Financial Intelligence Centre Amendment Bill [B33-15]: public hearings; Tax Administration Laws Amendment Bill [B30-15]: consideration

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Finance Standing Committee

11 November 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Banking Association of South Africa (BASA) submission indicated that the Financial Action Task Force (FATF) recommendations had proposed the risk-based approach. However, the Financial Intelligence Centre Amendment Bill overlaps between the risk- and the rules-based approach. The Bill did not allow the provision of simplified due diligence on low risk customers and transactions and makes South African banks uncompetitive in jurisdictions where only FATF requirements applied. The beneficial ownership verification requirements were more onerous than FATF and required verification of identity details as opposed to obtaining identity details. BASA said the Bill required a significant period for implementation of regulations and guidelines, and extensive system and database development.

Members asked if National Treasury had really gone further than what FATF had required. There is a possibility that some of the burden of verification would be significantly reduced by the advancement of technology. They suggested that the Minister needed to deal specifically with the onerous requirements in the Bill as complaints seemed to be that the Bill was too prescriptive.

The Association for Savings and Investment South Africa (ASISA) submission highlighted that in principle there should be a robust consultation process between regulator and regulated entities. It is fundamental for ASISA members to have a consultation provision for regulatory instruments in the Financial Intelligence Centre Act - similar to clause 97 of the Financial Sector Regulation Bill. The Bill had failed to provide for a country risk assessment to be conducted and results thereof to be published to assist accountable institutions in sectoral and institutional risk assessments and it was necessary to assist accountable institutions with the formulation of the required Risk Management and Compliance Programme. There is also no specific indication of how amendments in the Bill would affect regulations and exemptions (as well as guidance, directives and Public Compliance Communications (PCCs). In conflict with a Risk-Based Approach (RBA) – these still needed amendment or repeal before the effective date of the amendments. The Bill needed specific indication of changes to regulations and exemptions to fully assess impact. ASISA submitted that the requirement should be that the records are easily/readily accessible from the Republic. There is no indication in the Bill of transitional arrangements. ASISA members concerns included:
- Changes to processes and documentation
- Training of staff
- Engagement with independent intermediaries
- Large scale system changes which need to be planned and scheduled far in advance
- Request a minimum implementation period of 18 months
- Increased compliance burden will lead to an increase in costs (ultimately borne by clients)
- Doubtful of significant benefits in combating Anti-Money Laundering and Counter Finance Terrorism
- Increase in specialised resources to implement, monitor, train and maintain more specialised processes.

Members indicated that Parliament together with the Department had taken measures to reach out to all interested stakeholders who wanted to comment on the Bill. It was becoming a theme for most stakeholders to come to Parliament and complain about not being properly consulted. The stakeholders played their role in the deliberation of any bill but it was MPs that were mandated to ultimately legislate. Some Members agreed that it was indeed true that the public should be properly consulted in the processing of any bill and it was important for the Treasury to precisely explain its process of consultation. company that verifies identity online, made comments and recommendations for the Committee to consider which included:
- Authorise private third parties beyond simple storage functionality, i.e. data validation and verification
- Accountable Institutions can manage costs and resources more effectively
- The Bill should encourage multi-source information verification
- Consideration be given to countering identity theft as this leads to financial crime
- Consideration be given to authorise shared early-warning systems and true identity verification systems
- Different industries interact with their customers differently (for example: remotely, infrequently).

Members asked questions about the “centralisation of information”. It was indeed still unclear how the information would be made available to do an assessment of the customer instead heavy of reliance on Google. The Parliamentary Budget Office pointed out that there is a need to avoid high costs caused by legislation as this would be pushed onto the consumers.

National Treasury said that the Bill did go through a comprehensive social economic impact assessment and this could be made available to the Committee. Treasury admitted that there was a need for more public consultation especially on beneficial ownership.

Meeting report

Banking Association of South Africa (BASA) submission
Ms Yvette Singh, BASA Representative, indicated that the benefits of compliance to the recommendations of the Financial Action Task Force (FATF) enhances South Africa’s ability to participate in the international economy and financial industry leading to increased social development, financial inclusion and economic growth. Additional benefits included enhanced abilities to combat crime and assist in the prevention of attacks on South Africa and its citizens by terrorists. The FATF recommendations propose the risk based approach but the Bill overlaps between the risk and rules based approach. The Bill does not allow simplified due diligence on low risk customers and transactions. It was also concerning that the requirement of the Bill makes South Africa banks uncompetitive in jurisdictions where only FATF requirements applied. The beneficial ownership verification requirements were more onerous than FATF and required verification of identity details as opposed to obtaining identity details.

