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Due diligence under the spotlight

Posted on March 2, 2020

Due diligence under the spotlight

Court Papers filed in the United States reveal that a host of Africa’s former political leaders and their families are allegedly stashing their cash in South Africa’s property market, once again highlighting the importance of due diligence.

“The country’s status as Africa’s most sophisticated financial hub and its low prosecution rate are enabling politically exposed persons to hide vast amounts of money in real estate,” a February report in the Mail & Guardian said.

There are several mechanisms, including large cash purchases, the use of third parties (such as offshore and shell companies), and buying or selling properties for significantly different values than market prices, that could enable people to profit from South Africa’s real estate market. Artificial leases could also allow illicit funds to be laundered.

Through their law firm, one SA estate agency named in the court documents, declined to comment on the report but said the matter was under investigation.

The report quoted SA’s Financial Intelligence Centre (FIC) as saying the “property environment, including renovation and improvements, is often associated with criminal proceeds related to corruption and narcotics as well as a variety of other predicate offences”.

The new Property Practitioner’s Act – which replaced the old Estate Agency Affairs Act – brings important reform to the property industry, including the establishment of a new board of authority and definitions on property practitioners.

Estate agency firms, as accountable institutions, should carefully consider the changes introduced by the Financial Intelligence Centre Amendment Act, 2017 at the highest level of authority.

In accordance with Guidance Note 7 on the FIC website, estate agency firms are advised to pay particular attention to:

  • the adoption of a  risk-based approach to performing customer due diligence, including risk assessment and risk mitigation measures;
  • customer due diligence measures including establishing the identity of and verifying clients, beneficial ownership requirements, the position of prominent persons and ongoing due diligence;
  • record keeping requirements;
  • the development and implementation of a Risk Management and Compliance Programme; and
  • the implementation of the United Nations Security Council Resolutions relating to the freezing of assets.

Due Diligence is aimed at combating financial crime, including:

  • Financing terrorism
  • Money laundering
  • Tax evasion
  • Bribery and corruption.

The FIC Act requires a high level of due diligence to assess the risk associated with the prospective relationship with the prominent domestic individuals (such as presidents, judges, mayors, CEOs and CFOs) and also foreign prominent persons (such as heads of state, royal family members, high-ranking military and government officials).