The Committee took briefings from the Public Investment Corporation (PIC) , the Financial Services Board (FSB) and the Financial Intelligence Centre (FIC) on their 2008/09 Annual Reports. The Deputy Minister of Finance, Hon Nhlanhla Nene, introduced each of the presentations, setting out the role of each of the institutions and emphasising the importance of interaction with the Committee.
PIC was the asset manager for South Africa's public sector and took care of the investment needs of 35 public sector pension, provident and other funds. Its largest client was the Government Employees Pension Fund. It was wholly owned by the South African Government, represented by the Minister of Finance under the Corporation's own enabling Act. It was registered with the Financial Services Board as a service provider. In carrying out this mandate the Corporation used market-driven measures to benchmark its investment performance. It had a consistent track record of delivering returns on par, or above the market benchmark. The Corporation had not been as severely affected by the economic downturn as had been many of its peers. In carrying out its fiduciary responsibilities throughout the year, the Corporation's Board and its subcommittees paid close attention to risk management and legislative compliance. Despite the change of Chairmanship of the Corporation's Board, there had been continuity of the Board's affairs. The Corporation made good progress in developing an innovative mechanism to measure the triple bottom line performance of listed companies. The Corporation was meeting its obligations to submit its first report as a signatory to the United Nations Global Compact.
The Chief Executive Officer’s presentation added that PIC had succeeded in restructuring its investment activities and operations on the same lines as those of private sector investment managers. It benchmarked its investment performance against market driven indices, was a long term investor that sought consistent returns for its clients. It had two subsidiaries: Advent Asset Management, which focused on retail property investments in townships and rural areas, and Harith Fund Managers, which was appointed to manage the Pan African Infrastructure Development Fund. It had won several awards. Its portfolio had grown considerably, it had done well for its clients and it had received an unqualified audit report. Members’ questions included the role of the Corporation, if the Corporation used consultants; the rate of public participation in the Corporation's activities, and whether the Corporation had service providers within the Civil Service. Members also asked about its interface with Government, how many jobs PIC had created, how many skills it had transferred to unskilled workers, and its national demographics and apparent omission of persons with disabilities from the employment ranks. Members also asked about the difference between a pension and a provident fund, the financial performance of Harith, and about the low numbers of graduates employed. A Member suggested expansion of the Corporation so that the best use of its properties could be made for expansion of Government departments, particularly in Eastern Cape. The Chairperson observed that poverty in rural areas indicated absence of economic activity, and employee savings could be a useful capital resource, but it had to increase its reach.
The Deputy Minister, introducing the Financial Services Board's presentation, said that lessons could be learned from the financial crisis, in that there had been no failure of a South African bank. The same applied to the South African insurance sector. The financial position of South African retirement funds remained sound. However, still more remained to be done to ensure that it met international standards, that the lives of South Africans were improved by saving and protecting their families against risk and that institutions treating their customers fairly and with integrity and transparency. The Chief Executive Officer expanded on this, noting that the FSB was funded by levies raised from regulated entities. The Board regulated the insurance sector, retirement sector, financial services providers, investment institutions, and collective investment schemes. The Board would soon require further legislative amendments for the sake of alignment with the new Companies Act, the new Consumer Protection Act, and the Competition Commission Act, and in light of issues identified in an assessment of the Board by the International Monetary Fund and by the World Bank and recommendations from the G20. The Board aimed to improve the treatment of customers of financial services, initially through directives to institutions, but ultimately by legislation. The Board was also examining the issue of micro-insurance, specifically to create insurance vehicles for the lower-income people. The Board gave extra detail on the apportionment of surpluses. The Board was now enabled to issue administrative penalties to any institution that had unlawfully taken money from investors and compensate victims. The Board still had a number of curatorships under its jurisdiction, and explained how these operated. The Board still made its contribution in training fellow African countries to create their own financial services boards. It was committed to holding in 2011, and underwriting from its surpluses, the conferences of the International Organisation of Pension Funds Supervisors and the International Organisation of Security Commissions, which it hoped would boost the economy and bring in some investments. The remainder of the Board's surpluses were used to fund any short-term working capital requirements. The Board undertook to give a separate presentation on consumer education if required.
Members asked questions about transformation and employment equity, and the FSB noted the statistics. Members also asked about the training of trustees, why it had not been possible to prevent the Fidentia losses, why legislation would be necessary. Members raised questions about surpluses and how these were dealt with, the problems around beneficiaries not knowing of policies, the funeral scheme underwriters and their businesses, and unregistered insurers, and the actions that FSB would take. Further questions were asked around consumer education, the outcome of workshops for schools, the behavioural changes in consumers, and the methods used to educate people, and the cases of market abuse and finalisation of issues. Members also thought that consumers should be advised properly of their options and their possible protection when purchasing insurance, how the FSB defined the behaviour of the financial institutions being regulated, whether there was good cooperation, what recourses FNB had when institutions did not comply and how long it took to finalise court cases. Members also asked about the figures of those with insurance, how FSB helped small enterprises and what was being done to increase scarce financial skills, what it was doing to work through constituency offices, employment equity and transformation in the institutions regulated. Staff turnover, geographical spread, leave accruals, executive remuneration and the conferences were also interrogated. The Deputy Minister commented that the issue of the pension surpluses could not be fully dealt with in this meeting and he recommended a separate meeting for a full update. The Chairperson commented that he would want entities to state specifically how the Committee could assist in future and apprise the Committee of operational problems.
The Deputy Minister, introducing the Financial Intelligence Centre (FIC) presentation, said that this played a critical role in the economy. The Director’s presentation was short, and he explained the benefits of generic anti-money laundering and combating of terror financing system which enhanced financial market stability, reduced the cost of borrowing, and reduced financial crime and crime generally. The FIC's legislative mandate was to assist in identifying the proceeds of crime, and in combating money laundering and the financing of terror. It occupied a pivotal point between the business community, supervisory bodies, law enforcement agencies and prosecutors. 19 categories of institutions were vulnerable to money laundering. Suspicious transaction reports were sent to the FIC for data storage, analysis and referrals to law enforcement and investigative agencies. Amendments to the Act that the FIC was intending to propose next year would give effective administrative enforcement powers. The bodies in which FIC collaborated, internationally and regionally, were outlined. The Centre was funded from the national budget and accountable directly to the Ministry of Finance. Its staff complement had increased to nearly 140 in the year under review. Its strategic objectives for 2009-2012 included ensuring a culture of compliance by vulnerable institutions and maintaining a robust legal framework to combat money laundering and the financing of terror. During the 2008/2009 financial year, 22 762 suspicious transaction reports were received and 1 221 referrals made to the law enforcement authorities, with a value of about R6 million. Members' questions included a request to streamline issues for legislative purposes, rather than go deeper into matters of intelligence. Members suggested the need for an awareness campaign in co-operation with the Financial Services Board on the dangers of money laundering, that banks should know their customers better and co-ordinate with other institutions to be aware of assets held by individuals. Members asked the extent of money laundering in South Africa and globally, and what was the best method to regulate behaviour.
The Chairperson observed that it had been an arduous year for Members of the National Assembly, who were now hastening to complete Committee business so that Members could perform constituency work before their official vacation period.
Public Investment Corporation (PIC) Annual Report 2008/09 Presentation
The Hon Nhlanhla Nene, Deputy Minister of Finance, and Chairperson of the Public Investment Corporation, said that he attached great importance to the interaction with the Committee and therefore, despite the current economic constraints, had agreed to bring a full delegation.