Ms Singh mentioned that the banking industry submitted extensive comment on the draft version of the Bill where it noted that there was an uneven playing field (Schedule 1 – designated accountable institutions). The previous comments had not been addressed in the current version of the Bill nor was there feedback on the previous comments (May 2015).The period of ten days allowed for the latest round of comments is not sufficient to address all concerns that had been flagged. The existing FICA compliance process has been built around the existing FICA regulatory framework. The Bill requires a significant period for implementation of regulations and guidelines, and extensive system and database development. It is anticipated that the effect on international banking groups operating in South Africa as well as the local banks’ international operations will be significant.

Discussion
The Chairperson noted that both BASA and ASISA said the Bill went beyond what the FATF required but asked why this was necessarily a bad thing. It was important to know if National Treasury went further than what the FATF required. There is a possibility that some of the burden of verification would be significantly reduced by the advancement of technology. Are there any circumstances in South Africa that were still of concern to what was required by FATF?

Ms Singh responded that the principles in the Bill went further beyond the FATF in the sense that the institution would be required to verify their clients. It was difficult for an institution like BASA to verify the clients as was supervised by the regulator. The challenge with the Bill was the fact that the principles are more onerous than the rules.

The Chairperson suggested that the Minister needed to deal with the onerous principles in the Bill as the complaint seemed to be that the principles were more prescriptive than the rules.

Ms Tobias disagreed that there is a legislation that is too prescriptive as the function of any legislation is to lay a foundation to enable government to set up rules. It must be reminded that the challenge of the African Bank emanated from the complete disregard of the regulations in the banking sector. Government was not the only institution that should be implementing regulations as banks also needed to have their RBA that may appear in the legislation. The Committee would need to look at the guidelines that are regarded as too prescriptive so as not to end up with a situation where the banking institutions would be creating their own regulations.

Mr Pieter Smith, Senior Manager: Finance Intelligence Centre (FIC), corrected that there is no “one risk fix-all” approach in the Bill.

Ms Singh mentioned that technology allows companies to be more efficient and this was one of the reasons the organisation highlighted that technological advancement should be the priority in the Bill. Companies were currently spending a lot of money on systems enhancement which often add no value in the elimination of risks.

Mr Ismail Momoniat, Deputy Director-General (DDG): Tax and Financial Sector Policy, National Treasury, maintained that there is general consensus between Treasury and the stakeholders that had made the submissions. However, it would perhaps be advisable for banks and the South African Revenue Service (SARS) to make their contributions on the Bill as some of the concepts and beneficial ownership still required further consideration. The intention of the Bill was to ensure that the institutions are able to take responsibility but that responsibility should also be made reasonable.

Mr Smith added that the intention of the Bill was also to make compliance easier and this was not just limited to prescribed measures on how to comply with regulations but describing what needed to be complied with in the regulations. The reason for the implementation of the risk assessment approach was to ensure that the institutions are able to take ownership for their decisions by making processes and obligations with the customers.

Association for Savings and Investment South Africa (ASISA) submission
Ms Anna Rosenberg, Senior Policy Advisor of ASISA, said the company was formed in 2008 and represents most asset managers, collective investment scheme management companies, linked investment service providers and life insurance companies. In December 2014, the company had 121 member companies and manages R7.8 trillion of the regulated household savings pool. The company is mandated by members to proactively engage on policy, regulatory and other issues of common concern. The role is to ensure that the key contributions by ASISA members in supporting the nation’s savings, development and transformation initiatives are valued and recognised and ensure that as a collective our industry remains relevant and sustainable. It was concerning that the company had not been afforded an opportunity to discuss comments on the consultation paper, the draft Bill and had not seen any response document to comments made on the draft Bill to National Treasury and the FIC.

