The Financial Intelligence Centre briefed Members on its mandate, the highlights of the 2010/11 Annual Report, some of the key financial data, and its plans for the future. It outlined the functions of the Centre; followed by the Centre's outcome areas and six strategic objectives.
The 2010 FIFA World Cup was the first time that a financial intelligence agency had been involved in such an operation. Cooperation with the banks was important. By creating a task team, the Centre was more effectively able to use information on, for example, pyramid schemes, organised crime and rhinoceros poaching, and deliver on investigations. Fraud to the extent of R25 billion had been detected in tender processes. Following implementation of the Financial Intelligence Centre Amendment Act 2008, the Centre was considering requiring the registration of veterinary surgeons as an accountable institution in the context of environmental resource plundering. The capacity to receive large volumes of reports in single batches, particularly from the financial institutions, was probably a world first achievement.
The Centre anticipated questions on the underspend of R45 million as a result of savings in its information technology system, its problems in obtaining specialised skills in the face of competition from other entities, a restatement of the financials, and the situation with the previous chief financial officer. The Auditor-General had detected that a number of controls had not been put in place. Now the Centre could report that those controls had been established.
A Member asked about fraudulent conduct of an employee and at what level of the organisation was this person? How much did this person steal, and had steps been taken to prevent a recurrence? Members wondered to what extent the Centre's strategic objectives would assist the Committee in its oversight role and in determining what had been achieved as against financial allocations, criticised apparent excessive expenditure on rent, asked when the Centre intended to appoint its new chief financial officer, about response rates, for details of the irregular expenditure, the Centre's surplus, savings on information technology, and about professional fees - was this a result of failure to hire specialised skills? Members asked what justified the bonus for the former chief financial officer who had failed in his duties. The Acting Chairperson noted that the Auditor-General's concerns were serious.
The South African Reserve Bank was entirely oral and on the assumption that Members had already read the Annual Report. The Bank noted that it had had its report independently assessed to determine how far the Bank was complying with best practice. There had been a considerable change since the previous financial year, in that there had been four appointments to the Board of Directors. The Government appointed eight of the 15 members. Shareholders elected seven, who had knowledge in different sectors – finance, mining, labour, and so on. The term of service for each Board member was nine years. The Bank was comfortable with the set of skills present on the Board. There were a significant number of chartered accountants, which was very important for the audit committee. The one outstanding appointment was that of Deputy Governor. All non-executive members of the Board sat on one or two of the Board sub-committees - the Audit Committee, the Non-Executive Directors Committee, the Remuneration Committee which was very important as it set the remuneration for the executive and the Bank as a whole. The Board Risk Committee, unlike in many organisations separate from the Audit Committee, was established last year and given the global environment this was very important.
The briefing included the management committees, with particular reference to the Financial Stability Committee and the Financial Stability Oversight Committee, followed by the report on monetary policy, the operational review, internal control - a priority focus area and an integral part of the Bank’s management and accountability function, human resources, and corporate social responsibility and investment. The Bank invited Members' specific questions, rather then going into detail on the annual financial statements.
Members asked how accurate was the Bank's forecasting, about loans, advances and collateral - more especially as they pertained to the Land Bank bills, if the practice for International Monetary Fund fund balances administered on behalf of South Africa was satisfactory, thought that any transaction into which we entered with the Fund must have settlement terms, asked when the Bank was going to start determining the exact nature of its oversight - such information would help the Committee in its own oversight role, about an apparent loss by the Corporation for Public Deposits, were worried about the Bank's other three subsidiary companies, asked the value of bank notes in circulation, asked about the R200 notes recalled in 2005, if the Bank still outsourced any printing of bank notes, sought clarity of the incorporation of the public deposits - was that a loss? Members asked if the Bank would be able to implement an employment equity programme by 2014 with such a low staff turnover, if the South African Reserve Bank Staff College would employ its contracted staff, and asked the Bank's views on the scare in the public domain that we might experience a credit bubble - from the global perspective, what were the strategic lessons going forward?
The South African Reserve Bank briefed Members on the current global economic situation with reference to an unbelievably strong statement by the Governor of the European Central Bank that reflected just how grave the situation was. There was a synchronised downturn in the advanced economies. Growth viewed quarter on quarter indicated that
GDP growth was slowing worldwide, with downward revisions all the time. There was talk of recession. The current conditions were so severe that going into recession would make it worse. Even if the crisis remained at this level, one would have a huge challenge to emerge from it. High levels of uncertainty were constraining investment. The American corporates were flush with cash and could invest, but did not. There was very high exposure of European banks especially the German and the French to peripheral sovereign debt – exposure estimated by the International Monetary Fund as high as 10% of
Members observed that the situation was 'really frightening'. The Acting Chairperson called for extra and more frequent engagements with the Bank, perhaps outside the eyes of the media so as to discuss freely the more sensitive issues.
In the absence of Mr T Mufamadi (ANC), Chairperson, Ms N Sibhidla (ANC), was Acting Chairperson.
Financial Intelligence Centre (FIC) Annual Report 2010/11 presentation
Mr Murray Michell, FIC Director, briefed Members on the FIC'S Annual Report 2010/11. It was the third time that the FIC had met the Committee this year – the strategic plan briefing earlier this year and the Committee's visit to the FIC a couple of months ago.
Mr Michell's briefing assumed that Members were familiar with its operations on the basis of previous interactions. There were four key areas – the FIC's mandate, the highlights, some of the key financial data, and some of the FIC's plans for the future.