The PIC was an asset manager for South Africa's public sector. It took care of the investment needs of 35 public sector pension, provident and other funds. It was wholly owned by the South African government represented by the Minister under the Public Investment Corporation Act, 2004. The PIC offered services comparable with those available in the private sector. It was registered with the Financial Services Board (FSB) as a service provider. In carrying out this mandate the PIC used market-driven measures to benchmark its investment performance, thus enabling its clients to achieve returns comparable to those achieved on the open market. It had a consistent track record of delivering returns on par, or above the market benchmark.
Mr Nene said that the economic climate had not been conducive to good performance. Although the PIC was not immune to the risks inherent in the investment environment, its strategy was better able to withstand the vagaries of economic and market changes than institutions with strategies driven by shorter term objectives. This was demonstrated in the 2008/2009 financial year. The PIC was certainly affected by the economic downturn that took effect from October 2008, but not quite as severely as many of its peers. In equities, for example, which was universally the class of assets that was most affected by turbulence in the markets, the PIC’s equities portfolio lost value, but its unrealised losses were smaller, relative to the market. In certain asset classes, notably bonds, cash, and money markets, the PIC delivered returns in excess of its clients' mandates. Since clients' targeted returns for fixed income investments were based on market-related benchmarks, PIC's returns for the year outperformed the market in these asset classes. In carrying out its fiduciary responsibilities throughout the year, the PIC's Board (the Board) and its subcommittees paid close attention to risk management and legislative compliance and ensured that investment decisions were made within the parameters of clients' investment mandates.
Wherever possible and practicable the Board also sought opportunities to enhance the governance that underpinned the investment decision-making process and matters of remuneration, including that of executive and non-executive directors. Furthermore the Board again enjoyed a high level of continuity during the year, with only one change in its membership. In September 2008, Mr Jabu Moleketi had resigned as Deputy Minister of Finance, and therefore as Chairperson of the Board. Nr Nene assumed that position in November 2008. He was pleased to report that there was no interruption in the continuity of the Board's affairs.
On behalf of the Government Employees’ Pension Fund (GEPF), the single largest investor on the Johannesburg Stock Exchange (JSE), the PIC had continued to encourage the listed sector and other asset managers to focus on critical corporate governance issues. Apart from publishing its voting record at company annual general meetings, the PIC made good progress in developing an innovative mechanism to measure the triple bottom line performance of listed companies. As reported in the corporate governance statement of the Annual Report, the PIC was meeting its obligations to submit its first report as a signatory to the United Nations Global Compact (UNGC). In its first report to the UNGC, the PIC outlined in detail in its progress in implementing the ten principles contained within the UNGC Principles for Responsible Investment.
The PIC Board remained committed to strengthening its own governance track record so as to lead by example and ensure that the PIC continued to manage clients' assets prudently while delivering satisfactory returns and putting into practice socially responsible investment principles.
The Deputy Minister thanked fellow-members of the Board for their contribution to ensuring the PIC's success. Although he had joined the Board late in the financial year, it was clear to him from the outset that the Board was a highly effective dynamic team of experts with a common vision and understanding of the Board's fiduciary mandate. He thanked the management and staff of the PIC for their skill and professionalism in exceeding market benchmarks in exceptionally difficult economic and market conditions.
Mr Brian Molefe, Chief Executive Officer, PIC, said that PIC had two subsidiaries: Advent Asset Management (Advent) and Harith Fund Managers (Harith). PIC was established as a corporation on 01 April 2005 in accordance with the Public Investment Corporation Act of 2004. That year was a point of departure for PIC and in the four years since its establishment as a corporation, PIC had been successful in restructuring its investment activities and operations in a manner comparable with those of private sector investment managers. Apart from pursuing FSB-compliant mandates, PIC benchmarked its investment performance against market driven indices, enabling its clients and shareholder to compare PIC's returns to those achieved in the marketplace. PIC was a long term investor that sought consistent returns for its clients. The GEPF was PIC's largest client.
Advent was a property asset management subsidiary owned 100% by the PIC. It focused on retail property investments in townships and rural areas. Harith was the inaugural fund manager appointed to manage the Pan African Infrastructure Development Fund (PAIDF). PAIDF was established in 2007 for investments in infrastructure development projects in the continent of Africa. PIC believed that PAIDF was one of the many initiatives that would see Africa fulfilling its growth potential. Harith was named as the infrastructure fund of the year at the 2009 Africa Investor Awards, for its activities on the African continent.
Ms Albertinah Kekana, Chief Operations Officer, PIC, said that PIC had also received a number of awards. It was named as Empowerment Leader of the Year at the Wits Business School/Barloworld Empowerment Leadership Awards. It had partnered with Stellenbosch University and other leading corporate governance institutions to develop a unique matrix mechanism to rate the triple bottom line performance of listed companies. The portfolio had grown considerably. Harith was an exceptional case. It was a short year for Harith, which had a net profit. As Harith expanded its investments, its expenses of operation were forecast to increase, but it would remain financially sustainable.
Dr Daniel Matjila, Chief Investment Officer, PIC, said that the equity tender had been successful. The property portfolio had also grown well. By and large PIC had done well for its clients.
The Deputy Minister pointed out some typographical errors in the Annual Report. The picture of the Minister of Finance had been wrongly captioned.
The Chairperson commended the Deputy Minister and delegation for a short and succinct presentation.
Dr Z Luyenge (ANC) said that the presentation made the identity of the PIC very clear, as previously he had not known that it was part of Government.
The Deputy Minister said that Dr Luyenge's accolades reflected the corporatisation of the PIC, an outcome of a Parliamentary decision to corporatise the PIC.
Dr Luyenge asked about PIC's use of consultants.
Ms Kekana replied that PIC did use consultants, mainly at an operations level in the implementation of information technology (IT) systems. Over the past four years PIC had been working to improve in this area. The systems in use were specialised, and the implementation called for consultants, but PIC tried to monitor and reduce the cost of consultants, who were not used for everyday operational requirements.
Dr Luyenge asked what was the extent of public participation in the PIC's activities. In the Eastern Cape there had been a perception that PIC was a business run by powerful entities. He asked if PIC had service providers within the civil service, and if PIC was ensuring that it had an adequate interface between itself and Government.
Ms Kekana said that PIC took pride in public participation.
Mr Molefe replied that when Bridge City Mall opened in KwaZulu-Natal, the PIC had held extensive consultations with local councilors, who had reminded PIC that the Mall was not a shopping centre but a fully fledged mall comparable with a similar development in the Cape Town area. PIC had had extensive consultations with the community about the people to be employed there. However, because unemployment was high, there were nonetheless still demonstrations on the day the Mall opened, by people who had not been able to obtain jobs. They effectively stopped taxis from entering the Mall, yet all targets for sales were nevertheless exceeded. Mr Molefe stressed that at all times PIC had been in consultation with the local council and with different community organisations, including individuals employed by the Mall to find out about and try to resolve community issues with the Mall. This was just one example of how the PIC involved members of the public in specific projects.
Dr Luyenge said that PIC’s management of properties was completely different from the usual style of management in the public service.