Ms Rosenberg added that FATF documentation refers to the importance of on-going engagement and consultation with private sector. In principle – there should be a robust consultation process between regulator and regulated entities. It is fundamental for ASISA members to have consultation provisions in FICA – these should be similar to clause 97 of the Financial Sector Regulation Bill. There is provision for consultation between FIC and public bodies but not for consultation with the private sector. The Bill does not provide for a country risk assessment to be conducted and results thereof to be published to assist accountable institutions in sectoral and institutional risk assessments and it necessary to assist accountable institutions (AIs) with formulation of the required Risk Management and Compliance Programme. There is also no specific indication of how the Amendment Bill will affect regulations and exemptions as well as guidance, directives and Public Compliance Communications (PCC’s). In conflict with a Risk-Based Approach (RBA) –there is a need for amendment or repeal before the effective date of the amendments, an integral part of the compliance requirements of FICA. The Bill needs specific indication of changes to regulations and exemptions to fully assess the impact of amendments.

She pointed out that in clause 14 of the Bill – Records may be kept in electronic form and by third parties and must be kept in the Republic, one must be able to swiftly retrieve stored records in order to provide them to a client or competent authority. In today’s technological environment, records can be stored in a cloud facility. South African companies host databases for foreign countries and vice versa. ASISA submits that the requirement should be that the records are easily/readily accessible from South Africa.

It also highlighted that there is no indication in the Bill of transitional arrangements. The major concerns about the Bill for ASISA members included:
- Changes to processes and documentation
- Training of staff
- Engagement with independent intermediaries
- Large scale system changes which need to be planned and scheduled far in advance
- Request a minimum implementation period of 18 months (a phased implementation may be possible to be decided in consultation with AIs)
- Increase compliance burden significantly and will lead to an increase in costs (ultimately borne by clients)
- Doubtful of significant benefits in combating Anti-Money Laundering and Counter Finance Terrorism in relation to costs
- Increase in specialised resources to implement, monitor, train and maintain more specialised processes.

Discussion
Mr B Topham (DA) asked which Act that was referred to in the submission that focused on the sharing of information between government institutions and AIs.

Ms Rosenberg replied that this referred to clause 30 of the Amendment Bill which amends section 43(a)(1)(b).

The Chairperson pointed out that the Bill was introduced late to Parliament. It was not as if stakeholders had not been properly consulted in order to make their inputs. Parliament had taken measures to reach out to all the interested stakeholders who wanted to make their inputs on the Bill. It was becoming a theme for most stakeholders to come to Parliament and mourn about not being properly consulted. The stakeholders played their role in the deliberation of any bill but it was MPs that were mandated to ultimately legislate.

Ms D Mahlangu (ANC) agreed with the Chairperson that it was completely unacceptable for any stakeholder that had made a submission in public hearings to complain about lack of consultation. The Committee together with Treasury had been emphasising the importance of consultation with different stakeholders. It was indeed true that the public should be properly consulted in the processing of any bill but it was also important for Treasury to precisely explain the process of its consultation with stakeholders.

Ms Rosenberg responded that ASISA was willing to comply with the principles that had been set up in the Bill as the regulations in the money laundering measures also benefit insurance companies and investors which are members of ASISA. It was obviously difficult to balance the achievement of regulatory objectives but it was still unclear whether the regulatory objectives would be achieved in a cost-effective way. There was a need to comply with international regulations on money laundering but companies also need to be assisted on where they would get reliable information instead of relying heavily on Google.

Ms Tobias responded that the Department of Home Affairs (DHA) and the South African Police Service (SAPS) were trying to synchronise this information and this could also be helpful in cases where the police are looking for an undesirable person. It was indeed still unclear how the information would be made available to do an assessment of the customer instead of using Google.

Mr Smith highlighted that the risk assessment at the country level was critically important and this was not something that could be written in to the legal framework as it is something that could be done within the government structures by assembling different information and coming to a conclusion on emerging risks and solutions.

ThisIsMe submission
Mr Juan Furmie, partner at ThisIsMe, a company that verifies identity online, indicated that technology exists to leapfrog and achieve global standards and “the risk approach” is the correct one. However steps must be taken to correctly verify information collected by AIs from multiple and changing sources, to ensure fraud, money laundering and other activities become more difficult to perpetrate. The ongoing due diligence requirements have been introduced (section 22), however these could be expanded on, in particular to include a “heartbeat” (or sign-of-life) in the data and review of information for customers. This is exceedingly important given the rise of identity fraud on recently deceased individuals. The majority of information collected by AIs is taken at face value. The Bill should foster a modernised culture of compliance to include true identification of customers. With increasing business being done remotely, the Bill should address non face- to-face verification requirements and technology should introduce methods of establishing information, for example smart phone location services.

