year.

The original source of the cash is ultimately unknown and likely not limited to tobacco and gold profits. What appears to be a vast money-laundering network orchestrating payments, has left many breadcrumbs indicating central roles for other secretive players, which we will unpack in part two of this series.

What is clear is we are dealing with a cash and gold laundromat that developed and thrived over a considerable period, that crossed borders and moved a staggering amount for a variety of players – and that appears to have helped prop up the Zimbabwe regime.

What is also clear and immediately jarring is the failure of banks and the banking regulator to timeously block even the most reckless and transparently suspicious activities tied to this group.

Senior sources in the banking industry have told us that much of what follows should have been impossible, even with the help of corrupt staff in the implicated banks.

Bank-hopping

AmaBhungane can today reveal not only the major incursion by the laundry group at Habib Bank but also that Sasfin Bank seemingly repeatedly missed their activities, opening its doors to the same players in different guises after they had been previously ejected.

Some of this can be gleaned from a late-2020 application by the South African Revenue Service (SARS) to freeze the assets of an allegedly “pivotal” figure in the money laundering enterprise, Mohamed Khan.

Khan and a since-deceased partner Mohammed Sohail Jiwani operated through two main legal personae, the PKSA Group and SALT Asset Management, both of which are implicated in a series of extraordinary events at the two banks, Habib and Sasfin.

Up to at least September 2017 Khan and Jiwani’s company SALT worked with the controversial Gold Leaf Tobacco Corporation (GLTC), the cigarette company of Rudland and local partner Ebrahim Adamjee, to expatriate billions of rands through the company’s accounts at Sasfin Bank.

Below we explain how this “service” was provided, allegedly utilising fake invoices.

This network was identified at Sasfin and ostensibly kicked out in 2017 after the bank’s head of forex Amanda Gie flagged several dodgy payments.
She had picked up suspicious invoices totalling over $60 million, which was only part of the picture. The scale of this operation was recently spectacularly revealed by Daily Maverick. We can however now reveal that the alleged launderers were far from done with Sasfin, effortlessly regaining access mere months after getting kicked out.

To achieve this the syndicate seemingly enlisted the help of rogue executives from the local subsidiary of a German multinational seller of heavy construction equipment, Putzmeister, to once again access the Sasfin foreign exchange department.

AmaBhungane can also show that after the 2017 setback at Sasfin much of the syndicate’s money-shifting work seemingly just moved over to Habib Overseas Bank where the mammoth cash infusions created an overnight bonanza wildly out of proportion to the existing business of the bank.

Habib told us the bank “was the victim of an unscrupulous client acting in concert and collusion with some staff members”.

It emphasised that when it “discovered” the abuse, the bank had alerted authorities, acted against staff and laid criminal charges “against the clients and the implicated staff members”. But the evidence suggests that, at best, Habib chose not to observe basic compliance rules long before this supposed “discovery”.

The Reserve Bank doesn’t have that excuse – and indeed seems to believe they don’t have to explain at all. The SARB refused to answer any questions related to this article, merely telling us that it “does not comment on any matters that relate to individual regulated entities”.

A bank of their own

Habib is no stranger to controversy. It is the same bank which associates of the Gupta family unsuccessfully tried to buy in 2017 when other banks froze them out. The bank itself was very much in favour of that deal but the South African Reserve Bank (SARB) shot it down.

Habib claims it had no idea the Gupta family was involved in the takeover bid and says they proactively canned the deal when they found out. Soon after Gold
Leaf’s accounts at Sasfin were shut down and could no longer act as conduits for expatriating funds, a deluge of money found its way to Habib, completely transforming the small bank’s finances.

The sudden inflows are illustrated by bank statements included in the application by SARS for a preservation order on Khan’s assets.

In January 2018, soon after the closure of the known Sasfin accounts, one of Khan and his partner Jiwani’s companies, PKSA Finance, opened the first cheque account at Habib.

After that another entity with Khan as sole director called Ovenbird Trading appeared, evidently a shell company created for the express purpose of holding another Habib bank account.

Obscene amounts

These accounts saw millions of rands in deposits and outward payments on an almost daily basis, sometimes totalling obscene amounts in the context of the bank’s total size.

Between January 2018 and February 2019 about R1,2-billion moved in and out of the two accounts.

There seemed to be a mounting carelessness as well. Initially outbound payments would average only R10-million or so on a single day. Later as much as R78-million would shoot in and out at a time. The likelihood of someone who is not part of the operation noticing increased exponentially.
AmaBhungane analysed Habib’s monthly so-called BA900 filings to the Reserve Bank to track its depositor base against the PKSA and Ovenbird bank account statements to gauge how prominent these money flows would have appeared to the bank’s managers.

The results are staggering.