Ms Kekana thanked Dr Luyenge for his commendation of PIC's management of properties. PIC took pride in its work in this field. The property portfolio managed on behalf of the GEPF was competitive, compared to what was offered by other private sector participants, and so was the management of its properties. Specifically in regard to the GEPF portfolio management, 5% of that portfolio was occupied by government. On occasion, PIC struggled to recover payment on leases and this sometimes involved expensive legal processes. Also, PIC struggled sometimes with the timely renewal of leases. PIC was working on this with the various entities involved. There was some difficulty because it was not really empowered by the legislation to force the issues, and the Committee was asked to assist with advice.
Ms N Sibhidla (ANC) asked how many jobs PIC had created; how many skills had been transferred to unskilled workers; and how many Small, Medium and Micro Enterprises (SMMEs) PIC had supported though its investment projects.
Mr Molefe said that PIC would need more time to compile statistics on the jobs that had been created. These figures had not been prepared for the meeting.
Dr Matjila said that PIC had faced capacity challenges that constrained it to concentrate on non-complex matters such as black economic empowerment (BEE) transactions. The focus in future would be socially responsible investments in infrastructure, including energy, low cost housing, and SMMEs. PIC was intending to place emphasis on socially responsible investing. As Mr Molefe had indicated, the process of compiling data had been quite complex.
Ms Sibhidla also asked the PIC to categorise its responses according to national demographics.
Mr Molefe also asked that PIC be given time to compile statistics on national demographics.
Ms Sibhidla noted that figures on persons with disabilities were missing from the information on employment equity given in slide 16.
Ms Kekana replied that the PIC did have a representative employee component, but admitted that PIC needed to do more as an institution around issues of disability.
Mr Molefe replied that there were no persons with disabilities at the head office of the PIC. There had been one, who had resigned. However, there might be disabled employees working at other offices of the PIC. It was a statistic on which the PIC intended to improve.
Ms Z Dlamini-Dubazana (ANC) asked about the assets under PIC's management, which on 31 March 2009 amounted to R739.7 billion, as set out in slide 7. She asked if taxation changes might lead to withdrawals from the Government Employees Pension Fund (GEPF).
Dr Matjila responded that as yet PIC had no information on the possible impact of lump sum withdrawals by GEPF members. Depending on the size of the withdrawal, it would definitely affect the size of the assets under PIC's management. However, it was quite difficult to quantify until PIC knew the numbers involved.
Mr Molefe added that the PIC just managed the funds of the GEPF and essentially matched assets and liabilities. If assets and liabilities decreased together, there was no problem. If somebody withdrew a lump sum from the fund, PIC cancelled the asset and the liability simultaneously, since it had settled what it owed to that person. He noted that, as indicated by the Deputy Minister, GEPF was the PIC’s major client. There was constant interaction between the PIC and the Board of the GEPF. The political office bearer’s pension fund was not included with GEPF.
Ms Dlamini-Dubazana asked if the value of assets under management was still increasing.
The Deputy Minister replied that the performance from April 2009 onwards would be reflected in the Annual Report for 2009/10, which would be tabled next year. He did not want to begin to give the Committee unverified figures.
Ms Dlamini-Dubazana asked for an explanation of the difference between a provident and pension fund.
Mr V Ntombela, Non-Executive Director, PIC, explained the distinction between provident funds and pension funds. .The Government was trying to harmonise the regimes for the provident and the pension funds. However, that stage had not been reached. A provident fund allowed the beneficiary, when he or she retired, to withdraw everything, whereas the beneficiary of a pension fund could withdraw only a portion, after which the principal sum would remain in the fund until the death of the beneficiary.
Ms Dlamini-Dubazana asked how much benefit the GEPF derived from its investment in Harith, the inaugural fund manager appointed to manage the Pan African Infrastructure Development Fund. She asked about the figures for financial sustainability set out on slide 13.
Ms Dlamini-Dubazana asked about Harith's financial sustainability, since the figures appeared to indicate that Harith was operating at a loss, as set out on slide 15.
The Deputy Minister replied this figure did not represent a loss. The 54% reflected the growth in Harith's expenses, in relation to the expenses themselves. It was not 54% of the entire returns.
Mr Molefe said that Harith had been established for two reasons. Firstly, there was a space for infrastructure development on the African continent. Money had never in the past been mobilised from Africa. He thought that this was a good decision. Secondly, Harith was part of a revenue diversification strategy for the PIC. He referred to slide 13. He noted that the revenue minus expenses was not the net profit after tax. The operating expenses did not include tax. This was why these figures did not add up.
Ms Kekana clarified that the expenses had indeed increased quite substantially. She asked Members to bear in mind that Harith was established in 2007, and was still a new entity and building itself up from a low base with no employees. The 54% increase was an increase from a low base. Because it managed a Pan African Infrastructure Fund, the agreements with the institutions committing funding were that PIC had to have geographic representation on the Continent, that mirrored the activities of the fund.
Ms Dlamini-Dubazana said that she was not convinced by responses to her question on Harith. She referred again to slide 10. She asked what the PIC's objective was when the PIC decided to make that acquisition.
The Deputy Minister replied that the Pan African Infrastructure Development Fund had performed very well. The issue of the spread of investments was in full compliance with the mandate. Harith was one of those that had received accolades.
Ms Dlamini-Dubazana asked about components that were managed externally, amounting to about 25% of the GEPF.
Ms Kekana replied that the PIC still remained responsible for oversight.
Dr Matjila added that PIC outsourced up to 25% of equity to external managers to manage it on 'an active management basis'. It had also allocated money to upcoming black economic empowerment (BEE) managers to start developing an asset management capability. These mandates were allocated on 01 April 2009. The returns in the few months that they had handled this money had been quite pleasing. They had outperformed the benchmark by 76 bench points. PIC saw value added there.
Mr N Koornhof (COPE) asked about PIC's increase in its staff complement from 105 in 2007/08 to 160 in 2008/09, and asked why this was reflected as a highlight. He quipped that the Deputy Minister had obviously delegated the task of responding to the more detailed questions to his management team, to justify their high salaries.
Ms Kekana replied that the PIC was by no means overstaffed. When the PIC was changed into a corporation, it had had just over 50 employees to manage the assets entrusted to it. Parliament's view at the time was that this was not sufficient, given the extent of the risks that needed to be managed, and the exposures. Over the last five years PIC had embarked on a process of trying to ensure that the risks being managed in the portfolio were matched by the expertise of the PIC's employees to provide oversight. Even when PIC outsourced the management of assets to external fund managers, it still remained responsible for oversight.
Mr Molefe added also that PIC's responsibilities had increased, and this warranted an increase in staff and investment in information technology (IT) capability.
Dr Luyenge said that he was pleased at what he saw as assistance to the poorest of the poor. However, he also questioned the staff establishment and the location of the structures of the PIC in the provinces. He said the Committee needed to encourage the expansion of the PIC, so that its properties could be best used to remedy the dire shortage of accommodation for Government departments, including regional offices in Mthatha. There was a responsibility to address the shortfall and the remedy rested with the PIC.
Ms Sibhidla made a request to the PIC in its next Annual Report to give greater details on its achievements in the financial year under review.
Ms Z Balindlela (COPE) observed that Departments of Rural Development, Agriculture and National Treasury made a good triumvirate. It appeared as if this was going to be a new initiative on the part of the Deputy Minister. She asked for another opportunity to discuss the involvement of the PIC in rural development.
The Deputy Minister noted Ms Balindlela's point.
An ANC Member asked for the location of the PIC in the rural development strategy.