Mandate and Functions
Mr Michell outlined the functions of the Centre which derived directly from its statutory mandate (slides [3-4]) and noted the Centre's reporting directly to the Minister of Finance and its close liaison with the National Treasury and other departments and stakeholders in the public and private sector and internationally, together with the Centre's monitoring and giving guidance to the supervisory bodies such as the South African Reserve Bank (SARB), the Financial Services Board (FSB), the National Gambling Board (NGB).
The FIC led South Africa in the Financial Action Task Force (FATF), which was the international global standards setting organisation and reported directly into the Group of 20 (G20) processes and therefore to the Minister of Finance and 'the G20 world'. The Centre also participated in the G20's regional body, the East and Southern African Anti Money-Laundering Group (ESAAMLG), and the Egmont Group made up of 127 financial intelligence units.
Outcome areas and strategic objectives
Mr Michell continued with the Centre's outcome areas (see table, slide 5). The Centre had six strategic objectives – improved consumption of the Centre's products and services, improved compliance with the Centre's Act by accountable institutions and society in general, improved anti-money laundering/combating financing of terrorism capacity in the region, improved anti-money laundering/combating financing of terrorism framework in South Africa, development and commissioning of the Centre's information and communications technology system, and for the Centre to be a sustainable and capable institution – together with achievements (slides 6-12).
Mr Michell noted that the 2010 FIFA World Cup was the first time that a financial intelligence agency had been involved in such an operation (slide 6). It was important to note in this regard the Centre's cooperation with the banks. The Centre had learned over recent years that by creating a task team, it was more effectively able to use information on, for example, pyramid schemes, organised crime and rhinoceros poaching, and deliver on investigations. Fraud to the extent of R25 billion had been detected in tender processes (slide 6). Following implementation of the Financial Intelligence Centre Amendment Act 2008 (Act No. 11 of 2008), the FIC was considering requiring the registration of veterinary surgeons as an accountable institution to the FIC in the context of environmental resource plundering.
The capacity to receive large volumes of reports in single batches, particularly from the financial institutions, was probably a world first achievement; the FIC had a 98.2% uptime on its information and communications technology (ICT) systems, which was in excess of target (slide 11).
Mr Michell also reviewed human resources. The Centre was a small organisation with a staff complement of 143. The pie charts, slides 13-15, gave an analysis of the equity component.
Key financial data
Mr Michell described financial performance. With an expenditure of R137 million there was an underspend and surplus of R 45 million on revenue of R182 million allocated to the FIC (table, slide 16). He also discussed the financial position and budget allocation (pie-chart, slide 16).
Plans for the future
Mr Michell described plans for the future, in particular, the development of a new operating model for the development of financial intelligence, with a focus on increased level of compliance, effectiveness and ease of use (slide 16). That process had also been benchmarked against five or six other countries. The recession had meant that the financial intelligence units around the world could no longer simply just receive STRs, but were required to make sense of them and provide really hard financial intelligence including the development of policy instruments for ministers of finance. The Centre would have the details when it returned later in 2011/12 with its strategic plan. The Centre would also be emphasising compliance and working with the supervisory bodies. The Centre also sought understanding of 'the illicit economy' and how it worked domestically and internationally. Also the Centre sought to create a national footprint. With its new thrust, the FIC had to focus on compliance, and this would mean that a significant portion of the FIC's work would be engaging with companies and supervisory bodies and this work would have to take place in the public domain very visibly and forthrightly. This would change the nature of the FIC's work.
The FIC aimed to be 'green' in its work and pointed out that the cost of producing the Annual Report was R61.55 per copy (slide 20).
Problems and challenges
Mr Michell anticipated questions on the underspend of R45 million. This had been creeping up on the FIC over three years or so. At the behest of the Minister two years ago the FIC had made savings in its information technology (IT) system. This had affected the rollout and some of the money had been sent back to National Treasury. The other area with which the FIC was having problems, and of which it had made no secret, was the area of specialised skills. While the Centre had never had a large staff, and it was never intended to have a large staff, the staff members that it had were required to be 'very smart' and specialised. The Centre was struggling to find such people. It had been hamstrung by the human resources and remuneration framework. The Minister had agreed to more flexibility in the Centre's remuneration framework to assist it to bring on board the people that it required. Mr Michell was not referring to vacancies but to growing the organisation. However, the FIC and other institutions were all competing for scarce skills. It needed a growing number of compliance officers who could also give legal guidance. There had been a restatement of the financials, since there had been a need to recount the assets. This related to the situation with the previous chief financial officer, concerning which matter questions had been asked in the previous interaction. The Auditor-General had detected that a number of controls had not been put in place. Now the Centre could report that those controls had been established (see FIC documents).
Dr D George (DA) asked about fraudulent conduct of an employee. At what level of the organisation was this employee? How much did this person steal, and had steps been taken to prevent a recurrence?
Mr Michell replied that the fraud had occurred at a low level. It was committed by someone who had access to the system and was able to manipulate it.
Mr Nischall Mewalall, FIC Senior Manager on Monitoring and Analysis Department, indicated that the amount involved was around R400 000. Of that, R144 000 had been recovered. The individual concerned was on trial and the matter was sub judice.
Dr George found the information on the Centre's costing of production of its Annual Report very useful, but asked how many had been produced in total so that he could determine the total cost involved.
Mr Michell replied that the figure quoted was a unit cost. The Centre sought to produce the report to the greatest possible extent in electronic format.
Ms Z Dlamini-Dubazana (ANC) wondered to what extent the FIC's strategic objectives would assist the Committee in its oversight role and in determining what had been achieved as against financial allocations.
