In the spotlight: Churches have come under the radar AML/CFT probes PIC: CRUXNOW.COM

Religious institutions that operate charities and places of worship perform an important role in our society.

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 [email protected] for more information on AML/CFT training and consultancy services in Botswana

In celebration of International Women’s Day last month, our Managing Director Michaela Powell-Rees sat down with Keneilwe Mere & Kgaotsang Matthews (Founding Partners of Moribame Matthews ) to talk family, women in the profession, and setting work requirements to meet your environment.

Credits: Videography Re-Mmogo Visuals

In celebration of International Women’s Day, our Managing Director Michaela Powell-Rees sat down with Sharifa Noor (Head of Operations at Kgori Capital) and Tiny Kgatlhwane (Managing Director of Kgare Insurance Brokers) to discuss their unique journeys & milestones.

Credits:

Videography: Re-Mmogo Visuals

The art of the deal: Advisors are key to M&A deals PIC: SCORE.ORG

As an M&A Advisor one of the comments I hear most from my clients is: “I wish we had spoken to you sooner”.

It is also not uncommon for people to ask me “So what is it you actually do as an M&A Advisor?”

M&A stands for Mergers and Acquisitions. We generally classify our services into two categories, Sell Side Advisory Services and Buy Side Advisory Services. Put rather simply, we provide advice and assistance to clients, mostly individuals and companies, who are looking to either sell their businesses or shareholding in a business, or clients who are looking to buy a business or acquire an interest in a business. We are not stockbrokers or Financial Advisors. An M&A Advisor takes an active approach in guiding and assisting an individual or company to successfully complete the transaction. Sadly, we are often brought in when transactions and negotiations have already commenced and when clients find themselves in a tough spot and under pressure to conclude a transaction with doubts as to whether they are getting the best deal. Ultimately, anyone looking to sell or acquire a business or an interest in one, wants a certain level of peace of mind before they sign the dotted line.

Most of our mandates fall into the Sell Side category. Often our clients have worked numerous years and made many sacrifices to establish successful businesses and when it comes time to sell, they are unsure where to begin. This can be a daunting process for any shareholder, never-mind owner managed business. They are often approached by keen buyers who have noticed their success and want to leverage off this for their own investment return purposes. M&A Advisors also act for Liquidators, Business Rescue Managers, Private Equity Firms, etc. In this article, we focus on M&A Advisors who act for owner managed business and shareholders in private companies.

Let us go back to that question: “So what is it you actually do as an M&A Advisor?”. On Sell Side Advisory mandates, we basically work hand in hand with clients to gain an understanding of their business. Thereafter, we undertake an indicative valuation to obtain a sense of what a willing buyer would be prepared to offer for the business or the shareholding our client has in the business. Once we know this information or have a good sense of it, we are able to prepare and recommend sale strategies and identify potential interested buyers.

On behalf of our clients, we prepare the marketing documentation and approach potential interested parties on a confidential basis to assess their appetite. Depending on the sale strategy agreed with our client, we begin to provide additional information to interested parties to enable them to assess the transaction and solicit offers and negotiate the transaction. There is a lot more that goes on behind the scenes and each transaction is different and often requires a different approach.

Most sale processes take anywhere between four to six months, but we have been involved in a few which have taken up to 18 months to conclude. I was recently told that our services can be likened to “an insurance”. Something which I found not only flattering but also quite accurate. The key objective of an M&A Advisor is to complete a deal as quick as we can, for the best value and to provide our client deal certainty. Our clients still have their businesses to run on a day to day basis and do not have endless time to spend involved in the transaction. The M&A Advisors’ goal is to relieve the burden and stress of their client and management as much as possible whilst the transaction is in progress and during conclusion.

We all know that age old saying “fail to plan, plan to fail” and an M&A Advisor never likes a failed transaction. Our fees are mostly linked to transaction success and the success of most transactions underlies in the preparatory work undertaken prior to soliciting offers and in preparing the asset for sale. An M&A Advisor is responsible for ensuring the process is well managed and that their client gets the best deal possible given their circumstances and the market environment within which they operate. Before potential parties are even contacted, a clear sale strategy needs to be in place and agreed upon.

When looking for an M&A Advisor you should be looking at firms and individuals who have a wealth of experience of successfully completing transactions. They are not there to simply broker a deal and need to have a deep understanding of their client’s requirements.

What we do is not an exact science. We have professional qualifications but more than that we have hands on experience gained through completing various transactions. As professionals, M&A Advisors are required to act with the outmost integrity and in compliance with requisite legislation.  M&A Advisors must be able to quickly obtain an understanding of the business, what drives it value, to identify potential deal breakers and to negotiate transactions in the toughest circumstances.