Mr Molefe replied that the PIC was involved in rural development.
The Member asked if there were any specific interventions to address the issues of skills shortages. He commented on the low number of graduates employed.
Mr Molefe replied that the PIC had 105 staff at the beginning of the year, of whom eight were graduates. Its staff complement was already low. It would increase the number of graduates as the staff complement increased.
Another ANC Member noted the Auditor-General's comments on the non-availability of senior officials at the time of auditing. This appeared to be a common problem in the public sector.
The Deputy Minister denied that non-availability of senior officials had been cited in PIC's audit report.
The Chairperson remarked that PIC had been lucky to be praised by the Eastern Cape. He noted that PIC's revenue string was composed of 95% of governmental pension funds, unemployment compensation insurance and so forth. He assumed was that the bulk of those on behalf of whom the PIC was investing money were members of the poorer classes, living in rural conditions. The current challenge that faced the rest of humanity was poverty. PIC's investment strategy had to minimise risks, but its actual success ought to be managed by the outcomes in the quality of life of the people on whose behalf PIC was investing their money. The only way in which a worker could be assisted to improve the lives of those whom he or she supported was through the pension to which he or she contributed before retirement, and how this had been invested in rural communities. Poverty in rural areas was nothing other than the absence of economic activity. This was the capital resource that could be mobilised from within South Africa. It was not sufficient to measure PIC's progress only by the number of shopping malls that it helped to establish. However, he felt that management and shareholders should be congratulated.
Financial Services Board (FSB) Annual Report 2008/09 Presentation
The Deputy Minister said that the Financial Services Board (FSB) was a statutory entity whose core business was to regulate and supervise the non-banking financial services sector, in terms of the Financial Services Board Act and other relevant legislation set out on page 145 of the Annual Report. It supervised the PIC, amongst other institutions. The FSB also had a mandate to promote the fair treatment of consumers of financial services and products. The year under review had been unprecedented because of the financial upheaval caused by the global crisis, which had arisen from the imbalances occurring in the developed market economies. For financial regulators around the world, this had been a nerve-wracking time. It appeared that the situation was now returning to some normality. However, there were many lessons to be learned.
The South African financial sector had proved itself robust in the face of global crisis. As had been widely reported, the crisis had resulted in not a single failure of a South African bank. Less widely reported was that the same could be said for the South African insurance sector, and that the financial position of South African retirement funds remained sound. South Africa could be proud of this regulatory framework. However, there was still much to be done to ensure that the South African regulatory framework met international standards. The FSB was not achieving its aims if it did not protect ordinary men and women in their efforts to save for a better life, to protect their families against risk, and to provide for old age and other eventualities. It was also the work of the financial regulator to ensure that institutions were treating their customers fairly and with integrity and transparency.
Mr Dube Tshidi, Chief Executive Officer, FSB, noted that in order to achieve its mandate, FSB was funded by levies raised from regulated entities. In its role of regulation and supervision, the FSB was looking after various industries in the non-banking sector, including the insurance sector, retirement sector, financial services providers, investment institutions, and collective investment schemes.
He highlighted some significant business issues. The FSB had to approach Parliament to ask for certain legislative amendments, and had recently managed to have the Insurance Laws Amendment Act, and the General Financial Services Laws Amendment Act passed. However, FSB would soon have to request further amendments to various pieces of legislation under its supervision. This was as a result of the new Companies Act, which now contradicted certain provisions in other legislation, so amendments would be needed to harmonise. The new Consumer Protection Act also raised issues of alignment. It was necessary to align the FSB's legislation with that of the Competition Commission. Internationally, the FSB had been assessed by the International Monetary Fund (IMF) and by the World Bank. Certain issues had also been identified there that would need legislative amendment, as also certain recommendations from the G20. One aspect that the FSB would review was the whole concept of treating customers fairly in South Africa, which was still not happening, despite good intentions. Initially this would be addressed through directives, but finally would have to be translated into legislation.
Mr Dube said that FSB was also examining the issue of micro-insurance, specifically to create insurance vehicles for the lower-income people and to legislate for this. Further significant issues that must be dealt with were supervisory activities on which FSB had to embark, including the management of the whole financial crisis.
Mr Dube gave extra detail on the apportionment of the surplus. When FSB referred to surpluses in pension funds, it was talking of the monies that were additional to those required to enable any pension fund to meet its liabilities, or pay out all members their full benefits. According to legislation enacted in 2001, every fund was required to identify whether it had a surplus or not. Many Funds had announced that they had surpluses. They were required to embark on an apportionment exercise, and FSB had, to date, approved schemes that distributed R16.4 million of surplus to various members of various funds. However, there remained the worrying part as to what part of the surplus had apparently disappeared from some Funds. FSB was still battling to close that gap, and it involved a huge amount of litigation. Entities were trying to resist the bringing back of those assets to enable them to be distributed to the rightful owners, who were the members of the pension funds. It was very serious, as no less than R1 billion was involved. FSB would tackle each of the institutions in turn. Two weeks ago, one of the institutions had approached FSB and the curators to ask if it could enter into a settlement. The amount put on the table was in the order of R80 million or R90 million. FSB rejected that offer. The issue of surpluses would be constantly raised, until it was resolved.
Mr Dube spoke about the merger of the Johannesburg Stock Exchange and the Bond Exchange. FSB had sought the Committee's support for powers of enforcement. Upon a decision by an enforcement tribunal, the FSB was now able to issue administrative penalties to any institution that had unlawfully taken money from investors, to compensate victims.
Mr Dube said that FSB still had a number of curatorships under its jurisdiction. FSB had been criticised for curatorships, but it would only approach the court after certain events had taken place. Firstly, there must be a clear failure of any entity to comply with supervisory requirements that were put in place for the protection of investors. FSB identified failure when an institution failed to submit what it was bound to submit in terms of the legislation. Secondly, FSB could identify failures through its own oversight visits that brought problems to light. Once these had been identified, FSB would institute a formal investigation into the activities of that institution. This took time, it was difficult to find the perpetrators, and, when they were found, they were not always willing to tell the truth. FSB pursued the investigation until it was satisfied that it had enough information to approach the court and ask for a curatorship order, while the management of the entity was replaced and investigated. Once FSB had completed its investigations, it could either approach the Court without informing the perpetrators, on an urgent basis, or serve a notice of intention to approach the Court. The application for curatorship would outline the nature of the problem, to identify the skills needed to address it, and would set out the applicable fees. The Court would then consider the application, and, if it approved it, would issue a Court Order. The Court, through the Curator, then administered the institution. That Curator then had to report to the Court on a quarterly basis, through the FSB. The length of the curatorship depended upon the nature of the problem, not on the FSB or curator’s actions.
Mr Dube said that even though FSB was a non-profit making organisation, it still made its contribution in training fellow Africans. Several times a year, FSB received requests for assistance, especially if countries wanted to create their own financial services boards. Nigeria was currently receiving such training.
Mr Jonathan Dixon, Deputy Executive Officer: Insurance, FSB, said that the insurance sector had remained robust. There had been no insurance failures resulting from the recent crisis. This was because there had been a very low exposure to foreign toxic assets. Moreover, the insurance sector had entered the crisis in a healthy state. There had been good risk management in the large insurance groups. However, some strain had been observed on smaller insurers as a result of the deceleration of economic activity. FSB continued to monitor that. The FSB had exercised much closer supervision in response to the crisis. There were a number of initiatives to strengthen the prudential regulatory framework.