Mr Michell entirely agreed and said that the FIC was trying to improve its reporting in this regard. When it had developed this three-year process, it was really a continuation of the previous period as well. It was a five-year process of putting in place the FIC, which sought to be more precise in the way it measured and dealt with its work. When it had underspent and sent back to National Treasury the R45 million, it was not a bad thing. On the contrary it was a good thing, as far as he was concerned, since it took the Centre back to a zero-based budget process, so it could be far more specific about what it was achieving and how. The strategic plan would include the targets, the measures, and the extent to which they were achievable.
Ms Dlamini-Dubazana criticised apparent excessive expenditure on rent (Annual Report, page 67) and on parking facilities for the staff.
Mr Michell replied that the Centre was in discussion with the National Treasury two years ago to acquire a building that was customised to its work. There had been negotiation with the Public Investment Corporation (PIC) to build such premises. However, the deal had fallen flat, through the then Minister of Finance. It would make a lot of sense if the state owned the premises instead of leasing them. The parking facilities were necessary to provide the essential security for staff, but if the Centre had a state-owned building, it would not need to pay rent also for parking places. The security of the personnel was a major worry for Mr Michell. The environment was getting rougher as we moved forward, and as we were exposed to more data.
Ms Dlamini-Dubazana asked about the problems of recruitment which existed despite expenditure on recruitment, presumably on advertising.
Ms Grace Madilonga, Manager: Human Resources, FIC, replied to the question on recruitment costs that it was very hard to find suitable candidates for the specialised kind of work in which the FIC engaged and in which it faced severe competition from other governmental departments and entities and from the financial sector.
Mr Michell added that despite intensive recruitment efforts, including head-hunting, the Centre often found itself, once it reached the stage of psychometric testing and verification, unable to make appointments.
Mr Mewalall added that, after the psychometric assessment, there was a need to obtain secret or top secret clearance for candidates for FIC positions. The candidate's own financial position was often a bar to appointment. Such a candidate, compromised financially, was an attractive target for criminals, who could exploit the candidate's access to sensitive information, if appointed. This would jeopardise the interests of the state.
Ms P Adams (ANC) was partially covered by Dr George's questions.
Ms Adams asked about the Auditor-General's report (Annual Report, page 48). According the Report, the investigation of the employee concerned was ongoing. How far had the investigation progressed?
Mr Michell replied that the person was on trial, and the trial was in progress.
Mr Mewalall emphasised that the individual concerned was on trial and the matter was sub judice.
Ms Adams asked when the Centre intended to appoint its new chief financial officer.
The Centre responded that the new chief financial officer would begin duties in November.
Ms Adams observed that the Centre had responded to only 59% requests timeously (Annual Report, page 14). To what did the Centre attribute that?
Mr Mewalall replied that this had been because of the loss of skills to other government agencies, particularly to the security apparatus, or to private institutions. Also once someone had learned the tricks of the trade, he or she could become a good business person. Moreover, the Centre's role was becoming more complex. Also the Centre was required to respond to requests within tightly defined time-frames.
Mr Christopher Malan, FIC Head of Compliance and Prevention, said that a more serious challenge to the FIC in respect of the staff was its direct competition with other agencies and institutions, such as banks and insurance agencies. It was a very hard area in which to work. Also the FIC found itself becoming a training agency.
Ms Dlamini-Dubazana asked about the expenses of travelling.
Mr Mewalall replied that this was because of the need to have people on the ground during an investigation, while the Centre did not have offices across the country. The rates were taken out of public service circulars. The Centre had a foreign mandate as well.
Mr D van Rooyen (ANC) asked for details of the irregular expenditure of R4.8 million. This was quite substantial.
Mr Michell replied that this related to pensions.
Mr Van Rooyen asked about the Auditor-General's identification of fruitless and wasteful expenditure. Why had this happened?
Mr Michell replied that this related to a contract that was not followed up.
The Centre reported that it had addressed 80% of the supply chain issues identified and was confident that it would have dealt with all of them by the next time it met the Committee.
Mr Van Rooyen sought a detailed response plan to the Auditor-General's concerns, so that the Committee did not have to speculate.
The Acting Chairperson asked about the Centre's surplus and savings on information technology.
Mr Van Rooyen was not sure how savings on information technology could be considered as underspending, as Mr Michell had said.
Mr Michell replied that Parliament had already allocated funds, while the Centre was still using information technology provided by National Treasury. So that money was rolled over year by year. Now the Centre was 'rebasing', and working out exactly what funds it required.
Mr Van Rooyen asked about professional fees (Annual Report, page 67). Was this a result of failure to hire specialised skills?
Mr Michell replied that the Centre did not want to hire people for the long term, if their role was short-term.
Mr Van Rooyen asked what justified the bonus for the former chief financial officer who had failed in his duties to (Annual Report, page 73).
Mr Michell replied that the bonus was paid for the previous year.
The Acting Chairperson, in spite of this reply, thought that the individual had been given a bonus without deserving it.
The Acting Chairperson observed that the Centre had not met its target of 90% in responding to cases brought forward by the stakeholders in an agreed period of time.
Ms Dlamini-Dubazana said that there appeared to be no allocation in the financial statements for recruiting from the tertiary institutions. She asked for this to be included specifically in the next strategic plan to demonstrate that the Centre had seen it as a problem and had budgeted for it and requested the money from the National Treasury so as to achieve that objective.
The Acting Chairperson said that the Committee would deal with outstanding issues in the course of engagements with the FIC. She thanked the FIC for the good work it was doing for the country, but noted that the Auditor-General's concerns were serious. The Committee would forward its response to the Annual Report [through the Office of the Speaker] to the Minister and to Mr Michell's office by the end of November.