Our network is also vital. Your M&A Advisor needs to be able to identify potential interested parties, both locally, regionally, and sometimes internationally. They should have sound knowledge of which other advisors are required in the transaction process to conclude a transaction and their roles and responsibilities.

M&A Advisors should have good working relationships with other advisors. For example, lawyers are integral to the execution of a transaction. M&A Advisors work closely with them to negotiate the transaction’s commercial terms (i.e. price, payment terms, warranties and indemnities) which are included in the legal agreements and required to execute the transaction. Lawyers provide confidentiality agreements used by the M&A Advisors to protect the information shared with potential buyers. They also advise on matters where legal opinions may be required and assist in obtaining various consents and approvals required by law. By working closely with our clients’ lawyers, we are able to derive the best value for our clients and provide them the necessary legal and commercial protection.

Another common question we get asked is “How do you know you completed a successful deal?”. More often than not, my answer is that “both parties walked away a little unhappy”. You may ask how does that make sense, surely you want a happy client? Well it means that both parties have compromised enough that the deal was fair to both and neither have given up too much that the deal could not be concluded and was worth their while. The process of negotiation is not always straightforward, it can be difficult, but a seasoned M&A Advisor will be confident in their negotiation strategy, approach and skills.

If you are ever considering disposing of your business or a shareholding in a business, I would strongly advise you to “obtain insurance” early on and consider appointing an M&A Advisor.

Look for one that has passion, has a successful track record of completing transactions, is professional, has professional qualifications in the financial sector, has a good business understanding and acumen, operates at the highest levels of integrity and can negotiate the terms which are important to you. When you are in the deep end it is tough for M&A Advisors to re-negotiate terms which you may have accepted or implied you are agreeable to. You increase the chances of completing a successful transaction or resolving a dispute with the help of an M&A Advisor.

We have not dealt with Buy Side Advisory Services in this article.

If you would like to know about what this entail, please reach out to us via our website. Contact us via email [email protected] for more information on our AML/CFT training and consultancy services in Botswana.

MICHAELA POWELL-REES*

*Michaela is an experienced M&A Advisor. She has completed a variety of transactions locally and regionally and has been involved in some of Botswana’s largest deals. She has trained over 200 M&A Professionals across Africa, Europe and the Middle East.

Dirty cash: The authors say even receiving information could be punishable PIC: arachnys.com

All too frequently there appears in a newspaper, stories about financial mismanagement or fraud in government, or an article analysing a government report which is not publicly available and it appears has been leaked to the paper involved by someone working in the ministry that published it.

Or stories are published or aired on TV or radio of contractors considering legal action because they were unsuccessful in securing a specific government contract. The source of their information to ground any action, apparently leaked to them by family or friends or corrupt government officials who work for the ministry that issued the contract.

While there are specific corruption offences for officials who release information unlawfully and for those who offer or provide some inducement to do so, what are the other repercussions for any person or entity that receives unsolicited unlawfully acquired and released information? Particularly if they also act upon that information for their own benefit or the benefit of another for example their employer. Widely unknown and understood amongst professionals and the general public is the application of the criminal money laundering laws of Botswana to corruption. Internationally, money laundering laws were initially enacted to combat the proceeds of drug trafficking and later expanded to include other crimes particularly human trafficking, people smuggling and weapons smuggling.

It was never initially envisaged that money laundering legislation would encompass the trade in illegally obtained information. But the broad provisions of many money laundering statutes around the world has changed that. In Botswana, the provision relevant to the use of information that has been illegally obtained and provided to another person, whether they knew of its illegal origin or not, is sub-section 47(1)(b) of the Proceeds and Instruments of Crime Act, 2014 (“PIC Act”) which provides that a person who: “receives, is in possession of, conceals, disguises, transfers, converts, disposes of, removes from or brings into Botswana any property which, in whole or in part directly or indirectly represents, the proceeds of any crime, where he or she knows, suspects or has reasonable grounds for knowing or suspecting that the property is derived or realised, in whole or in part, directly or indirectly from any confiscation offence or foreign serious crime related activity, shall be guilty of the offence of money laundering.” For information to be captured by sub-section 47 it must be property. Section 2 of the PIC Act provides guidance as it defines property to mean money or any other movable, immovable, corporeal, or unincorporeal thing. Movable property is any property a person can take with them, which means it is personal property and therefore does not include a house, apartment, or land. In relation to the unlawful acquisition of information it would include a hard copy of a report, a USB containing information, a file etc. Corporeal property means real estate and personal property which has a tangible form.