Mr Jurgen Boyd, Deputy Chief Executive Officer: Retirement Funds, FSB, said that FSB had feared the consequences for the funds under its supervision. It had initiated a “dipstick” test. FSB found a limited impact on assets, thanks to restrictions under Regulation 28, which limited the exposure of pension funds. In addition, exchange controls had contributed a measure of protection, as indicated on slide 9. However, job losses had amounted to at least 700 000, and in the absence of an option to preserve pension benefits, this resulted in leakage, since people, on losing their jobs, tended to withdraw their pension benefits.
Mr Bert Chanetsa, Deputy Executive Officer: Investment Institutions, FSB, said that while financial advisors and intermediaries had not been unaffected, the rebound had been quite noted of late. Whilst other jurisdictions had been constrained to introduce measures to protect their capital markets, it had not been necessary to do the same in South Africa. FSB had noticed a decline in assets of management, but that was also rebounding, as set out on slide 10. FSB was examining measures to bring hedge funds under the regulatory framework. Similarly there had been discussion on credit-rating agencies, their role in exacerbating the financial crisis, and measures to bring them within the regulatory net.
Mr Gerry Anderson, Deputy Executive Officer: Market Conduct and Consumer Education, FSB, spoke on the impact of the crisis on financial service providers and intermediaries, which had only become apparent after 31 March 2009, since when there had been a decline in the number of licenses. This had affected levy collections.
Mr Dawood Seedat, Chief Financial Officer, FSB, referred to pages 99 to 132 of the Annual Report for full details of the financial statements. Slides 11 to 17 provided a synopsis. FSB was fully funded by the industry which it serviced. It had obtained approval from the National Treasury to spend on a move to new premises, and committed itself to ensuring that the PIC would receive its rent on time. The FSB was committed to holding, and underwriting from its surpluses, two major international events in 2011: the International Organisation of Pension Funds Supervisors, to be held in Cape Town in October 2011; and the hosting of the International Organisation of Security Commissions Conference, in April 2011. FSB hoped that these events would boost the economy and bring in some investments. The remainder of FSB's surpluses were used to fund any short-term working capital requirements.
Mr Tshidi said that if time permitted, FSB could give a separate presentation on consumer education.
The Chairperson said that consumer education was very important, but he preferred that Members study the documentation in their own time and thereafter the Committee would submit any questions to the FSB. For the present, it was necessary to concentrate on the strategic issues of the Annual Report. He noted that the FSB was an important institution, but its profile was low. Raising it was part of consumer education.
Mr E Mthethwa (ANC) agreed with the Chairperson that the FSB was a most important institution. However, he asked how FSB dealt with the training of the trustees who dealt with the funds. He felt that they needed a clearer understanding of the issues with which they were entrusted.
Mr Tshidi admitted that trustee training was weak in South Africa. It had been taken over erroneously by the service providers themselves. However, FSB wanted this to be done by the FSB itself, or by academic institutions.
Ms Olivia Davids, Head of Department: Consumer Education, FSB, added FSB was working to develop a national strategy and framework for such training, supported by educational techniques such as a website and other face-to-face kinds of communication. FSB wanted to make this kind of training available to many more people, and to enable trustees to build on their qualifications.
Mr Koornhof asked why it was not possible to stop an institution like Fidentia before it created havoc. He asked why legislation was necessary.
Mr Anderson replied that the Fidentia matter was a difficult question. FSB had investigated a collapse earlier in the year when it came to FSB's attention. Before FSB could take action, however, Fidentia was liquidated. The Fidentia umbrella fund was an unregulated fund. The greater part of the misappropriation of funds, theft or fraud, occurred by a process of raiding the Living Hands Trust, which was an umbrella trust. However, the relevant legislation was in transition when the Fidentia matter occurred. The new amendments to legislation to place umbrella funds under the FSB's jurisdiction were expected to reduce such occurrences.
Dr Luyenge also agreed with the Chairperson and Mr Mthethwa that the FSB was very important, since it protected the poor people, including the representatives and the policy holders. He asked about the undertakers, and their underwriters, who took much money from the poor people in the rural areas. He also asked about surpluses, and whether there was a suspense account in which recouped monies could be kept in a proper manner. He also noted that many people died without their beneficiaries knowing that monies were due to them.
Mr Dixon said that the issue of funeral scheme underwriters was a matter of great concern to the FSB. The issue was not so much the smaller burial societies that operated like informal savings clubs but the larger societies which involved the undertakers, and which often amounted to unregistered insurance business. Such unregistered insurers pretended to provide insurance but they were not properly underwritten. Currently, FSB was devoting considerable resources to addressing the issues of unregistered business, including those of undertakers. Action taken included naming and shaming, and referral to the National Prosecuting Authority and the South African Police Service for prosecution. This had been frustrating at times, because the formal criminal justice system worked slowly. However, the Enforcement Committee now had the power to impose quite strict financial penalties. That, together with naming and shaming, would hopefully be part of the solution. Micro-insurance reforms also played a role. Micro-insurance was really about developing insurance products for the low income sector. It involved products that were simpler and easier to understand. It would allow some of the SMMEs, such as undertakers or administrators, to move their business into the formal regulated insurance sector. FSB would be applying sanctions where it found unregistered business, but it would also be encouraging such informal providers to enter the regulated formal sector through the micro-insurance proposals. The other part of the problem, as the Member had indicated, was group schemes, whereby a master policy covered a number of people. Usually these involved third parties, and it was often not clear who the insurer was. The reforms that FSB was considering would define who the insurer was and provide for proper disclosure of what the products were, and how to claim.
Ms Sibhidla asked about consumer education, and the outcome of workshops for schools, especially as to the behavioural changes in consumers, including their assertiveness. She asked how far consumer education had penetrated to all areas, and what media FSB had used to ensure accessibility by those communities.
Ms Davids responded that 108 workshops had been completed. The project would continue, as it had been so well received. FSB was targeting young people between the ages of 18 and 22. The Department of Education had invited FSB to work with their Further Education and Training Colleges (FETs) to train about 5 000 students. FSB was very pleased with the outcome. Monitoring and evaluation would be part of the overall plan to be submitted to the Department of Education. The FSB had also given programmes in schools and was pleased with the excellent working relationship it had achieved with the Department of Education. This year had been a pilot. FSB worked with the provincial consumer affairs offices to ensure accessibility in the nine provinces, used as many different approaches to educating consumers as possible, ensured that materials were available in the official languages, and attempted to make programmes available in the remote rural areas. There was engagement with networks through the South African Council of Churches. FSB had been busy with employee assistance programmes in governmental departments. Outside broadcasts were also used, as were programmes at taxi ranks. A number of community radio programmes had been presented at no cost to the FSB at all, but purely by invitation and arrangement. FSB had also worked on career exhibitions, and given talks to students on the importance of financial management. FSB had also done work in shopping centres.
The Chairperson noted that consumer education warranted a separate session in the future.
Ms Balindlela asked about pages 88 to 89 of the Annual Report, in which the FSB noted 245 cases of market abuse. Only 27 cases had been completed. She asked if FSB had the capacity to deal with these offenders.
Ms Sibhidla noted that those most affected by the abuse of financial institutions were those from poor backgrounds.