PKSA and Ovenbird’s rapid-fire deposits, the origin of which is unfortunately not clear, at one point made up as much as 25% of the tiny bank’s entire current account base.

Multi-million-rand transactions were made almost daily with money leaving the bank on a single day in December 2018 once amounting to 11% of the bank’s current deposits.

The transformation of the bank’s balance sheet is unmistakable:

Due diligence?

There is seemingly nothing resembling the plausible ignorance the bosses of larger banks might be able to plead. It would be impossible for Habib’s management not to know something was seriously amiss.

According to SARS, the documentation provided to the bank to justify the foreign payments contained forgeries full of clumsy errors that should have been caught. These included fake invoices and customs documents.
The vast majority of the funds moving through Habib were destined for Howard
Baker’s Aulion Global Trading, ostensibly payments for imported gold.

Aulion received R880-million of the Habib flows before Ovenbird cleared out its account in February 2019.

Other payments were made to a company called Premier Trading Group, ostensibly for cooking oil. A closer look at an invoice provided by this company shows that it has the same phone number as Aulion and has as its sole director none other than Howard Baker.

In response to amaBhungane’s questions Habib managing director Henk Engelbrecht claimed that it “was never complicit in the nefarious activities of Mohamed Khan” whose companies were delivering these bogus invoices and requesting the forex payments.

Instead, he blamed three corrupt employees who allegedly conspired to let massive suspicious payments go unreported. Two quit before they could face disciplinary charges and the head of forex was fired, he says. The bank has laid criminal charges against everyone involved, he added.

However, even if it was a case of a few bad apples, it still seems hard to believe that top management would not notice the sudden influx of a whole orchard of deposits – deposits large enough to be conspicuously reflected in filings at the Reserve Bank.

Our sources claim that a corrupt forex department would never be able to hide this scale of activity from the bank’s compliance officer and indeed the top management.

And this leads to another apparent failure – seemingly no red flags were raised at the central bank when these anomalous monthly filings started coming in.

The Reserve Bank has a dedicated supervisor for each individual bank and a failure to at least question the sudden bloating of Habib’s balance sheet would, at best, amount to a shocking lapse in oversight.

However, as noted earlier, the Reserve Bank has refused to answer any questions related to this article.
In Engelbrecht’s version Habib “played a very active part in assisting the authorities and ensuring that Mr Khan, his associates and the Habib employees suspected of unlawfully aiding Mr Khan are brought to book”.

The abrupt end of outward payments by Ovenbird was due to the bank telling Khan to take his business elsewhere, claims Engelbrecht.

“After it became apparent that some of Mr Khan’s entities were being investigated by the authorities, Habib proactively and independently decided to end its business relationship with Mr Khan’s associated companies. Habib told the companies that the relationship would be terminated for commercial reasons.”

Engelbrecht claims that banks cannot be expected to catch every crook.

“There is nothing peculiar about these attempts in South Africa. Banks around the world frequently deal with attempts to defraud the bank and customers: it is an evolutionary arms race – as soon as modern security systems are put in place, criminal syndicates start learning how to beat those systems.”

He also claims that it is “not unusual” for single clients to hold 5% or more of the bank’s total deposits.

Sasfin, the rogue machinery salesman and Baker (again)

Although a lot of business made its way to Habib after Sasfin cottoned on to the Gold Leaf accounts, the alleged money launderers also almost immediately returned to Sasfin under at least one new guise – Putzmeister SA, a local subsidiary of a German group dealing in heavy construction vehicles.

On 30 November 2017 Sasfin received a letter from Khan and Jiwani’s SALT, signed by Putzmeister SA chief executive Ludwig Geyser. The letter informed the bank that Putzmeister SA had appointed SALT as its forex agent in future transactions with the bank.

Presumably unbeknownst to Sasfin, or indeed the German parent company, Khan also registered a new company called Putzmeister HK in Hong Kong, according to company records procured by amaBhungane.
This entity has nothing to do with the real group, Putzmeister’s chief commercial officer Carston von der Geest told amaBhungane.

The real group also knew nothing of the arrangement with SALT at Sasfin and on the face of it, it appears that Geyser (the local boss) had gone rogue to help set up a parallel “off-the-books” structure bearing the legitimate group’s name.

An innovative mechanism was then apparently created to justify expatriating money.

Where the Habib payments and previous payments through Sasfin had relied on fake invoices from offshore providers of allegedly non-existent goods and services, the Putzmeister arrangement seemingly relied on a court order enforcing a fictitious debt.

In September 2018 the Johannesburg High Court rubber-stamped a “settlement agreement” between Putzmeister and an obscure entity called Prodigy Trading.

In terms of this settlement Putzmeister would pay R67-million to Prodigy in monthly instalments.

But who is Prodigy?