South African Reserve Bank Annual Report 2010/11. Oral presentation
Ms Gill Marcus, SARB Governor, summarised the highlights of the Annual Report but did not go into the details as she assumed that Members had already read it. Thereafter she looked at the Annual Report in the present context. She noted that the Bank had had its report independently assessed to determine how far the Bank was complying with best practice.
The Board of Directors
There had been a considerable change since the end of the 2010/11 financial year, in that there had been four appointments to the Board of Directors. The number of Board members had changed to 15. The Government appointed eight of the 15. Shareholders elected seven, who had knowledge in different sectors – finance, mining, labour, and so on. The term of service for each Board member was nine years. The Bank was comfortable with the set of skills present on the Board. There were a significant number of chartered accountants, which was very important for the audit committee. There was expertise on risk, which was of value to the risk committee. Therefore 14 out of the 15 were now appointed, the last two being appointed the previous day, from Government. The one missing was the Deputy Governor, a position which remained vacant and on which the Bank was in discussion with the Presidency. The Board did not delegate its authority to the Bank's executive, which had original authority in the law.
The Board sub-committees
All non-executive members of the Board sat on one or two of the sub-committees. Many organisations had combined risk and audit committees, but the Bank had sufficient Board members to separate the two and a establish a separate Board Risk Committee. The Audit committee obviously had a very key role. The Non-Executive Directors Committee was formed to enable non-executive directors to discuss issues concerning members of the executive in the latter's absence. This was the body that evaluated the performance of the Governor. The Remuneration committee was also very important as it set the remuneration for the executive and the Bank as a whole. The Board Risk Committee was established last year. Given the global environment this was very important.
The Governor's Executive Committee (GEC) was the day to day responsibility of the Bank. It met fortnightly to consider policy issues and other executive management matters. The Governor’s Co-ordinating Committee (GCC) ensured engagement between executive and management in a structured way.
Members were already familiar with the Monetary Policy Committee (MPC) and a second, very important committee was the Financial Stability Committee, the role of which was changed and elevated, since financial stability was something that central banks were now focusing upon.
The Management Committee (Manco) was chaired by a deputy governor, and the Head: Special Projects, the Chief Economist and Adviser to the Governor, and all heads of department served as members of the committee. This examined the ongoing work of the Bank.
The Bank had a well-defined approach to budgeting for which the Budget Committee had ongoing responsibility. It had to receive presentations by the heads of each department. No substitutes were allowed. Following this process, and prior to approval, heads of department individually presented and justified their budgets to the GEC. Once GEC approval was obtained, the budget – comprising the operational budget, the remuneration budget and the capital budget – was tabled at a Board meeting for approval.
There was also at management level the Risk Management Committee which had as its primary purpose to oversee risk management in the Bank and to report thereon to the GEC and the Board Risk Committee. The main objectives of the committee were to facilitate the implementation of the risk management strategy, policy and structure, and to assess the adequacy and effectiveness of the risk management processes in the Bank.
Another important committee was the Reserves Management Committee (Resmanco) which had as its primary responsibility to oversee the implementation of the Gold and Foreign Exchange Reserves Investment Policy, and to facilitate the prudent investment of reserves. Two representatives of the National Treasury attended committee meetings in an observer capacity.
Report on monetary policy
In essence this was a review of monetary policy actions. (See Annual Report pages 25-29).
This sought to give more background information on the Bank's work. It included exchange control, accumulation of reserves, responsibility to the banking system, the approach which the Bank took to regulatory reform, and the question of currency supply and distribution. Research was a very important part, probably about 50% of what the Bank did. Data, analysis and reporting were core functions. Also regional cooperation was a very important part of the Bank's work. The Bank had an outreach programme.
This was a priority focus area, and was an integral part of the Bank’s management and accountability function. The Bank had received a clean audit opinion and was committed to maintaining that. The internal auditor and the internal audit department reported directly to the Governor and had a direct link to the Bank's audit committee. Therefore it was a very strong independent function in many ways. There was also a code of ethics and business conduct and the Bank was working on the development of value systems which the Bank would be evaluating on an annual basis. The Bank also had whistle blowing. The Bank took its legal and regulatory responsibilities very seriously, and felt it was compliant. Risk management was a strong feature (see Annual Report, page 41).
The Bank recognised that it fulfilled its objectives through its employees. It was therefore critical to ensure that the Bank attracted, developed and retained the requisite skills and competencies, and that it remained an employer of choice for current and future employees. (Please see pages 43-49). Ms Marcus noted that the Bank had a very low staff turnover (4.6%) of which about a third was through normal retirement. The Bank sought to reskill and had a cadet programme, which took about 15 to graduates from around the country per year. There was a bursary programme for about 24 people per annum. There was also a full programme, which cost the Bank about R9 million a year to support children of employees who entered higher education for as long as they studied, provided they passed their examinations.
Corporate social responsibility and Corporate Social Investment (CSI)
The Bank worked towards a more focused approach to CSI going forward.
Overview of subsidiaries
The Bank had four subsidiaries and entrusted certain defined responsibilities to them. The members of the Boards of the subsidiaries were appointed by the Board of the Bank, with the exception of the CPD, where the Minister of Finance appointed the Board members. The audited financial results of the subsidiaries were consolidated with those of the Bank in the financial statements included in this Annual Report:
▪ The Corporation for Public Deposits (CPD)
▪ The South African Bank Note Company (Pty) Limited (SABN)
▪ The South African Mint Company (Pty) Limited (SA Mint)
▪ The South African Reserve Bank Captive Insurance Company Limited (SARBCIC)
Annual financial statements for the year ended 31 March 2011
Ms Marcus preferred to receive Members' specific questions, rather than go through the statements in detail.