It also includes moveable property. While an incorporeal thing refers to something that cannot be seen or touched but it can be owned. Incorporeal property is intangible property and often it is intellectual property, for example a government report or information that has a security or privacy classification or copyrighted works. And to be sure that no intangible property is left out of the meaning of incorporeal property, the definition of property in the PIC Act also includes “any right or interest in property”.

For a person to be involved in money laundering they must undertake one or more of the following physical acts namely either receive, be in possession of, conceal, disguise, transfer, convert, dispose, remove or bring into Botswana any property (in whole or part) that is directly or indirectly the proceeds of any crime.

These acts of money laundering should be given their normal meaning. In a practical sense, if a government official or someone working in the private sector, unlawfully removes or steals information from their employer that would be an offence covered by section 47 of the PIC Act. For example, if that person stole a report, the report would be tangible or movable property while its contents would be incorporeal property or an interest or right owned by the employer or government concerned. Now if that person provided the report to an editor or reporter from a newspaper or other media organisation or to a company that did not obtain a contract from the government which it thought it was entitled to win, then that official would be disposing of the proceeds of crime. And they could be charged with the offence of stealing the information and/or corrupt behaviour in addition to being charged with money laundering. And it does not have to have been communicated or given to them directly by the person who stole the information or who released it unlawfully.

For example, a common method used to convey stolen information is to set up a fake email address and upload an unlawfully acquired file to an email. That email is not sent. The receiver of the information who knows the email address also has the password.

They access the email account and download the file. They then delete the unsent draft email and no record remains in existence of any email being sent or received. Establishment of cloud-based services also makes the theft and transfer of stolen information easier.Any person who received the report or information (e.g. received by email or on a USB) that was stolen or unlawfully obtained, for example an employee of a media organisation, would commit a money laundering offence. Similarly, if that person passed on an illegally obtained report or information to another person, they would be in possession of that item and potentially could be charged with money laundering. It is a matter for a court to decide if the provision has been satisfied by a course of action. However, the handling of an envelope or storage device containing classified documents or receipt of an email etc might constitute receiving. Uploading of the material to another device, computer or the cloud would amount to possessing the items and if the information was later encrypted or password protected or both by a journalist, then those actions might amount to an act of concealment.

It has often been said that the legal relationship between the predicate offence and money laundering is similar to the roles of a thief and a receiver of stolen goods. Except in relation to the criminal money laundering law of Botswana, a person who commits a predicate offence can also be charged and convicted of money laundering, whereas a thief cannot be convicted of being a thief and a receiver of the goods he/she stole. They are usually charged with one offence.

Establishing that a person has possession or has received etc property namely information that has been acquired illegally is usually not difficult. Finding a stolen report or a USB containing the information during a search of premises occupied or used by a suspect is the most common occurrence. The most difficult aspect to prove is the knowledge the person possessed at the time they received the unlawfully acquired information. Here too, section 47 aids the prosecution. The section is slightly unwieldy and a full analysis of the mental elements of that provision is beyond this article. But in simple terms, where a person knows of the illegal origin of the information, then the element is established.

This could be brought about by evidence given by the other party, namely the person who unlawfully acquired the information and passed it on, could state that they told the person receiving it where it originated from and how.  The severe penalty for money laundering in Botswana is another enticement the prosecution can use to secure the cooperation of other offenders. And from experience, when a co-offender is facing a substantial penalty, they are more likely to cooperate with the prosecution in exchange for a reduced sentence. An offence against Section 47 upon conviction carries a sentence of up to 20 years imprisonment or a fine not exceeding P20 million or both.

The penalty is one of the severest in the world for money laundering. Adding to that penalty is the potential forfeiture of any assets or benefit derived from the crime or used to commit the crime. Potentially in relation to a media organisation, if it were convicted of a money laundering offence or civil forfeiture action was initiated against it, it could involve forfeiture of the business to the government. Where full knowledge cannot be established, a person can be convicted if they suspect the information is proceeds of crime or has reasonable grounds for knowing or suspecting that the property is derived from any offence. This section has subjective and objective elements. The latter would be based on what a reasonable independent person placed in similar circumstances, as the offender would conclude about the origin of the information. It would be easy to prove that a suspect had reasonable grounds for knowing or suspecting that information in his/her possession was the proceeds of crime if the information is not publicly available or contained government security or privacy classifications. The presence of a security or privacy classification would alert any prudent journalist or other person that the person releasing the information to them, is not be entitled to do so. The unlawful release of information particularly from government ministries is a major problem in Botswana. Use of money laundering laws to combat it would have a significant impact on the issue and be a major deterrent, particularly to the receivers of the illegal information. All parties involved in this abhorrent practice are on notice about the power and application of section 47 and its potential use by authorities to quash the illegal trade in information in Botswana.