Mr Chanetsa responded that 245 was a cumulative figure of cases of market abuse reported for investigation since 1999. In 2008/9 there were 27 completed investigations. Of these 27, 20 were closed because of lack of evidence; and seven were referred to the Enforcement Committee. One individual had been fined R2 million for market manipulation by the Enforcement Committee. However, this was reduced to R1 million by the Appeal Board. This fine had not been paid, but steps had been taken to execute against the assets of the individual.
Ms Sibhidla said that an issue had been raised in March 2009 about the Road Accident Fund.
The Deputy Minister replied that the FSB did not supervise the Road Accident Fund.
Ms Sibhidla said that it was unfair to the consumers that they were not clearly informed of the protection to which they might be entitled when purchasing insurance in connection with consumer products, such as furniture. She thought that a similar situation applied in the motor industry.
Mr Dixon responded that FSB considered this to be a very important issue, and was giving it much attention. Legislation provided that when a person went to buy furniture on credit, that person must be provided with a choice of insurer. While that existed in legislation, its enforcement was sometimes problematic. , there remained a lack of implementation, however. The second problem was that often people did not understand that they were purchasing insurance, nor did they understand its purpose or how to claim. In 2008 there was an independent panel of enquiry into these kinds of products, which were designated consumer credit insurance products. The FSB was studying those recommendations, together with the National Treasury. A discussion paper was expected in 2010. Improved disclosure was expected to be a focus of the discussion paper, but there was also a need for greater regulation.
Ms Sibhidla asked how FSB could define the behaviour of financial institutions that it was regulating. She asked if these institutions were co-operative. She asked what recourse FSB had with regard to institutions that did not co-operate, and how long it took to finalise cases against those who did not comply with the regulations.
Mr Anderson responded that legislation had brought about codes of conduct, which were taken very seriously. FSB was successful in identifying service providers whose conduct was questionable. To date it had withdrawn 417 licences from financial service providers. FSB had debarred 919 individuals from interacting with any consumer on any financial service for a period of one to five years. There were attempts to improve the integrity and ethical behaviour of financial service providers overall. Five years previously, there had been no monitoring of financial service providers' conduct.
Ms Dlamini-Dubazana thanked the Board for briefing the Committee about the surpluses.
She asked about the 12 000 retirement schemes with a total of nine million members. South Africa had a population of about 44 million. This membership of only nine million was a reflection of a country severely afflicted by poverty. She asked the FSB what it was doing about the situation, in view of her understanding that FSB's focus was not on profit but on services. She thought that the problem was about supervision. She also asked how much FSB had done for the SMMEs, and asked how many creditors did the SMMEs have.
Mr Boyd responded that there was a certain amount of double counting in the figure of nine million. Out of the population of about 44 million, about 26 million constituted the labour force. There were extremely high levels of unemployment. There were about 13 million people who were formally employed, (which included the nine million retirement scheme members). It was not mandatory to belong to a pension fund. The environment was quasi-mandatory, which meant that usually a company would insist that its employees joined a pension fund. South Africa's levels of coverage were quite significantly low. As Members would be aware, there was currently a whole debate and discussion on the reform of the social system, and the system for funding retirement. Part of the debate was how Government, from a policy perspective, proposed to increase levels of coverage, and whether there would be mandatory pension fund coverage for everyone.
Ms Dlamini-Dubazana asked how much FSB had done to improve South Africa's scarce financial skills.
Mr Tshidi responded that FSB had gone out of its way to employ new graduates. It also had a bursary scheme.
Mr D van Rooyen (ANC) asked about the role of the FSB when the amended legislation to which it had referred had been discussed. He appreciated the magnitude of the challenges in recouping funds and tracing beneficiaries. Mr Van Rooyen asked to what extent Parliamentary constituency offices were utilised to make sure that consumer education exercises were effective.
The Chairperson asked about employment equity.
Mr Anderson responded that FSB had a strict process whereby every new staff member employed had to go through both Mr Anderson himself and the Chief Executive Officer for 'sign-off'. In the past five years, as shown on page 10 of the Annual Report, FSB had concentrated on transformation and employment equity. At present the majority of staff members were female. At the time of the report, this had constituted 51% but had now risen to 53%. FSB had 78% black employees, and 22% white employees, of which 9% were white males. FSB was proud of its employment equity.
The Chairperson asked about transformation in the institutions regulated. In his own experience in the short-term insurance industry, there had definitely been no transformation.
The Chairperson asked about the method of disposing of surpluses to ensure that the employer did not appropriate what was due to the employees.
Mr Tshidi responded that the legislation enacted was very clear. When there was a surplus, it was necessary to ask what had been paid to those employees who had left the fund. If there remained a balance, it was necessary to call the three stakeholders - the former members who had been paid up, the current members, and the employers. If the three stakeholders decided that something must be given to the employer, that money was not for the employer to take home, it was for the employer to leave in the fund for the benefit of the business, to avoid possible retrenchments in the future. This was the method expressed in the legislation.
The Chairperson asked operational issues. He asked in particular about staff turnover and geographic spread in the country.
Mr Tshidi responded that there was only one FSB office in the whole country. To fulfil its responsibilities from one office in the country required very highly skilled people who put more emphasis on serving the country than searching for higher salaries. There were 410 employees in total. It was the thoroughness with which FSB performed investigations which counted, not the numbers of persons employed. Small as it was, the FSB's investigations were detailed. He added that the industry benchmark for turnover was about 12% per annum. FSB's staff turnover was around 6% or 7%.
The Chairperson asked about leave accruals.
Mr Tshidi responded on the R11 million related to leave. Leave accrual had been one of the incentives to encourage employees to move from the Ministry of Finance when FSB was separated from the Ministry.
The Chairperson asked about executive remuneration.
Mr Abel Sithole, Chairperson of the FSB Board, responded that the bulk of the increase was directly related to the increased number of staff. However, there was a technicality in that there were a couple of months in which there were outgoing executive officers who were employed on the FSB Board, while the current executive officer was also already employed, to facilitate that process of handing over. FSB had also provided for a new position within the Board for the Chief Operating Officer. Therefore the increase was purely technical and did not represent an increase in executive remuneration per se.
The Chairperson asked about the hosting of the conferences on slide 16. He asked about the R12 million expenditure.
Mr Tshidi responded that one was the International Conference of Pension Supervisors together with the Organisation of Economic Co-operation and Development (OECD). The FSB would be hosting this conference in Cape Town on consumer education related matters, including trustee training. FSB was part of the international standard setting bodies worldwide. When FSB met with its associated bodies in international fora it discussed education. FSB certainly came out amongst the top institutions when it shared with the international community its experiences with consumer education. The International Organisation of Securities Commissions Conference would bring together all the 300 or 400 supervisors and regulators of capital markets worldwide. In 2010 it would be hosted by Canada and in 2011 by South Africa. The R12 million was budgeted for the organisation of the conferences and meals. Flights and hotels would be paid for by the delegates themselves.
The Deputy Minister made a general comment that the issue of the pension surpluses could not be fully dealt with in this meeting. He recommended that the Committee be given a proper update. He recalled discussion on the subject in the previous Finance Committee, at a time when the surplus was estimated to be R80 billion, with only R16 billion apportioned, and R1 billion being contested. The Chief Executive Officer had indicated that some persons were before the courts for their unwillingness to discharge this responsibility.
The Chairperson commented that in future he expected entities to state specifically what they required from the Committee in order for the entities to be able to function effectively. There were current operational issues that should be raised. Parliament and the Committee could assist the FSB to have the necessary powers to be effective.