Mr Van Rooyen appreciated the good work done by the bank under the leadership of Ms Marcus. The rapid fluctuations in the global economy necessitated accurate and appropriate estimates of our economic indicators. He asked the Bank's view if our projections were accurate. As we all knew, how we projected was also important for
Ms Marcus replied that the Bank's main forecasting was in relation to the direction of inflation. At each monthly policy meeting the Bank spelt out what it had observed and what it expected. So far, over the past two years, we had been within the inflation target. Towards the end of this year and at the beginning of next year, we expected to be outside the target, but that inflation would come back to within the target. So until it happened the Bank was not quite sure if the Bank's forecast was quite accurate. She explained that the Bank took what was known and made projections around that.
The Bank was introducing, going forward, a regular evaluation over the forecast and its accuracy, and an assessment of any deviation from the forecast and the cause of that deviation. For the present, the Bank's forecast was the best forecast that it could produce, since a central bank was always faced with uncertainty. The Bank made assumptions on what it could anticipate on the basis of the best available data. It tried to look forward, because in this kind of climate it was not possible to use previous data or information to predict the future because it was so different. There had not been a steady state in relation to growth, the world environment, or trade, which was very volatile.
It was a huge challenge, but so far the Bank felt that it used forecasting as information. It was 'not wedded to a models result'. 'Our view is that a model is a tool to help you.' However, a model was not an absolute. So generally speaking, she thought that the Bank's ability to say that it had been accurate in its forecasting was determined by whether the Bank had been able to achieve the target that it had set itself and stay within the band. So it was not an absolute, but it was something that the Bank was undertaking going forward by way of a regular review, in which the Bank asked itself if its judgement had been right.
However, the Bank did have a suite of models and a strong team which examined all the variations. The suite of models was constantly evolving. If one was examining monetary policy, it had to be asked how one factored in financial stability. What that would mean in the sense of modelling was a very complex question. It was a big challenge, but something that the Bank saw as an executive tool, and which the Bank interrogated. The Bank did not simply act on what the model predicted.
Mr Van Rooyen asked on issues of loans and advances, more especially as they pertained to the Land Bank bills, which were said to have been placed as collateral against foreign loans, as correctly stated here the Bank did not have any authority to pledge or resell bills because they were not yet transferred to the Bank. He asked if the bills had any implications on the day-to-day operations or on the mandate of the Bank.
Ms Marcus said that the Land Bank bills, as far as she knew, did not affect anything at this time. They were collateral for the loan to
The Bank added that its Act actually required that if the Bank made a loan, it must be secured. This loan had indeed been secured.
Ms Marcus said that the Bank had to be very selective as to what it accepted as collateral.
Mr Van Rooyen asked, regarding the International Monetary Fund (IMF) fund balances administered on behalf of South Africa (SARB Annual Report, page 84), if this was a good practice? How was it impacting? What were the implications if it was not a good practice?
Ms Naidene Ford-Hoon, Chief Financial Officer, SARB, replied that this fund balance would have been there for a very long time. These were the terms and conditions of which Members were aware. It was nothing out of the ordinary – 'that they did not have any settlement terms'.
Ms Marcus said that it was standard practice; it was a 'country issue', so it would not be a problem that there were no settlement terms.
Mr Van Rooyen thought that any transaction into which we entered with the IMF must have settlement terms. He asked if this was a best practice.
Mr Johann de Jager, General Counsel, SARB, cautioned that, as a law professional, he was open to correction, but he understood that if a country was a member of the IMF an account was opened in the name of its central bank. This was what was maintained here. It was an account that was open all the time for the central bank of the member country – it was like an overdraft. It was this kind of account that was referred to, and there were no settlement terms. If in future it was necessary for us to fall back on the IMF this was the account that the South African Reserve Bank would use. It was not something that one was going to 'square off'. If he could draw an analogy, it was like a membership fee.
Mr Van Rooyen thought that maybe Mr De Jager would refer to a certain facility of the IMF so that one could make a follow-up.
Ms Marcus said that the Bank had no facilities in the IMF.
Mr Van Rooyen accepted this response.
The Acting Chairperson said that, if Members required, the Committee could always ask the Bank to return to give a further briefing.
Ms Marcus undertook to supply more details in writing on the origin of the matter.
Ms Dlamini-Dubazana thanked the SARB delegation for its comprehensive oral briefing and the perspective that it had given. She also thanked the SARB for its handling of financial stability management which was a very complex and diverse matter. However, she asked when the Bank was going to start determining the exact nature of its oversight. Such information would help the Committee in its own oversight role.
Ms Dlamini-Dubazana said that the Corporation for Public Deposits (CPD) had had a loss.
Ms Ford-Hoon, replied, in respect of the CPD, that this was not a loss. Brackets did not always mean a loss. In this situation it meant that it was a liability in the Bank's book. The CPD had placed, on call with the SARB, deposits. It was not a loss; it just reflected the balance that was with the SARB at this time.
The CPD's financials had been tabled to Parliament on 31 August 2011. It had made a profit. She explained how the CPD received funds, which it invested in various money markets. One of the areas in which it would invest was the SARB, on-call. This was an inter-company transaction and it was reflected because the CPD was a wholly owned subsidiary of the SARB. 'In our books, it was reflected as a liability' and hence the brackets – to distinguish a liability from an asset. At the end of every year, whatever was left in the CPD was transferred, after paying a dividend to the SARB of R200 000, basically to Government.
