This week, Finance Minister Pravin Gordhan reminded us all of the damaging effects that illicit financial flows can have on our economy. "Money laundering, financing of terrorism and related crimes significantly undermine the integrity of financial institutions and systems. Illicit money leaving the continent reduces the amount of resources available to Africa to invest in jobs and provide critical social services to citizens and economy," he said.Because they are hidden, illicit flows are difficult to quantify, but there is no doubt that they rob economies of billions that are rightfully due to them.Just last year, the South African Revenue Service made history by hitting the R1-trillion mark in taxes collected, notwithstanding the weak economy. Illicit cash outflows essentially rob tax authorities of much-needed revenue, especially in developing countries such as ours, where there is a consistent need for infrastructure development.story_article_left1We therefore have no option but to implement regulation that makes it impossible for these unscrupulous beings to cheat and compromise our economic prosperity.This is why the Financial Intelligence Centre Amendment Bill is such an important development, insofar as it relates to mechanisms available to financial institutions to enforce regulation that seeks to stop illicit flows.The bill seeks to enhance South Africa's ability to combat financial crime by proposing measures to address threats to the stability of the financial system posed by activities such as money laundering.The bill also introduces a risk-based approach to client due diligence. This approach will simplify the current complex and rules-based system of compliance, by providing financial institutions with the flexibility to determine how they verify their clients' identity.Most notably, though, the bill introduces the concept of "prominent influential persons".Officially, this is trying to aid financial institutions in properly identifying their clients, thereby enabling them to apply appropriate standards of due diligence.The bill also gives financial institutions more flexibility in dealing with corruption and money laundering.The definition of a PIP makes for interesting reading.Top of the list is the president. It also includes all politicians, senior government officials, judges, CEOs, chief financial officers and senior executives of companies that do big business with the state.block_quotes_start It is important to note that the erosion of a country's tax base is not always done by overt thieves block_quotes_endThe bill requires the financial institution to establish who the prospective client is and in instances where the client is a business, the institution will need to make sure that it knows who the beneficiary-owner is, what the ownership and control structure of the business is, and the nature of the business.If a client is regarded as a PIP, the financial institution will need to decide if the client brings higher risk. If so, it will need to determine the source of wealth and funds, and thereafter monitor the account to spot transactions that seem anomalous.This also applies to the PIP's immediate family members and close associates.story_article_right2Over the lifetime of the relationship with the client, the institution is required to monitor the client's ongoing transactions, to ensure that they fit the client's profile. So, basically, banks will be man-marking these PIPs.The risk with this classification is the assumption PIPs are more likely to be involved in criminal activity.It is important to note that the erosion of a country's tax base is not always done by overt thieves. Some of the biggest culprits of hiding profits and transferring profits to tax havens are multinationals. Hundreds of millions are spent by "law-abiding" corporates in ensuring that they minimise their tax liabilities in the many African countries in which they operate.They don't do this because they are bad people. They do this because they are commercial people.Only tighter regulation will drive the right behaviour in this instance.Khumalo is chief investment officer of MSG Afrika Group and presents "Power Business" on Power98.7 at 5pm, Mondays to Thursdays..