MICHAELA POWELL-REES & CHRIS DOUGLAS*

*Michaela Powell-Rees & Chris Douglas, on behalf of Merero Partners, a boutique advisory firm based in Botswana offering Corporate Finance, Management Consulting and Risk Advisory Services. Contact Merero via email [email protected] for more information on its AML/CFT training and consultancy services in Botswana

Close to home: Mozambique is battling Islamic terrorists PIC: WWW.CHRONICLE.CO.ZA

As risk consultants we realise that every risk management system has flaws and when it is in place it does not guarantee that identified risks will not occur and if they do, will have the level of impact that was assessed.

Unfortunately, some risks are impossible to predict, and a few are extremely difficult to foresee.  Perhaps an example of the latter is a terrorist attack. We know that various terrorist groups exist, but due to the covert nature of their operations, we know little if anything about their intentions, capability, their targets and when they will strike.

Despite these difficulties, government agencies and the private sector must be vigilant and work in close cooperation to identify and prevent a terrorist attack. Implementation of international standards designed to combat the financing of terrorism and enshrined in the Financial Intelligence Act and Regulations of Botswana, are meant to operate in collaboration with the private sector.

The anti-money laundering and counter-financing of terrorism (AML/CFT) frameworks are not intended to be a contest between regulators and specified parties and accountable institutions, but a collaborative arrangement and a culture of cooperation built on trust and the mutual exchange of information. While specified parties and accountable institutions are legally required to provide various reports to the Financial Intelligence Agency (FIA), timely and comprehensive feedback from the FIA is required to ensure that the reports are beneficial. The FIA is required to provide a specified party or accountable institution feedback on a report made to it within 14 working days.  In addition to that feedback, the FIA and other regulatory authorities should also provide strategic information that might assist specified parties and accountable institutions discharge their responsibilities under the AML/CFT framework of Botswana.

The threat of terrorism in Botswana is a risk that our firm finds is often neglected or the least understood while undertaking a risk assessment for a client.  Apathy, arising from a view that the country does not have a terrorist threat or that it could not happen in Botswana, is one major cause.  The fact that Botswana has never experienced a terror attack may also make us complacent or we may believe that the risk of other countries being attacked is far greater than our own.

The other is the lack of available information in a consolidated format provided by the FIA and regulatory authorities, identifying the potential terrorism risks in Botswana, and of relevance to specified parties and accountable institutions, the financial indicators peculiar to them.  This information is vital, as it would enable specified parties and accountable institutions to prepare better risk management assessments, strengthen suspicious transaction reporting and enhance the monitoring of transactions and events.

An act of terrorism can occur unexpectedly at any time. A recent example is the terror attack in New Zealand on March 15, 2019, when a 28-year-old man from Australia murdered 51 people and wounded another 40 during Friday prayers at two Mosques in Christchurch. Prior to this incident, the terrorist risk rating in New Zealand, a relatively peaceful country, was low. It immediately went to high following the attacks and is now rated at medium.

In Western Europe during 2019, there were four fatal and 112 non-fatal but severe events involving right-wing extremists. It was the second most deadly period in the past six years in Western Europe. In Southern Africa, we have seen the development of small neo-Nazi groups. While local media often report that these groups do not have the capacity to commit terrorist acts, the Christchurch attacks clearly rebut that. Any person with a gun or as occurred in the United Kingdom, with a knife or a vehicle, can commit an act of terrorism causing death or serious bodily harm to others.

Closer to home in Botswana, we are witnessing the rise of Islamic Terrorism.  Once confined to Northern and West Africa, it has spread down the horn of Africa and has taken root in Mozambique.  These terrorism groups survive by being involved in criminal activities primarily heroin trafficking, theft and the sale of illegal ivory. Other forms of funding, particularly from local and international supporters cannot be ruled out.

Following the terrible terror attacks on the United States in 2001, the 9/11 Commission identified that authorities failed to understand the gravity of the threat posed by al-Qaeda leading up to the attacks and that there was a failure in imagination by authorities and a mindset that dismissed the possible intentions of the group.  It is therefore not beyond possibility that local and international supporters of terror groups in South Africa might exist and use Botswana’s recently acquired reputation, thanks to the Financial Action Task Force and the European Union, that it is a country of high money laundering and terrorism financing risk, to hide and move terror funds.