Ms Dlamini-Dubazana was confused because it appeared that the Bank did everything for the CPD, as compared to the other three.
Ms Ford-Hoon replied that such figures always appeared in the Bank's liability column. To consolidate the group from an accounting perspective it was necessary to limit the Bank's inter-company transaction. Effectively, it was the CPD's deposit which rested in the Bank's books.
Ms Dlamini-Dubazana said that the South African Bank Note Company (SABN) had been given a loan. For what purpose was the loan?
The Bank replied that the R32 million was a loan to erect the Pretoria North branch on the property of the SABN; so it was one of the Bank's branches. So we gave a loan to the SABN to erect the Pretoria North branch.' She referred to the Annual Report, paragraph 30.3. The Bank charged interest at the REPO on the loan.
Ms Dlamini-Dubazana asked for more information on the Bank's subsidiaries. She was worried about the other three companies – the SABN, the South African Mint Company (SA Mint), and the South African Reserve Bank Captive
Insurance Company Limited
These companies were operating under the Companies Act. She referred to the SARB Annual Report 2010/11, page 101. These companies spent so much on rent. This was a problem to Members as legislators. Why could the Bank not just build its own buildings? In the long term this would be a big saving.
Ms Marcus replied that the SARB's entities owned the properties concerned.
The Bank added that all these were inter-company transactions within the SARB group. The rent that Ms Dlamini-Dubazana had referred to was actually rent that the Pretoria North branch paid to the SABN. So these were all inter-group transactions. The rental and the interest paid on the loan virtually offset each other. Nothing was going to any external party; it was all within the group.
Ms Marcus said again that all the properties concerned were owned by the Bank or members of the SARB group. Moreover, the Bank owned all the properties where it had branches.
Ms Dlamini-Dubazana asked for more information on the bank notes – in particular, the value of bank notes in circulation.
Ms Marcus replied that the number of notes in circulation continued to grow, depending on the rate of economic growth, and how much cash was used. South Africa was still very much a cash economy. The one area of transaction that was declining drastically was cheques, but credit card transactions and electronic payments were common, and 'cash is king'. Our growth in cash was about 8% per annum. This meant that there was a constantly growing demand for cash. There was also an increasing demand for South African currency outside our borders, not only in the Common Monetary Area (CMA) countries, but even in Angola, Kenya, and Tanzania, and elsewhere. Zimbabwe had done away completely with its own currency and used South African rands and United States dollars; however, there was no formal arrangement with the SARB on the use of our currency, unlike in the CMA countries where there was a formal arrangement with South Africa around the rand and an agreement about repatriation. Zimbabwe, on the other hand, had decided simply not to have its own currency. This outside demand included the five-rand coins which were extensively used in Zimbabwe. There was in circulation about R75 billion, which was growing, on average, at about 8% at the present time. A few years earlier, in a more vibrant economy, it had been growing at about 12% to 13% per annum.
Ms Dlamini-Dubazana also asked about the R200 notes recalled in 2005.
Ms Marcus replied that the Bank did not have a problem with the R200 notes. The pre-2005 R200 notes had been taken out of circulation, and it was now just the normal R200 note that was in use.
Ms Marcus added that there was obviously a certain demand for different denominations. This was something that the Bank felt that it could manage better, and was making plans to that end in consultation with the commercial banks.
Mr Hlengani Mathebula, Head of Strategy and Communications, SARB, said that the question of the R200 note kept cropping up. There had never been a problem with the R200 note. The old note had been withdrawn because in 2005 the Bank had upgraded the security features on the note. The Bank had reached the stage where it felt that the old R200 note was very small and should be withdrawn so that the ones with the upgraded features could replace them in circulation. It was not an issue of counterfeit. It was a deliberate action on the part of the Bank to withdraw notes that lacked the new upgraded features. As Members would appreciate, all over the world there were certain time-frames in which banks upgraded the security features of their notes, and the SARB did so to comply with international security standards. All the South African notes were compliant. However, the Bank still had to be on its guard against those who would take chances with counterfeiting. Invariably those people were caught very quickly. Normally it was a police matter and the police acted swiftly in these matters. The security features were 'quite' strong and the notes hard to replicate.
Ms Dlamini-Dubazana asked if the Bank still outsourced any printing of bank notes to a European company. Were there still problems with equipment? When would the work be returned home, in order to create jobs?
Ms Marcus asked the Acting Chairperson's permission to respond immediately. Discussion on how and where the notes were produced was not something that should be part of a public awareness campaign. The SABN was one of the most secure facilities in the country, and should be respected as such. Without limiting the Committee's oversight role, she wanted to restrict the discussion. In such matters, it was common practice in the world not to go into discussion of where and how.
Ms Marcus, however, said that an important aspect of the above as regards production was that production was taking place at the SABN. There had been no lay-offs. It was an ongoing process of addressing the issues identified last year. There had been an independent hearing with the then Managing Director (MD), and that independent hearing had found the then MD guilty of the charges against him. So the Bank had taken appropriate action and tightened the relationship so that although they were wholly owned subsidiaries, the Bank had looked at a better approach to the group, so that both the SABN and the Mint were subject to a common approach on human resources and information technology (IT) throughout the group. This was what the Bank was working on at the moment. There was a new chairperson of the SABN. Ms Marcus identified her as a long serving board member at the Company. There was also a new MD. The Bank thought that it had taken the necessary measures. Production was taking place. The Bank was quite comfortable with that.
