A recent report by the Financial Intelligence Centre (FIC) offers valuable insights into the growing issue of money mule activities in South Africa. Released in June, the Financial Crime Insights: Money Laundering Risks Associated with Money Mules report sheds light on how criminals exploit individuals to transfer illicit funds, often unknowingly.
According to FIC, the report, which reviewed data from August 2016 to July 2023, is designed to help government, financial and non-financial institutions and other stakeholders understand and identify money mule activities. The report also aims to assist in developing effective strategies to combat this growing crime.
So, what is a money mule? Money mules are individuals who are recruited to help launder the proceeds of crime or physically transport goods, merchandise or money on behalf of a criminal. It’s someone who transfers illegally obtained funds on behalf of others, often without fully understanding the criminal nature of their actions. These individuals play a crucial role in laundering illicit money, making it harder to trace the origin of the funds.
In this article, we’ll highlight the key findings from the report and provide practical advice for accountable institutions to protect themselves from being unknowingly drawn into these illegal schemes.
Key Takeaways from the Report
The FIC’s report offers a comprehensive look at the methods criminals use to recruit money mules, the scale of the problem and how it impacts the financial system. Here are some key findings:
- High risk sectors: Banks, crypto asset service providers (CASPs) and foreign exchange dealers were the top institutions submitting suspicious transaction reports (STRs) during the assessment period. Other high-risk areas include high-value goods dealers, investment advisors or intermediaries and cross-border transfer providers. The report also highlighted additional industries frequently exploited in money mule activities, such as catering, transportation, motor vehicle dealerships and manufacturers, amongst others.
- Use of shell companies: Criminals often funnel illicit funds through shell companies to hide their true origins. Cash-and-carry businesses and construction companies were identified as common vehicles for these schemes.
- Use of technology: Digital financial services, such as remote online account opening, have expanded the scope and speed of money mule operations.
- Regional hotspots: Money mule activities are most prevalent in Gauteng (notably in Roodepoort, Cresta and Fordsburg) and in the Western Cape (particularly Stellenbosch and Cape Town).
- Cryptocurrency: The use of crypto assets in money mule schemes is on the rise, making it harder to trace illegal transactions.
Red flags for Money Mule Activities
Accountable institutions should stay alert for red flags that may indicate money mule activities. These include unusual account behaviour, such as business accounts lacking typical expenses like salaries or taxes and personal accounts missing salary credits or regular expenses. Rapid movement of funds through cash withdrawals, transfers or international withdrawals is also a key warning sign.
Suspicious transactions include frequent deposits just below reporting thresholds, large transfers abroad with no clear relationship between parties and multiple small deposits followed by large withdrawals. Transactions that don’t match a client’s usual business activities are another red flag.
Behavioural indicators to watch for include clients acting suspiciously, being directed by another person or providing false or unverifiable information. Dormant accounts that suddenly become active or accounts held by young, unemployed or foreign individuals showing unusual patterns, also deserve closer scrutiny.
Specific transactions like quick movements through betting accounts, large cash deposits followed by transfers to crypto providers or high-value credits followed by rapid withdrawals are concerning.
Geographical factors, such as clients near borders or in areas with high mule activity like Gauteng or the Western Cape, should also be noted.
By monitoring these signs, accountable institutions can better detect and prevent money mule schemes, safeguarding both their operations and the wider financial system.
Common pitfalls accountable institutions face
Accountable institutions may unknowingly facilitate money mule schemes due to a variety of pitfalls:
- Inadequate due diligence: Failing to conduct thorough background checks or ongoing monitoring of customers leaves institutions vulnerable.
- Weak internal controls: Insufficient procedures for tracking suspicious transactions can allow illegal activity to go unnoticed.
- Lack of awareness: Without proper training, employees may miss important warning signs of money mule activity.
- Overreliance on automation: While automated systems are useful, relying solely on them without human oversight can result in missed red flags.
How can accountable institutions protect themselves?
To safeguard against money mule activities, accountable institutions should take the following preventive measures:
- Strengthen customer due diligence: Implement comprehensive verification processes to ensure that clients are who they claim to be. Ongoing monitoring of their activities is essential, as it helps detect any suspicious behaviour over time.
- Monitor transactions: Use advanced monitoring systems to flag unusual transaction patterns, such as rapid transfers of large sums, frequent small deposits followed by withdrawals or transactions that don’t align with the customer’s typical behaviour.
- Educate staff and clients: Regularly train staff to recognise the warning signs of money mule activities and educate clients on how to avoid becoming mules themselves. Knowledge is one of the best defences. Stay abreast of changes in your industry or geographical area, and how these developments could open you up to falling victim to money mule activities.
- Enhance internal controls: Establish clear procedures for identifying and responding to suspicious transactions. Regular audits and strong anti-money laundering (AML) protocols can greatly reduce risk.
- Collaborate with authorities: Work closely with regulatory bodies, law enforcement and other institutions to share insights and best practices. This collaboration helps build a stronger defence against criminal activity.
- Report suspicious activities: Promptly submit suspicious transaction reports (STRs) and suspicious activity reports (SARs) to the FIC, providing detailed information to aid in investigations.
- Implement a tailored FICA Risk Management and Compliance Programme (RMCP):
Doing the bare minimum in customer due diligence can expose your business to significant risks. Accountable institutions must thoroughly understand their client base, including whether clients operate in high-risk industries. It’s also crucial to assess environmental threats, such as being located in a high-risk geographic area. In such cases, your RMCP should be enhanced, and you must conduct more rigorous and ongoing due diligence to mitigate these risks.
Avoid serious consequences
The FIC’s Financial Crime Insights: Money Laundering Risks Associated with Money Mules report highlights the growing threat money mule schemes pose to South African accountable institutions. By understanding how criminals operate and addressing common vulnerabilities, businesses can bolster their defences. Strengthening due diligence, monitoring transactions and fostering collaboration with authorities are critical steps in safeguarding against money mule activities.
Failure to take these steps can result in significant consequences. Accountable institutions embroiled in money mule schemes, even unwittingly, may face legal and regulatory sanctions, negative publicity and severe reputational damage. This can directly affect the bottom line, as clients may lose trust and choose not to do business with them.
Through vigilance and proactive measures, accountable institutions can protect themselves and the wider financial system from exploitation.