To ensure that Botswana does not repeat the mistakes of the past made by other countries in the fight against terrorism, law enforcement and security agencies in the country need timely and accurate information, particularly financial information. Specified parties and accountable institutions are required to prepare an assessment of the financial crime risks their businesses face, with terrorism financing one of those risks.  An entity cannot complete a useful risk assessment without relevant and timely information. This is one area where the FIA and regulators can assist specified parties and accountable institutions – by publishing information on the latest terrorism trends not only occurring in Southern Africa, but throughout the world.

It is often said that during this current COVID-19 pandemic that we are all in this together.  With terrorism in our region increasing, the government and people of Botswana cannot be complacent. The authorities and the private sector need to work more closely together to ensure that Botswana does not become a victim of a major terrorist attack.

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. Through Merero’s joint venture partner, terrorism financing training has been delivered to government and private entities in countries with a high terrorism risk including Indonesia, Nigeria, Pakistan, and Sri Lanka. Contact Merero via email [email protected] for more information on its AML/CFT training and consultancy services in Botswana

If you are a specified party or an accountable institution in Botswana, you have a responsibility to identify and report suspicious transactions. 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.

Suspicious transaction is defined in the FI Act to mean a transaction that:

1. 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;
2. gives rise to a reasonable suspicion that it may involve the commission of a financial offence;
3. 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);
4. is made in circumstances of unusual or unjustified complexity;
5. appears to have no economic justification or lawful objective;
6. 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
7. 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 license 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 who responsibility it 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 it is to monitor, identify and report an STR, is to report every single transaction it is involved in to 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 the 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.

Authors: Michaela Powell-Rees & Chris Douglas, on behalf of Merero Partners, a boutique advisory firm based in Botswana offering Corporate Finance, Management Consulting and Risk Advisory Services.  Contact us via email  [email protected] for more information on our AML/CFT training and consultancy services in Botswana.

A school is probably the last place you would consider being used as a vehicle to launder illegal money.  However private schools and universities, just like most businesses, can be used as instruments of financial crime. Schools and universities caught up in money laundering are usually unwitting participants. The amount of money laundered through a school is not significant compared to other techniques, but the volume can be increased with the help of school administrators who receive a kickback or “commission” from criminals to move illegal money through the school. making the funds returned to them appear to have originated from a legitimate source.

Last year, private schools in the UK were identified as being soft targets for money laundering.  While in the US, the recent nationwide college admissions scandal involving many prominent people has highlighted the risk of an education facility, in that case the University of Southern California, being caught up in financial crime. Parents have been charged with conspiracy to launder money for concealing bribes and other payments. With a charity, fake consulting agreements and fake invoices being some of the methods used to conceal funds as legitimate payments.

In most countries, for example the UK and Australia, schools are not regulated by anti-money laundering and counter-financing of terrorism frameworks. In Botswana a private educational institution such as a university or school, if it is an accountable institution, is captured by the Financial Intelligence Act (FIA) and regulations which is the anti-money laundering and counter-financing of terrorism (AML/CFT) law of Botswana.

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.  A trust is required to be registered with the Master of the High Court pursuant to the Trust Property Control Act 2018,while a private company must be registered with the Companies and Intellectual Property Authority.  If a school or university 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 FIA and regulations.

It is beyond this article to state all the AML/CFT obligations a private school or university as an accountable institution must comply with, but a summary of the core compliance obligations is briefly discussed here.

When designing any anti-crime measure, the first step is to assess the criminal risk the institution is facing.  The assessment of criminal risk is important not just for a school or university but for any business.  Understanding all risks, including criminal risk, are important and a sound business planning strategy.  This is acknowledged in global AML/CFT frameworks and legally enforced in the FI Act.  The risk assessment must be done first because all other AML/CFT plans and mitigation strategies hang off it.  Some organisations in Botswana, to expediate their obligation to comply with the FI Act and regulations are designing their AML/CFT strategy and policies first.  This approach is thwart with problems that will occur later. It could result in some risks, including high risks, being overlooked and resources wasted on low risks which either did not require the degree of mitigation deployed or could have been eliminated completely.