Financial Intelligence Centre (FIC) Annual Report Presentation
The Deputy Minister, introducing the delegation, said that the Financial Intelligence Centre (FIC) played a very critical role in the economy. Part of its activities could be considered classified information. It was therefore perhaps preferable in future to hold such an interaction in camera. The Deputy Minister excused himself to attend to other business in the National Council of Provinces.
Mr Murray Mitchell, Director, FIC, said that the FIC had reduced the size of its delegation in mind of the need to economise. The presentation would be short, as he assumed that Members already had copies of the Annual Report. Some sensitive issues might have to be kept off-line, though he did not expect them to arise in the discussion. He explained the benefits of the generic anti-money laundering and combating of terror financing system which enhanced financial market stability, reduced the cost of borrowing, and reduced financial crime and crime generally. The FIC's legislative mandate was to assist in identifying the proceeds of crime, and in combating money laundering and the financing of terror. It occupied a pivotal point between the business community, supervisory bodies, law enforcement agencies and prosecutors. There were 19 categories of institutions, such as banks, insurance providers, casinos, financial advisors, lawyers, and estate agents, who were vulnerable to money laundering. Suspicious transaction reports were sent to the FIC for data storage, analysis and referrals to law enforcement and investigative agencies such as the South African Police Service, the National Prosecuting Authority, and the South African Revenue Service. The Financial Intelligence Centre Act listed supervisory bodies such as the Financial Services Board and the South African Reserve Bank and the FIC was obligated to act as supervisor of last resort. Amendments to the Act would give supervisors administrative enforcement powers.
Mr Mitchell said that the Financial Action Task Force (FATF) was the international policy-making body to combat the laundering of money and financing of terror. Its regional body was the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). South Africa was a member of both. A mutual evaluation by the two bodies rated highly South Africa's work thus far in developing measures to fight money laundering and financing of terror in such areas as prioritising investigations and prosecutions and legislative improvements. FIC also participated in the Egmont Group, an organisation of 116 financial intelligence units to improve communications, information sharing and co-ordination of training.
Mr Mitchell said that FIC was a Public Finance Management Act Schedule 3A entity; it was defined as a juristic person, was funded from the national budget and accountable directly to the Ministry of Finance. Its core responsibilities included analysing reports from accountable institutions, referring information to law enforcement authorities such as the Police, the Hawks, and the intelligence agencies. It inspected where no other supervisory body existed, for example, parastatals and the Post Bank. It exchanged information with other countries, besides leading South Africa's participation in the FATF and the ESAAMLG and participating in the Egmont Group.
Mr Mitchell reported that FIC's staff complement had increased from about 120 to nearly 140 in the year under review. FIC sought to increase it further. It was growing its staff organically. It required scarce skills. Its strategic objectives for 2009-2012 included ensuring a culture of compliance by vulnerable institutions and maintaining a robust legal framework to combat money laundering and the financing of terror. High quality information was a prerequisite. An awareness programme was of importance. FIC aimed to upgrade its information and communication technology (ICT) equipment, and provide technical information to neighbouring countries. During the 2008/2009 financial year, 22 762 suspicious transaction reports were received and 1 221 referrals were made to the law enforcement authorities. The value of these referrals amounted to nearly R6 million, a 195% increase year-on-year. An increase in the quality of reports received had been noted. South Africa was the first country in the world to be able to receive financial intelligence reports from businesses electronically. This had now become an international standard. Amendments to the Financial Intelligence Centre Act (FICA) were completed and draft regulations were in preparation. The Centre had received another unqualified audit from the Office of the Auditor-General. This spoke to the quality of the work of Ms Alice Puoane, Chief Financial Officer.
Mr Mitchell reported that FIC was under tremendous pressure to expand its national footprint. Although it was based in Pretoria, the FIC also needed to establish a regional footprint. The logic behind this was that compliance monitoring needed to be done on a decentralised basis, as well as support for investigations. ICT infrastructure needed to be further upgraded.
Mr Mitchell said that FIC sought the Committee's help on developing, enabling, and encouraging compliance particularly in the financial sector, a most important area. It also sought help in facilitating co-operation between the various agencies. Although co-operative arrangements existed, the truth was that much more could be done. FIC was involved in a task team which was examining better co-operation within the broad finance family, and that was a major task; if FIC could achieve success it would lead to an enhanced integrity of the financial system as a whole. Mr Mitchell said that he had hastened to complete the presentation, much of which was 'high-level' material, in anticipation of questions.
The Chairperson thanked Mr Mitchell for a substantial and technical report. He appreciated the FIC's contributions in the international arena.
Mr Mthethwa asked the FIC to streamline issues for legislative purposes, rather than go deeper into matters of intelligence. A page in summary would assist Members in taking decisions.
Ms Sibhidla asked that all entities inform the Committee early in the New Year of the legislation to which they required amendments, since 2010 would effectively be a short year for Parliament.
Mr Pieter Smit, Head: Legal Policy, FIC, replied that the bulk of amendments would be derived from the experience that FIC had gained in the implementation of the FICA over the past five years, and from some of the issues that had been pointed out in the process of mutual evaluation to which Mr Mitchell had referred. One of the issues that FIC wished to consider was allowing more flexibility for institutions in their decision-making processes, based on the way in which they assessed risks. The aim was to make the system more efficient in identifying customers and the potential risks that they posed. FIC would co-operate with the National Treasury and with other entities in the financial family. FIC did not envisage bringing amendment legislation to Parliament in the first half of the next financial year. There remained much consultation and research work before FIC's proposals could be completed. FIC wanted to approach the amendment process interactively and inclusively since it affected a large portion of the business community.
Mr Mitchell said that the FIC would prepare a document in the near future outlining likely legislative requirements.
Ms Balindlela said that for many ordinary people the term 'money laundering' was hard to understand. Possibly members of the public might be unaware that they were involved in this activity, for example, ladies who sold fruit and vegetables exchanged money all the time. A campaign of awareness was required. However, she felt that the community generally was beginning to appreciate the FIC's work. She pointed out that banks hardly knew their customers, even those who had been customers of a particular bank for many years, but were now becoming more aware of their need to know their customers better. Banks and other financial institutions currently did not co-ordinate the assets of individuals.
FIC noted that two kinds of awareness campaigns were needed. One approach was to the general community, the other was to stakeholders such as financial institutions. A campaign would be rolled out that included African language radio stations and print media, in partnership with other institutions. FIC was working with Department of Rural Development and Land Reform to educate people how not to violate the FIC Act, yet still be able to access financial products.
Ms Sibhidla asked how much money laundering existed in South Africa, both internally and across borders.
Mr Mitchell replied that the exact amount of money laundering globally had never been quantified accurately, despite many international research campaigns. The John Walker crime economic model had tried to quantify the amount and estimated it at $2.85 trillion annually. South Africa's national budget, by comparison, was tiny. Within the boundaries of South Africa, the extent of money laundering had not been quantified. South Africa recently undertook to include proceeds of crime as part of the calculation of its Gross Domestic Product (GDP) because it was not an unusual phenomenon and was also a global phenomenon. Statistics South Africa would now include these proceeds as part of the generation and quantifying of the GDP. FIC reported success in being better able to identify greater areas of risk. Consequently, FIC had identified categories of accountable institutions for which it wanted to insist that a high level of governance be applied within those institutions. Banks were such an institution. Banks were supposed to know who their customers were.