Ms Marcus, however, reiterated that she did not want to go into 'where and what and how'. The Bank was committed to ensuring that the SABN was equipped and had adequate staff and programmes. It had to be remembered that the Bank was the Company's only client, and would remain so for the foreseeable future. In the past it had had a couple of other clients. The profitability of the Company depended on what the Bank ordered from it. The Bank's orders were currently much lower, so, with a standing overhead, the Company's revenue was obviously affected. The Bank was confident that the SABN would remain fully functional and able to fulfil its functions professionally. This meant that there was a need to replace some old equipment. Updating technology was part of the programme going forward.
Ms Marcus, however, added that it was certain that the SABN would continue to fulfil its responsibility in creating jobs by way of upgrading and up-skilling, but this would take a few years to develop properly.
Ms Marcus, however, added that the Mint functioned extremely well. Some Members may have visited the Mint and the coin shop there. It was very skilled in its numismatic coins, which were very highly sought after, and had won many international prizes. However, there would have to be expenditure on replacing ageing equipment.
Ms Dlamini-Dubazana sought clarity of the incorporation of the public deposits on on-call deposits. Was that a loss? She could see Ms Ford-Hoon, the Chief Financial Officer, nodding her head.
Ms Dlamini-Dubazana commended the Bank for supporting its staff's children. However, where was this support reflected in the financial figures?
Ms Marcus replied that the amount was specified in the Annual Report, under human resources (HR), on page 48. It was R9 million in the period under review and benefited 393 dependants. The figure would vary from year to year. Staff members were assured that benefits were renewable until the beneficiary had completed his or her course of study.
Ms Adams asked about human resources. Ms Marcus had said that the Bank had a low staff turnover. Would the Bank be able to implement an employment equity programme by 2014 with such a low turnover?
Ms Marcus felt that the low staff turnover was not necessarily a problem, since the Bank had achieved substantial progress in employment equity. Its numbers were 'reasonably good'. There was a changing situation. The regulatory reform that was part of being more prudential as agreed by Cabinet involved, inter alia, a large influx of new staff. Until the Bank knew more about the new staff, it was not sure how it would affect staffing numbers. At present she could estimate a number of new staff members that was between 50 and 70. In certain areas, the Bank was having to expand its staff. The Bank had also created a new department concerned with compliance. As a result the Bank thought that it could address the employment equity requirements. It did not see this as a problem, and was reasonably confident, on the basis of the curricula vitae (CVs) that the Bank was receiving, that the demographics, at all levels, were progressing well. The Bank noted a definite need to increase staff, and the low turnover did not inhibit reaching employment equity goals.
Ms Adams noted that the South African Reserve Bank Staff College had a staff complement of 21. However, 50% of the staff members were on contract. Was the College going to employ them?
Ms Marcus replied that the College had a very small staff. Those who were on contract were often people who had retired from the Bank, and whose services were engaged for two days per week. There was no intent to employ them. Such staff members wanted to put back their expertise into the system. She gave a specific example. The College, moreover, did a good deal of training for central banks on the continent of Africa. Also the College sought to create a wider understanding, among those who were studying economics, of what central banking was about.
Mr Van Rooyen asked the Bank's views on the scare in the public domain that we might experience a credit bubble. Maybe in the Bank's analysis it might have detected this. From the global perspective, what were the strategic lessons going forward?
Ms Marcus said that the points raised by Members were extremely important. South Africa was not seeing a credit bubble at all. Private sector credit extension was very low – at around 6% and rising slightly, but very slowly. The credit extended on mortgages was low. Some of that was going to the corporates and commercial sector, which was fine. So the Bank was not concerned about a credit bubble at this time. The question was whether there was a demand for credit and whether there was a supply of credit. This was a huge challenge for South Africa, which was not seeing credit extension. This answer would relate to the last item on the agenda (see below).
South African Reserve Bank on the current global economic situation: oral presentation
Ms Marcus briefed Members on the current global economic situation, with reference to comments by the Governor of the European Central Bank. She said that central bankers were by nature conservative, and used words in a measured manner. She said that his comments of the previous day were, for him, outspoken. He had said that over the past three weeks the situation had continued to be very demanding. The crisis was systemic and must be tackled decisively. The high inter-connectedness in the European financial system had led to rapidly rising risk with significant contagion. It threatened financial stability in the European Union (EU) with adverse effects on the economy of Europe and beyond. He called for governments and European authorities to act together to solve the crisis and added that delay would be disastrous. It was a matter of urgency that all authorities acted in unison to safeguard financial stability.
Ms Marcus believed that this was an unbelievably strong statement that reflected just how grave the situation was. Three elements of a crisis came together. Firstly, it was synchronised. There was a synchronised downturn in the advanced economies – in the United States, in the United Kingdom, on the continent of Europe, and in Japan. For the Group of Three (G3) economies, the expected growth for the second quarter of this year was only 0.6%. For the United States in the last quarter it was 0.4%. It was expecting now 1.3%. For Japan it was – 2%. For the Euro area as a whole it was 0.6%. Germany, which was the strong man of Europe, was at 0.5%. France was at 9%. The United Kingdom was at 0.4%. Greece was at – 7%. Portugal was at – 0.2%. Spain was at 0.6%. Growth viewed quarter on quarter indicated that Europe was in 'huge trouble'.
The fiscal deficit in the United States in 2010 was 10.3%. In 2009 it was 12.8%. The expectation this year was 9.6%. Expectations for next year were 7.9%.
Debt to GDP (GDP) ratio was, for this year, expected to be 100%, and next year 105%. This was debt as a percentage of GDP. In the Euro area it was expected this year to 88.6% and next year 90%. France's ratio was expected to be 90%. Italy's was expected to be 121%. Japan's was expected to be 233%.