Once the AML/CFT risk assessment has been completed, and it should be appreciated that it is a living document and must be reviewed regularly, an organisation can then set about implementing the other important measures including:

• AML/CFT policies, programmes, procedures, and controls to educate and guide staff on what the organisation and they must do to comply with the law. The AML/CFT frameworks should be more than just a compliance exercise undertaken by an educational institution.  For a system to be effective, it is important to build a culture within the organisation where managers and employees of all levels understand the threat posed to their country, community and organisation by criminal activities and will therefore do the right thing and go beyond the minimum required by law;
• Development and maintenance of an independent audit function to examine and evaluate the effectiveness of the educational institution’s AML/CFT programme;
• Designation of AML/CFT compliance officers at the management level to ensure a high level of ownership and commitment to preventing financial crime. The largest fines imposed on financial institutions for failing to comply with AML/CFT law have occurred because of incompetent, poor commitment, or a failure of leadership by senior management;
• Establishment of procedures to ensure high standards of employee integrity and a system to evaluate the personal, employment and financial history of potential employees. In conjunction with the development of AML/CFT policies, an educational institution should review and where necessary interconnect its anti-bribery and corruption policies and procedures. Overlapping both frameworks significantly strengthens the capability of an organisation to prevent financial crime. As we know from global experience, where an AML/CFT framework or any internal control measure has failed, like the US college scandal, it has primarily been due to corrupt staff;
• Conduct due diligence on entities before they become customers and continue with ongoing due diligence throughout the life of the business relationship. The question often raised by educational institutions is who is the customer? For universities and schools that would mean the parents or guardians of children. Unless the university is only dealing with a student of adult age and has not entered a business relationship with another adult, being a parent or guardian of the student. But what about children attending primary and secondary schools run by private organisations? The FI Act requires specified parties and accountable institutions to identify and verify the identity of any beneficial owner.  And under the law, a beneficial owner includes a natural person, who directly or indirectly through any contract, arrangement, understanding, relationship or is otherwise is involved in a transaction conducted on his or her behalf.  This would appear to include children.  Universities and private schools are therefore required to implement CDD measures for parents and for children attending or who apply to attend the institution; and
• Conducting enhanced due diligence in relation to customers, products, services, and jurisdictions deemed high risk because of the risk assessment or from advice received from the Financial Intelligence Agency or other foreign organisation. The list of what is a high-risk business, or a high-risk jurisdiction as defined in the FIA is broad.  The relevance for educational institutions would be entities based offshore especially in tax havens and parents who operate businesses that are known to be high risk for money laundering or predominantly deal in cash.  An educational institution when dealing with a company or trust, particularly offshore, which usually means receiving funds from it in payment for fees, must identify the natural person behind the legal entity.  Failure to do so could mean that the institution could be dealing with a sanctioned entity, a person of high risk or a foreign prominent influential person (PIP).

The definition of a PIP in the FIA is extensive and includes any person who is entrusted with a public function in Botswana or by a foreign country and includes close associates and immediate family members.  To be a politically exposed person under international AML/CFT standards requires that a person hold a “significant” position in government or in an international organisation, but that is not the case in Botswana.  The word significant is missing from the definition.  This means any person employed by the government in Botswana is a PIP regardless of the position they hold.  It should be noted that it not only includes senior executive officers of public bodies and political parties but also from a private entity.  It is therefore highly probable that a private university or school will engage a customer, a parent, or a child, who is a PIP.  This is because a PIP is usually able to afford the fees charged by private educational institutions and because a very large number of people, approximately 52% of the working population, are employed by Government in Botswana (25% by the central government, 22% by local government and 5% by parastatals). Before an educational institution enters a business arrangement with a PIP, approval must be obtained from a senior manager and reasonable measures undertaken to establish both the source of the persons wealth and source of their funds.  The PIP must then be subject to enhanced ongoing monitoring during the relationship.

Finally, private universities and schools must adhere to the mandatory record keeping and reporting obligations required by the FIA. Records must be kept for a period of 20 years and an institution is required to report to the FIA suspicious activity it has identified and all cash transactions of or above P10,000 or in equivalent foreign currency.

Failure by a private educational institution to comply with any of the provisions of the FI Act could result in the imposition of a serious penalty upon the organisation.  Serious penalties also apply under the FI Act for any person who is responsible for ensuring compliance with the FI Act who negligently fails to take any measure that is reasonably necessary to ensure compliance.  And if any manager or employee is involved in an act of money laundering, and note that in Botswana the level of knowledge required to convict a person is low compared to other crimes, then penalties involving a  fine not exceeding P20,000,000 or imprisonment for a term not exceeding 20 years, or both could be imposed on that person.

Private education providers are advised to not take the risk of being caught in money laundering and implement measures to eliminate or mitigate the probability of it occurring.