AmaBhungane has established through corporate filings that the company, registered in Hong Kong, is yet another entity set up by Howard Baker.
Later, in early 2019, Geyser also registered a new company called Putzmeister Africa Holdings, again without the knowledge of the parent company. It was registered at a residential address in Soweto.

AmaBhungane does not have proof of specific payments being made by these parallel structures through Sasfin, but the fake Putzmeister group did seemingly succeed in illicitly expatriating funds as planned.

According to von der Geest, Putzmeister was alerted by authorities to “certain employees” at its subsidiary violating exchange control rules in June 2020. An internal investigation followed and in 2021 the company replaced the local management, he said.

“The Putzmeister Group does not bank with Sasfin nor instructed SALT or Sasfin to facilitate the expatriation of funds on its behalf and as such is not able to provide any insight in this regard. Any conduct or documents purporting otherwise is unsanctioned by the Putzmeister Group,” von der Geest said.

“SALT was not lawfully appointed/contracted by the Putzmeister Group and SALT was used in a fraudulent/unlawful manner,” he told us, adding that they had laid charges against Geyser, who had served at the company for 20 years.

Amabhungane made contact with Geyser, but he went silent after receiving our inquiries.

Geyser seemingly had at least one accomplice inside the company – financial manager Asiff Goolam.

AmaBhungane could not reach Goolam but he was a co-director of the unsanctioned “subsidiary” Putzmeister Africa Holdings.

Goolam also recently had his bank accounts seized by the reserve bank, an indication that authorities are circling.

Sasfin, as detailed earlier, is not talking, pending its internal “independent”investigation.

Our sources suggest that Sasfin has a serious case to answer for lettingPutzmeister slip through the cracks.
The mere fact that SALT had already been caught out as suspicious in relation to the Gold Leaf accounts should have been enough for Sasfin to proactively block it from introducing its new client Putzmeister.

Nuts and bolts

The Putzmeister scheme using a court order seems to be an anomaly.

The primary way in which entities like Gold Leaf, PKSA and Ovenbird are alleged to expatriate funds illicitly is through the creation of fake invoices from foreign companies.

The chief “service” of agents like Khan and Jiwani’s SALT allegedly entailed falsifying these invoices from real but also ghost companies they themselves created abroad to justify massive offshore payments.

SARS calls these payments “ghost imports”. In the background the operation requires the constant creation of fake companies with bank accounts which then entails the forgery of yet more documents.

Aulion Global Trading in Dubai is seemingly the most prominent of a large constellation of alleged “invoice factories”.

In the transfers via Sasfin a whole range of invoice factories produced bogus invoices while SALT also evidently forged invoices from real multinational companies, simply swopping the bank details.
Khan and Jiwani of SALT were also apparently involved in setting up some of the foreign companies which would issue invoices to Gold Leaf to pay.

One of these was Hong Kong Joint Star Limited. Hong Kong corporate records show the duo as the directors and a $2,75-million invoice from this company was among the ones Sasfin flagged in 2017.

Another created by the same pair was Allway (China) Limited. And another golden threadOne seemingly very important foreign invoice factory that received payments from GLTC via Sasfin provides another hint that the operations of Baker and gold smuggler Greyvensteyn were related.

Some of the largest dodgy invoices red-flagged by Sasfin in 2017 were from an entity called Liberty Gold Investments, registered in North Carolina in the US.

Between June and July 2017 it sent invoices totalling $17,7-million for payment by Rudland’s Gold Leaf which would have been about R230-million at the time.

Corporate documents from North Carolina reflect Greyvensteyn as “president/CEO” of the company.

AmaBhungane has pulled on this and many other threads to piece together a picture of the alleged money-laundering operations that seemingly revolve around Baker and his associates in the tobacco and gold businesses.

We will share what we have found in part two.

Source: https://amabhungane.org/the-laundry-how-shape-shifting-money-launderers-infiltrated-sa-
banks-part-one/

Question 1

Discuss the reasons Habib Overseas Bank should report suspicious transactions to FIC. (5)
Question 2

Identify ten suspicious and unusual transactions in the case study. List your answer in bullet point format. One mark will be awarded for each bullet point. (10)

Question 3

Analyse the case study and identify four ML/TF/PF compliance and regulatory risks that Habib Overseas Bank experienced with reference to the Financial Intelligence Centre Act (Act 31 of 2001 as amended). Substantiate the identified risks with evidence from the case study. Thereafter conduct independent research and advise what controls banks can implement to mitigate these risks.
Remember to reference in line with the Milpark reference guide. (15)

TOTAL: 70 MARKS

Answers to Above Questions on Financial Crime

Answer 1: In respect to the given scenario, an example of an operational compliance risk from an anti money laundering perspective can be a situation whereby the automated systems of the banks fails to check the KYC of a customer, and it leads to accounts being opened without proper verification leading to increasing chances of money laundering.