Financial Intelligence Centre Amendment Bill [B33-2015]:briefing

Meeting report

The Chairperson asked National Treasury when the deadline for passing the Bill was.

Mr I Momoniat (Treasury Deputy Director-General for Tax and Financial Policy) said that it was supposed to be passed by the end of February 2016. A Constitutional Court ruling in early 2014 had demanded some changes to the Bill within two years.

The Chairperson was irritated that the Financial Intelligence Centre Amendment Bill had only come before Parliament now, giving them so little time. This was exacerbated by the fact that the Bill was considerably longer than had been expected. He had the highest regard for the staff of Treasury but it was unacceptable that the Bill was coming before them so soon before the deadline.

Mr Momoniat accepted the criticism. He did point out in Treasury's defence that considerable complexities had arisen in the drafting of the Bill, particularly concerning the definition of prominent persons, which was an important category for the purpose of risk calculations for financial institutions, but had potentially serious political ramifications. South Africa had a proud tradition of defending its sovereignty and it was not easy to balance this with the need to maintain favourable international relations in the arena of global finance.

National Treasury & Financial Intelligence Centre on Financial Intelligence Centre Amendment Bill
Mr Momoniat explained that South Africa was under considerable international pressure to update its legislation on financial crime, particularly on anti-money laundering and combating the financing of terrorism (AML/CFT). It was falling behind the international standards set by the United Nations and the Financial Action Task Force (FATF).

Mr Peter Smit (Executive Manager for Legal and Policy, Financial Intelligence Centre) explained that the current laws were insufficient in terms of UN Security Council resolutions concerning doing business with sanctioned institutions. He went on to explain the Constitutional Court ruling had concerned the right of Financial Intelligence Centre (FIC) inspectors to enter business premises that are either private residences or belong to unregistered or unlicensed institutions. The Constitutional Court had upheld a High Court ruling that required the inspector to obtain a search warrant.

Mr O Makhubela (Chief Director for Financial Investments and Savings, Treasury) said that there were serious consequences associated with non-compliance with international norms, such as the risk of heavy fines from overseas regulators and lack of multinational business confidence.

Mr Momoniat added that the FIC needed both to be tough and to appear to be tough in order to forestall possibly intrusive international inquiries. Large fines such as the one recently imposed on MTN by Nigerian regulators had the potential to undermine investor confidence and seriously destabilise an economy. He mentioned a $9bn fine imposed on French bank BNP Paribas by the United States of America (USA) for violating USA sanctions against Sudan, Iran and Cuba, despite the fact that BNP Paribas had not broken any French law.

Mr Makhubela noted the four principal objects: (1) to align the country with international AML/CFT standards, (2) to enhance customer due diligence of financial institutions (especially concerning domestic and foreign prominent persons and beneficial owners), (3) to provide for the implementation of the UN security council resolutions relating to the freezing of assets of persons suspected of financial crimes, and (4) to introduce a risk-based approach to the assessment of AML/CFT risks.

The definition of a “prominent person” was a key element of the Bill, and Mr Makhubela spent some time discussing the definitions of domestic and foreign prominent persons. He stressed that there was no implication that prominent persons were presumed to be involved in financial crime, nor were measures intended to stigmatise them or prevent them from accessing financial services.

Mr Momoniat explained that foreign prominent persons were nevertheless assumed to be a high risk category, and financial institutions were required to put additional risk-mitigation measures in place when doing business with them. This policy was in line with international norms.

Mr Makhubela continued that the Bill would also require financial institutions to exercise extra due diligence for customers who were not natural persons. This was to prevent transgressors from hiding their true identities behind trusts, companies and other corporate structures. The Bill would also enhance the ability of the FIC to share information with other relevant organs of state such as the defence force, Special Investigating Unit (SIU) and the Public Protector. The Bill would dissolve the Counter-Money Laundering Advisory Council, whose functions were adequately covered by other existing platforms.

Discussion
The Chairperson expressed some dissatisfaction about the communication between Treasury and the Committee about the length of the Bill. The Committee had been told that it was a quick Bill, a simple matter of approving changes demanded by the Constitutional Court ruling.

Mr D Maynier (DA) asked what criteria had been used to determine the definition of a domestic prominent person. He asked on what basis it included the defence force but, for example, excluded the police, intelligence services and trade unions.

Mr B Topham (DA) supported the inclusion of the police, but pointed out that members of the defence force would not necessarily be easily identifiable.

Mr Momoniat said that they had used international examples to guide their definition. They were wary of making the definition too broad, because one of the aims of having different risk categories was to make the system more cost-effective and inclusive by giving it a more effective focus.

Mr Makhubela observed that historically, the military was far more politically influential than the police force.

Mr Maynier was concerned that the Bill placed an obligation on institutions to assume the role of the state in conducting investigations into domestic prominent persons.

Mr A Lees (DA) was also concerned that the Bill places an onerous burden of compliance on institutions, particularly smaller ones.

Mr Smit clarified that the Bill did not compel institutions to investigate potential clients; they simply needed to get some information from the customer themselves. It would be impractical, he agreed, for institutions to have to second-guess customers and conduct full investigations into the sources of their income.