Chris Douglas is a Director at Malkara Consulting Australia. He is a former Australian police officer with the Australian Federal Police (AFP) for 31 years where he investigated money laundering, drug trafficking, people smuggling, human trafficking, corruption, organised crime, and fraud investigations in Australia and offshore. His extensive experience has made him a sought-after consultant and trainer in the field of financial crime and risk management. Chris has partnered locally with Merero Partners to provide AML/CFT training and consultancy services in Botswana. Contact [email protected] for more information.

As the clock struck midnight on Thursday, 1 October 2020, the European Union (EU) did what it threatened to do and listed Botswana as a high money laundering and terrorism financing (ML/TF) risk.  In deciding to list Botswana, the EU relied upon the mutual evaluation (ME) undertaken in June 2016 by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which is a Financial Action Task Force (FATF) Regional Body.

But since the ME, Botswana has made significant strides in improving its Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) framework.  With the passage of the Financial Intelligence Act and Financial Intelligence Regulations in 2019, Botswana now has one of the most comprehensive AML/CFT frameworks in the world, together with some of the toughest penalties for non-compliance.

While Botswana still needs to make improvements with supervision and enforcement of the law, that will take time to implement.  Building effectiveness cannot be achieved overnight.  By listing Botswana as a country of high ML/TF risk, the EU is engaging in strategic risk management, and has developed its own set of criteria to evaluate countries.  However, risk management is not an exact science and it has its weaknesses.  The methods used vary and the data collected is subject to interpretation. And in an international environment impacted by political influence. But with any risk management assessment, the data used must be current, relevant, accurate and independent.

Based on the above four criteria, the following assessments are applied to determine if Botswana should have been listed as high ML/TF risk:

The Basel AML 2020 Index

Transparency International’s Corruption Index 2019

Tax Justice Network World Ranking 2020

Global Terrorism Index 2019

The Basel AML Index released by the Basel Institute on Governance in Switzerland measures ML/TF risk in countries.  The 2020 report relates to results obtained during 2019.  Transparency International 2019 Corruption Index provides an annual snapshot of the degree of corruption in countries around the globe.

Countries and jurisdictions are ranked from very clean to highly corrupt and listed accordingly (1 being the least corrupt and the last country listed being the most corrupt, with the 2019 list containing 180 countries and jurisdictions). Botswana ranked 34 in 2019.While the Tax Justice Network World Ranking Index “ranks jurisdictions according to their secrecy and the scale of their offshore financial activities.

A politically neutral ranking, it is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight”. The ranking method is complicated, but it lists countries from 1 (highest secrecy) through to 133 (lowest secrecy).  Botswana ranked 113 in 2020.

The Institute for Economics & Peace (IEP) which releases the Global Terrorism Index measures the impact of terrorism on countries and jurisdictions around the globe. A ranking of one to four is very high; five to 18 is high; 19 to 48 is medium; 49 to 81 is low; and 82 to 137 is very low. While a rating of 138 means that a country is not impacted by terrorism. Botswana received a rating of 138.

The performance of every EU member country has been compared to Botswana and displayed in the table (pictured).

In relation to the AML Index, Botswana did not compare well against all EU member countries except Malta. But what is missing from that data is the risk from major predicate offences that drive money laundering activity.

For example, Europe is an important market for criminal organizations for the consumption of heroin and the use of cocaine and amphetamine-based substances. Further Europe is a significant market for the trafficking of humans, particularly for sexual slavery. In relation to the other three categories, compared to EU member countries, Botswana does very well. It is perceived as being less corrupt and more transparent than most EU member countries. For example, in relation to corruption, it ranked higher than 15 of the 27 EU countries. Lower perceived corruption in Botswana compared to many Western countries in the EU means that its AML/CFT systems are more likely to be effective.

Europe also has a significant terrorism problem in comparison to Botswana and hence Botswana is appropriately rated 138. This rating implies that the threat from terrorism financing in Botswana is very low.

While the data presented above confirms that Botswana is not a country of high ML/TF risk in comparison to other countries, it does not mean that the country has no money laundering and corruption problems.

Investigative and prosecution agencies still need to improve their capability and enhance their capacity to investigate serious financial offences, particularly money laundering and corruption.

In relation to corruption, Botswana scores well when compared to most countries and jurisdictions and is a standout performer in Africa.  But that is not good enough and being number one should be the target of the Government.  Nothing deters investment more than corruption and during this global pandemic when it is hard to secure foreign investment, rising corruption is the last thing Botswana needs.