Ms Sibhidla asked if FIC had systems to ensure that criminals were identified and dealt with. She asked if FIC had systems to anticipate crimes and if they had investigators on the ground.
Ms Sibhidla asked about mutual evaluation in slide 16.
Mr Smit replied that FIC had anticipated one of the findings of the mutual evaluation. The FIC Act currently provided for criminal sanctions only for transgressions of the Act, similar to provisions pointed out by the FSB in the insurance sector. This meant that the FIC was reliant on the criminal justice system to enforce behaviour that was of a supervisory or regulatory nature. Criminal sanctions were not necessarily the best mechanisms to enforce behaviour in a regulatory environment, in which one expected institutions to have effected certain internal controls and systems.
Ms Sibhidla asked about improved forms of supervision.
Mr Smit replied that supervisors had a limited range of options at their disposal. Those options were usually limited to issuing a warning, which was a very weak response, or revoking a licence, which was a strong response. It was rare to see a supervisory or regulatory body revoke a licence of a major financial body for something that did not amount to a very serious failure or contravention. That option was, therefore, very rarely applied, while the minimum option of a warning did not have sufficient effect. That was also the issue identified with compliance with money laundering legislation in the mutual evaluation report, and which FIC had identified previously. FIC therefore sought to improve the range of options that supervisory bodies had at their disposal so that they could select the most appropriate course of action to deal with a particular failure. Such options would include the power to impose monetary penalties. A powerful option would be to name and shame, in order to bring public pressure to bear on institutions.
Ms Sibhidla suggested that the FSB and FIC should cultivate a working relationship to promote community awareness.
Mr Mitchell said that FIC emphasised the partnership aspect of its collaboration with the FSB. FIC had paid especial attention to casinos and bookmakers, and had started to observe estate agents. It had also looked at insurance agents, attorneys, and the Post Bank. FIC chose areas for attention on the basis of mutual concern and agreement with FSB. FIC had noted increased reporting to it.
Mr Van Rooyen asked for information on FIC's success stories, and asked how many cases were successfully concluded.
Mr Smit responded that feedback was critical in order to quantify success. However, it was necessary to be cautious in viewing a successful prosecution as a success. Often, a prosecution was a method of measuring reactive feedback, since a crime and losses in the system had already occurred. FIC tried to quantify that feedback. It would be fair to say that there had been less than ten successful prosecutions as a result of pure suspicious transaction report -related information. On the other hand, it must be pointed out that the FIC had also been involved in more than 251 active investigations with law-enforcement agencies, and had contributed to these investigations, hoping to see results in this financial year. FIC needed to examine preventative measures. Such measures, along with successes in the financial year, had resulted in the freezing of bank accounts which the FIC suspected of holding money linked to some form of crime or the proceeds of crime. The results spoke for themselves and were detailed in the Annual Report.
A further preventative measure was the FIC's recent ability to identify and define typologies, or indicators, whereby the FIC had identified a sequential occurrence of key line items in order to detect certain suspicious activities. He referred to the Annual Report for more details of the recruitment of poor rural women by criminals who used those women's accounts to export criminal earnings. Banks had been advised of what they should look out for in the way of transaction patterns. This was an example of a preventative technique. The FIC had invested much effort into research into identifying these typologies. It had also identified typologies of human trafficking and smuggling, scrap metals, and precious metals.
Dr Luyende asked about the co-operation of the international community in combating financial crimes.
Mr Smit replied that there existed no financial police or international law enforcement agency that could, of itself, investigate information on possible money laundering. The advantage that FIC possessed, as distinct from other agencies, was the possibility to share information quickly between jurisdictions by means of the Egmont Group, the network to which Mr Mitchell had referred earlier. The closest equivalent was Interpol, although this functioned on a slightly different basis. It was not a law-enforcement agency itself. Such information-sharing was possible through Egmont without having recourse to tedious writing of letters through diplomatic channels. Organisations such as Egmont were more nimble. There were limitations, since information passed in this way was limited in its use to supporting investigations. Such information could not normally be introduced in a court as evidence. Cross-border crime was always the most difficult crime to combat; and money laundering was eminently a cross-border phenomenon, since criminals knew that this was a weak part of the system in so far as money could be moved across borders without hindrance.
FIC added that it had been involved in 71 investigations into crimes committed in foreign jurisdictions but which at some point had a link to South Africa. FIC did not want to disclose details of names. However, he referred to a shipwreck off the Irish coast involving a large consignment of heroin. It transpired that the vessel had been registered in the Western Cape. It had 22 memoranda of understanding (MOUs) with other jurisdictions. However, the absence of an MOU did not preclude FIC from requesting information. There were 116 financial intelligence units (FIUs) similar to the FIC. To put the FIC in context, it was necessary to remember that FIC was an emerging FIU. FIC had therefore decided to concentrate its international efforts within the region.
Dr Luyende asked about capacity of the FIC and co-operation with the Commercial Crime Unit within the Police.
FIC replied that the FIC was obliged by legislation to share information with other Government agencies. It was developing MOUs. There would be greater co-operation between the FIC and the Hawks in order to deal with the most complex crimes that any law enforcement agency had to deal with. It also co-operated closely with the Special Intelligence Unit of the Police, as well as the commercial crime unit. Such co-operation was vital, since the police had the ability to act quickly on receipt of intelligence. This was the essence of the concept of an FIU.
Mr Mitchell added that to some extent FIC had to exert itself towards greater co-operation and resist the tendency of institutions to work in silos. The Committee might wish to bring FIC and other bodies together for future discussion. He suggested a workshop with the Committee in the New Year to address the various issues informally.
Ms Sibhidla asked if any money laundering reports from members of the general public had been counted as suspicious transaction reports.
Ms Sibhidla said that the Annual Report did not give her a clear picture of how women and persons with disabilities were deployed in the FIC.
Ms Grace Madilonga, Manager: Human Resources, FIC, responded that FIC fortunately was a young organisation and from the start had considered equity in developing its staff establishment. Demographically, it was well representative. However, it admitted that it was failing to recruit a representative number of persons with disabilities. The building that FIC rented posed difficulties of access.
Ms Sibhidla asked if FIC had a strategy to recruit young people.
Ms Madilonga responded that anti-money laundering skills were scarce. FIC had begun a pilot internship programme that accepted four students a year, who were introduced to the programme on money laundering. It was a one-year programme, and after completion interns were absorbed into FIC's establishment.
The Chairperson welcomed Mr Mitchell's suggestion for a workshop. He agreed that in a week or so FIC should write to the Committee with a summary of issues for the Committee's attention. He commented that one could never have enough communication. He commented that money laundering could never be seen outside an intricate web of trade. Inter-departmental and inter-agency co-operation should be prioritised and budgeted for. Money outside the legal system almost matched the amount of money inside the system. This represented money taken from the poor. It was necessary to recover it, to improve the quality of life of ordinary people in South Africa.
The meeting was adjourned.
- Public Investment Corporation, Financial Services Board & Financial Intelligence Centre (FIC) Annual Reports 2008/09
- Public Investment Corporation (PIC), Financial Services Board (FSB) and the Financial Intelligence Centre (FIC) on their 2008/09
- Public Investment Corporation (PIC), Financial Services Board (FSB) and the Financial Intelligence Centre (FIC) on their 2008/09
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