Mr Maynier said it was unclear what if any actions the Bill mandated. What would happen, for example, if a domestic prominent person was investigated by their bank and it was found that a bond in their name was being paid from a suspicious source?

Mr Smit said that the obligations of the institution in a case like this were already in the Act in Section 39. This section obliged them to report suspicious transactions to the FIC.

Ms T Tobias (ANC) felt that the intelligence community should be part of the Committee's consultations, to ensure the legislation did not create any unintended security gaps.

Mr Smit noted that the FIC was not an intelligence body strictly speaking although it was broadly associated with the intelligence structures. Their function was to enhance the criminal justice system's ability to deal with financial crime more broadly.

Ms Tobias asked if the international standards, with which the Bill was bringing South Africa into line, were in fact adhered to, particularly by powerful countries like the USA.

Mr Makhubela replied that in this context, it might make sense to talk of “prominent influential countries.” The USA was undoubtedly one of these, partly as a result of the dollar's status as the international currency of trade.

Ms Tobias supported in principle the placement of prominent persons in a higher risk category, but cautioned that there was an inherent tension between the requirement of due diligence and the need to protect people from stigma and slander. She also worried that the warrant requirement demanded by the Constitutional Court ruling would have the unintended consequence of introducing delays into investigations that could allow financial criminals to avoid being apprehended.

Mr Topham noted that Clause 33 of the Bill provided for fines to be paid into the National Revenue Fund rather than the Criminal Assets Recovery Account. While this made sense, he asked what the rationale for the change had been.

Mr Smit explained that because fines were not the proceeds of crime, it was not appropriate for them to go to the Criminal Assets Recovery Account. He also noted that technically, the FIC did not impose fines, although they were done within the context of the FIC Act.

As a general comment on the practice of complying with international standards, Mr Topham said that the government needed to decide whether the country belonged with the West or with the unregulated economies. It would be strange if we went to great lengths to comply with FATF standards while we were also ignoring the International Criminal Court, for instance.

The Chairperson asked him to clarify what he meant by his reference to the unregulated economies.

Mr Momoniat observed that Indonesia was the only G20 country that was not part of FATF.

Mr Topham asked for more details about the so-called risk-based approach that the Bill advocated.

Mr Smit explained that they were essentially trying to force financial institutions to exercise common sense when it came to assessing the risk associated with different customers.

Clause by clause examination of the Bill
Mr Smit took the Committee through the clauses (see document). Discussion that arose included:

Clause 1 Definitions
Mr Maynier said it would be helpful if someone could do some research into the definition of a ‘prominent person’ and how it compared to other countries.

In the absence of a dedicated Committee researcher, the Chairperson asked Mr D Jantjies (Economist, Parliamentary Budget Office) to do this.

Clauses 4 and 5
Mr Smit explained that dealt with the dissolution of the Counter-Money Laundering Advisory Council. The insertion of Section 21B (effected in Clause 10 of the Bill) was one of the most crucial additions. It provided more transparency to the financial sector by clarifying the requirements where people acted through an entity like a trust or company. This “corporate veil” was one of the most widely abused mechanisms in financial crime, especially money laundering.

Mr Lees asked if Section 21B obliged institutions to trace a line right back to the natural person.

Mr Smit replied that this was correct. Section 21E makes provision for cases where the natural person could not be identified for whatever reason.

Clauses 11 to 15
The Chairperson asked about the security of customer records kept by institutions. Their rights must also be protected.

Mr Smit said that this was a valid concern, but customers' information was protected by another piece of legislation, the Protection of Personal Information Act.

Clause 25
Mr Topham noted that although the amendment to Section 40 in Clause 25 did increase the range of entities with which the FIC was authorised to share information, it appeared to reduce the powers of these entities to obtain information from the FIC when they wanted it. Was this the intention?

Mr Smit replied that it was not the intention to give the FIC a basis for refusing to share information, although it did want to require the entities to have a good reason for accessing the FIC's information. An official should not be entitled to FIC information merely because they were curious about their neighbour, for instance. The change had been to try and make the Bill more readable.

The Chairperson said that these did not seem like compelling reasons for the change.

Clauses 27 and 29
Mr Lees thought that the amendments in Clauses 27 and 29 were simply too onerous for small businesses. What were the consequences of non-compliance, and how lenient was the Act with regard to unintentional non-compliance? The aim should be compliance, not punishment. He asked if any cost analysis of these amendments had been done.

Mr Smit said that there were already cost implications of the existing FIC regulations, but these were not typically measured by institutions. The amendments were intended to ensure that the inevitable costs of compliance yielded better value. Clauses 35-50 decriminalised some failures of compliance with the Act. It was left to the discretion of the Supervisor whether to impose a fine or simply issue a warning.

Ms Tobias was concerned about deliberate non-compliance for the purpose of frustrating an investigation or court process.

Mr Smit noted that the failure to report information had not been decriminalised. There were also provisions outside of the Act that were not affected by these amendments.

The Chairperson reiterated his frustration at having been led to believe that the Bill was a minor amendment in response to a Constitutional Court judgement. He seriously doubted that the February 2016 deadline would be met. He warned the Treasury delegation that their credibility was now in question with the Committee.

The meeting was adjourned.