International Funds Transfers in Africa and the Compliance Measures to Detect and Combat Financial Crime — an Introduction

• Jurisdiction: South Africa
• Author: Marxen, K.
• Pages: 261-297
• Published date: 17 June 2020
• Date: 17 June 2020

INTERNATIONAL FUNDS TRANSFERS IN

AFRICA AND THE COMPLIANCE MEASURES

TO DETECT AND COMBAT FINANCIAL

CRIME — AN INTRODUCTION

KARL MARXEN*

Brunswick European Law School

Abstract

The article examines measures to identify and curb illicit international

funds transfers in Africa. It considers formal means of payment and

funds transfer (open account trading, documentary letters of credit,

documentary bank collections, payment intermediaries and other

(formal) funds transfer services), but also takes account of informal or

emerging options of payment such as mobile-phone-based systems (eg,

M-Pesa) and hawala. The article sheds light on important concepts

such as ‘know-your-customer’ (KYC), ‘risk-based approach’, and the

role of so-called ‘financial crime indicators’ in combatting illicit

financial flows. Special emphasis is placed on Africa and Africa-specific

issues. A mature and effective legislative and regulatory framework,

and due diligence in the scrutiny of parties and transactions involving

funds transfers, both locally and internationally, will be necessary to

prevent or reduce the illicit flow of financial means and financial

crime.

Key words: international payment; financial crime; illicit financial

flows; money laundering; compliance; trade finance.

IINTRODUCTION

This article examines legal compliance measures aimed at banks and

f‌inancial service providers to detect and combat f‌inancial crime. Special

attention is paid to common payment and funds transfer methods and,

within the context of the African continent, their use and practice.

*First State Examination (Hamburg), PGCert (Witwatersrand), LLM (Stellenbosch), LLD

(Johannesburg). Visiting Researcher at the Centre for Banking Law, Faculty of Law,

University of Johannesburg; Fellow of the Institute of International Banking Law & Practice

(IIBLP), USA. This article is based on a presentation given at the African Studies Association

of the United Kingdom (ASAUK) 27th Biennial Conference at the University of Birmingham

(UK), 11–13 September 2018.

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There are many reasons why a particular payment is made or certain

funds are transferred, for example, to settle an outstanding balance from

a sales transaction, to pay a licence fee that is due to a regional

government body, or to grant an advance to allow a contractor to

commence complex excavation work. Most payment transactions and

providers involve legitimate funds and legitimate transactions. How-

ever, the various payment and transfer methods available today can also

be used for illicit purposes. Using payment and transfer systems,

criminals may facilitate f‌inancial crime such as commercial fraud,

bribery and corruption, violations of capital f‌low restrictions, or inter-

national economic sanctions, tax evasion, or money laundering and so

contribute to the illicit f‌low of capital. This undermines the govern-

ments’ ability to generate legitimate income to f‌inance public services

and other expenses benef‌icial to the local population, and to oversee and

guide economic activity taking place within its borders. Particularly to a

developing country or region and, most importantly, its disadvantaged

people, f‌inancial crime can have devastating effects, limiting economic

development and social advancement. This article introduces some of

the relevant f‌inancial crimes and places them in a context of f‌inancial-

crime compliance and development in Africa.

This article also sheds lights on the complex issue of legal compliance

and important concepts linked to compliance aimed at f‌inancial crime

and illicit capital movements, such as ‘know-your-customer’ (KYC), the

‘risk-based approach’, and the application of ‘f‌inancial crime indica-

tors’. Without a sound understanding of these concepts and their

relevance to payment methods and electronic funds transfers, there can

be no meaningful discussion of illicit f‌inancial f‌lows in an African

context.

The article considers formal/established means of payment and

electronic funds transfer (cash, negotiable instruments, bank collec-

tions, and documentary letters of credit) used in most economies,

including those in Africa. This article then considers and takes account

of certain informal or emerging options of effecting payment and

moving funds (informal systems based solely on honour and trust, eg,

hawala, or emerging mobile phone-based payment systems, eg, M-Pesa

and similar options) that are particularly popular and relevant in several

African countries.

An advanced and effective legislative and regulatory framework, and

due diligence in the scrutiny of parties and transactions involving

(electronic) funds transfers, both locally and internationally, is neces-

sary to prevent the illicit f‌low of f‌inancial means and f‌inancial crime.

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For all concerned parties and stakeholders, a critical awareness of these

aspects is essential. This article seeks to contribute to that.

II FINANCIAL CRIMES, ILLICIT FINANCIAL FLOWS, AND

THEIR EFFECTS ON DEVELOPING COUNTRIES

Financial crime and illicit f‌inancial f‌lows negatively impact countries

and their populations. Boyce and Ndikumana report that ‘[c]apital

f‌light and other illicit f‌inancial f‌lows constitute a major constraint to

development f‌inancing in Africa’.

1

Similarly, Ayogu and Gbadebo-

Smith write that ‘illicit f‌inancial f‌lows create serious problems for the

f‌inancing of development in many poor countries, including those in

Africa’.

2

Their thinking is supported by Mongalo, who suggests that

‘curtailing illicit f‌inancial outf‌lows from Africa can produce the largest

source of new funds for poverty alleviation and economic growth in the

near future’.

3

These f‌indings are alarming yet credible and show that

f‌inancial crime and illegal f‌inancial f‌lows merit scholarly and societal

attention, and clearly concern the quest for development.

In developing countries and regions in particular, the negative effects

of f‌inancial crime such as bribery and corruption, commercial fraud

against provincial or state governmental institutions, violations of

capital restrictions, tax evasion, or money laundering offences con-

nected to such criminal offences, will likely have serious practical

implications and repercussions for the local population.

4

These include

lack of social services or access to public infrastructure due to insuff‌i-

cient funds available to the government and public institutions, and

general deterioration of the rule of law. Financial crime is likely to

contribute to, or be an essential part of, illicit f‌inancial f‌lows.

Financial crime, generally, relates to the use of the f‌inancial system

and f‌inancial institutions (such as banks, payment providers and

1

Boyce & Ndikumana, ‘Strategies for Addressing Capital Flight’ in Ajayi & Ndikumana

(eds), Capital Flight from Africa (OUP 2014) 393 (alteration by me).

2

Ayogu & Gbadebo-Smith, ‘Governance and Illicit Financial Flows’ in Ajayi & Ndiku-

mana ibid 278.

3

Mongalo, ‘Possible Contribution of Corporate Law Remedies to Curbing Illicit Outf‌low

of Capital from Africa’ (2015) 1 Journal of Corporate and Commercial Law and Practice 1, 2.

4

Heimann & Pieth, Confronting Corruption (OUP 2018) 14. However, note also the

interesting claim in Feltes & Hofmann, ‘Transnational Organised Crime and its impacts on

States and Societies’, in Hauck & Peterke (eds), International Law and Transnational

Organised Crime (OUP 2016) 52: ‘When analysing the impacts of TOC [transnational

organised crime] on society, it would be one-dimensional to focus solely on the negative and

devastating consequences associated with organised crime. Contrary to popular belief, to a

certain extent TOC may actually contribute to regional development, particularly in some

regions of the southern part of the globe.’ - insertion by me).

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