In the emerging markets there was a rather different picture. China's projections for its [fiscal] deficit this year were 1.6%. Its debt to GDP ratio was, as a percentage of debt to GDP, expected to be 27%. India's projection for this year's [fiscal] deficit was 8% and its debt to GDP ratio 64%. For Russia the projection for the [fiscal] deficit was 1.1%. South Africa was at the moment at about 5.5%. South Africa's debt to GDP ratio, as a percentage, was expected to peak at 43%, while the expectation for 2011 was still under 40%. So the scenarios for the emerging markets were very different.
Growth was falling. South Africa would be happy to have the projected hard landing for China of an expected growth of only 6%.
In the advanced economies, there was a commitment to low interest rates for longer. This was a statement about the economy. Whereas in the emerging markets there was a very low rate of growth, but rising inflation. This was a different challenge altogether. Obviously that would depend on what happened to commodity prices, which in turn was dependent on growth in the advanced economies.
Thus there were three crises coming together – a crisis of growing unemployment, a sovereign debt crisis, and a crisis in banking. The crisis in banking was mainly in Europe.
If one did not deal with sovereign debt, it would be transmitted through the banking system.
GDP growth was slowing worldwide, with downward revisions all the time. There was talk of recession. European countries were already in recession. The challenge in the south was that it was not just whether one had a recession or not. The current conditions were so severe that going into recession would make it worse. Even if the crisis remained at this level, one would have a huge challenge to emerge from it. We were now entering the fifth year of this global crisis, which had started in 2007. On the basis of the present severity, there would be many more years to come before we could come out of it.
Hence it had to be asked to what extent there would be a generational question of unemployment, low growth and what happened in those circumstances. The key inputs – oil, food, were higher in price in 2009 and 2010 and were dragging on growth. There was a downside of commodity prices if there was a decline in growth.
There was a lower inflation outlook for the advanced economies, slower economic growth, higher inflation in the emerging markets, and very limited policy space. Interest rates were likely to remain low for even longer in Europe. The banking system in Europe was under stress, and posed a strong downside risk to the global economy.
One important factor that was contributing to lower growth was the high levels of uncertainty that were constraining investment. The US corporates were flush with cash and could invest, but did not. Households, governments and banks were all deleveraging at the same time and this impacted on growth. There were high commodity prices and therefore long term structural issues in the advanced economies. At a global value these imbalances remained.
There was very high exposure of European banks especially the German and the French to peripheral sovereign debt – exposure estimated by the IMF as high as 10% of Europe's GDP. The USA was pulling back from investing in European banks.
The ECD had undertaken to keep the European banks afloat and had announced on 07 October that it would re-introduce 12 and 13 month duration loans and grant the banks unlimited access to cash until January 2013. It would also spend 40 billion Euros on cover bonds from next month and continue to lend banks as much money as they needed at least until July 2012. The ECD had really become the lender of last resort to countries and it was propping up the entire European banking system.
'We've got, in our view, a very, very dangerous situation.'
South Africa, however, had made some very interesting strides in diversification. A few years ago, 40% of South African exports would go to Europe. This was now down to 31%. However, there had been a rise of exports into the African continent.
The expectation of growth for the African continent was 5%. However, this varied from country to country. Next year the expectation was 6%. Some neighbouring countries, such as Angola and Mozambique, were growing more. Zambia was growing a 7% and above. Ghana was growing at 11% or 12%. There was thus a very different scenario in the region and on the continent of Africa. This was significant for the options that South Africa could exercise.
South African household expenditure was slowing. There was a very slow increase in private sector fixed capital formation both from Government and the private sector. In total it was about 18.9% but needed to be 24-25%. Business and consumer confidence was low. The Bank's own forecasts were downward in terms of the outlook for growth.
South Africa had to review its own ability to pull itself out of the crisis. However, there were big opportunities. People were looking for havens.
The challenge for emerging markets was that as soon as there was uncertainty around the situation in Europe investments flowed out and went back to the US dollar. This constituted 'a flight to familiarity'.
Globally we were in a situation of high unemployment, even in the United States of America (USA). Spain's unemployment rate was similar to ours.
It was, therefore, a very difficult and dangerous global environment in which South Africa had to function.
A response as a country was needed for us to weather the storm.
However, our banking sector had not had the same problems at all.
Ms Dlamini-Dubazana observed that the situation was 'really frightening' and thanked Ms Marcus for providing first hand information.
Ms Marcus said that South Africa was in an interesting and challenging position, because in many of the global meetings, South Africa was the only country from the African continent, and therefore its voice was very important. South Africa was attending the Group of 20 (G20) meeting on Friday and Saturday. The heart of the present issue was confidence and trust. It was no longer about Greece and whether it would default. Italy was the third biggest bond market in the world. There were likely to be other countries present, not from Africa, but with similar views to South Africa's.
The Acting Chairperson called for extra and more frequent engagements with the Bank. Perhaps some of these engagements should be outside the eyes of the media so that Members and delegates could be free to discuss to more sensitive issues. She thanked Ms Marcus for the insights provided, both on the Annual Report and the global economic situation.
Ms Marcus was happy to host a meeting at the Bank, but requested that arrangements be made well in advance.
The meeting was adjourned.
- Financial Intelligence Centre Annual Report 2010/11
- Financial Intelligence Centre Summary report on Annual Report 2010/11
- South African Reserve Bank Annual Report 2010/11
- Financial Intelligence Centre FIC reports 2010/11 statistics
- Financial Intelligence Centre FIC Annual Report 2010/11 presentation
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