As the data proves, the EU used out of date information to list Botswana.  The country has world beating AML/CFT legislation. But it must push on and build the capacity and capability of supervisory authorities, law enforcement agencies and prosecutors which will strengthen its case to be delisted by the EU and  to deter and prevent corruption, money laundering and terrorism financing in Botswana.

Data to assess the risk scores for each country is sourced from various organisations including Freedom House, Transparency International, the World Bank, World Economic Forum, Tax Justice Network, and the influential Financial Action Task Force.  The broad range of sources used, gives the Basel AML Index greater credibility over other assessments used to rank the performance of countries in combating money laundering and terrorism financing.

The index assesses a country’s performance across five core elements that operate to prevent money laundering and terrorism financing namely: 1. the quality of AML/CFT framework of a country 2. level of bribery and corruption 3. financial transparency and standards, particularly the level of financial secrecy 4. public transparency and accountability and 5. legal and political risks.

The index recently released in July this year, covers 2019.  Last year Botswana was ranked 76th out of 141 countries and jurisdictions assessed, as recorded in the public edition of the report, with an overall score of 5.06.   The risk rating is based on the min-max method with a rating scale of 0–10, where 10 indicates the highest level of ML/TF risk.  In the same year, the worst performer was Afghanistan with a rating of 8.16 while Estonia ranked the best coming in at 141 with the lowest score of 2.36.

Botswana outperformed FATF members India (5.15), Japan (5.16), Malaysia (5.25), Mexico (5.20), Saudi Arabia (5.33), Russia (5.51), Turkey (5.76), and China (6.76). It scored substantially better than larger African countries notably Nigeria (6.88) and Kenya (7.18).  In Sub-Saharan Africa, Botswana ranked just behind South Africa (4.83) and Ghana (4.89).

Countries with a risk score of 5.0 or above are regarded as having a significant money laundering and terrorist financing risk. Botswana’s rating is however close to the lower end of the scale, which classifies it as having a medium level of ML/TF Risk according to the Basel AML index.

While the index is not a contest between countries, it does enable political leaders to get an understanding of how their country is performing compared to others and how its performance is changing overtime. Botswana ranked 60th in 2018 with a score of 5.40, in 2017, it ranked 74 with an overall score of 6.02. Its current ranking, which is an improvement of 16 places from the previous year, is a significant achievement given the small size of Botswana’s economy, population and the resources available to it.

Botswana is clearly set on a continuous path of improvement with its AML/CFT framework.  A lot of hard work has been done for which the Government and all public institutions involved should be proud of. There however still remains room for further improvement, particularly in the area of capacity building for those involved in the investigation and prosecution of financial crimes, and with the implementation of the very far reaching Financial Intelligence Act and Regulations by both the financial and non-financial business and professional sectors.

The continued improvement in Botswana’s AML/CFT framework not only gives foreign investors greater confidence when deciding to invest in the country but also substantial leverage to the leaders of Botswana when they present their case to the European Union on why Botswana should be removed from its list of high risk ML/TF countries. It is worth noting that none of the FATF member countries that Botswana outperformed against in the Basel AML Index have been listed by the EU as being of a high ML/TF risk.  Interesting too was the overall assessment of countries in Europe by the International Centre for Asset Recovery with the Basel AML Index report stating:

“Despite having a generally lower risk than the global average, the region’s biggest deficiency is the quality of AML/CFT frameworks. This could indicate that AML/CFT does not enjoy the same level of priority in Europe than other accountability and transparency factors captured by the Index”

The report then cited Belgium, Cyprus, Malta, the Netherlands, Spain, and the UK as being major money laundering destinations according to the United States.

Botswana was listed by the EU for having a weak AML/CFT framework, but it appears that many European countries have a similar issue in compliance with international AML/CFT standards. Except in those countries, the ML/TF risks are far greater due to their larger economies which have substantial banking systems, a higher threat of organised crime particularly in drug trafficking and human trafficking; closer proximity to drug producing countries and a large number of foreign fighters who have returned from Syria.

Covid-19 has disrupted Government and business activities in 2020 but it also presents opportunities.  All Government departments, government owned businesses and the private sector should use any spare time that has been created by shutdowns to improve corporate governance systems, particularly those relating to the prevention of money laundering and terrorism financing.  If that is undertaken in a cooperative manner, then Botswana can expect greater achievements to be reported by the Basel Institute on Governance in its 2020 report.

Authors: Michaela Powell-Rees & Chris Douglas, on behalf of Merero Partners, a boutique advisory firm based in Botswana offering Corporate Finance, Management Consulting and Risk Advisory Services.  Contact us via email  [email protected] for more information on our AML/CFT training and consultancy services in Botswana.