Mr Furmie highlighted that the administrative burden will increase drastically for AIs, however the use of technology can assist in reducing this burden for both the institution and the consumer, through:
- Streamlining the collection of compliance documents, especially through verifiable digital channels
- Programmatically verifying collected documents and data using trusted data sources (triangulation)
- Making available multiple and evolving sources of intelligence to AIs to assist in assessments
- Sharing intelligence resources with multiple AIs to detect fraud and suspicious transactions
- Raising a flag to all accountable institutions when suspicious activity is detected.

Mr Furmie said that the financial implications on institutions will increase under the Bill as the lists of international Politically Exposed Persons (PEPs) are expensive to reference and verification of international passports and identification documents are costly and difficult to validate. Other additional costs implications included the fact that the systems to verify legal residence are not sufficient (but are improving) and increased compliance requirements could drive away consumers and loss of revenue. There is a general belief and ThisIsMe submits that costs can be reduced through technology companies specialised in verification. However private operators should be scrutinised and endorsed by the FIC so as to be effective and acceptable to institutions and the FIC.

Compromised data leads to identity theft, which leads to financial crime, of which proceeds can be used to fund terrorism and other crime. It must be noted that not all institutions have the resources or technical ability to secure this stored information and consumers cannot always trust clerks and AI staff to handle their personal information responsibly. The increased reliance on often the least trained and youngest resource, to validate without recourse, cannot be allowed to continue. The need to include the customer in the verification processes is more prevalent now than ever to gain consent from individuals for processing of personal information - Protection of Personal Information (POPI) Act.

Mr Fumie noted the ThisIsMe conclusions and recommendations which included:
- Consideration should be given to authorising private third parties beyond simple storage functionality, e.g. storage and data validation and verification
- Accountable Institutions can manage costs and resource more effectively
- The Bill should encourage multi-source information verification
- Consideration should be given to countering identity theft as this leads to financial crime
- Consideration should be given to authorise shared early-warning systems and true identity verification systems
- Different industries interact with their customers differently (e.g. remotely, infrequently, etc.).

Discussion
The Chairperson reiterated that perhaps the reason most stakeholders had been complaining about lack of consultation was because they had not been getting what they want from the Bills tabled in Parliament.

Ms T Tobias (ANC) repeated that perhaps it would be best for Treasury to clearly explain the process of consultation so to allay the fears of those that had been complaining that they had not been properly consulted. There was a complaint previously that some of the adverts published for comment on bills had appeared in the classifieds section of the newspapers and this section was often ignored by people who were not looking for jobs.

The Chairperson responded that although the adverts for public hearings often appeared in the classifieds section of the newspapers, they also appeared in the main section of the newspapers. Parliament was not in control of where the advert for public hearing on bills should be located. There is a rule that any bill should be advertised in national and community newspapers using at least three different languages.

Mr Ismail Momoniat, Treasury, responded that he had a lot of sympathy for the submissions made today as there seemed to be a complaint about lack of consultation. Treasury was cognisant of the fact that consultation of stakeholders had not been adequate and this was where the Department needed to play its role in terms of disseminating information in order to reach a broad audience. The Department had had a lot of bills to deal with this year and this might also be a factor that needed to be taken into consideration.

Mr Momoniat said that it was important to craft the Bill in a way that it does not foreclose better options for the future which could also be cheaper and ultimately benefit customers. The only institution that was bigger than the banks in terms of data was the Department of Home Affairs (DHA) and this was where technology played a key role in the storage of data as highlighted in the submission. The underlying discussion that everyone should be having is on the kind of systems of technology to be opened up to in the future and the cost to be involved.

Mr Momoniat said that the verification of data was the big issue and this was where government was perhaps not engaging enough with other stakeholders including the DHA, Financial Intelligence Centre (FIC) and other role players. It must be noted that even the South African Social Security Agency (SASSA) required verification of personal data in the processing of social grants and this highlighted the importance of the verification of personal information.

Mr Momoniat added that there would be a need to relook at the consultation process as this was an issue that had been flagged in most submissions and there would be an engagement with different stakeholders. It was disappointing that ASISA did not communicate directly with the Department when it realised that there was a lack of consultation on the Bill. The stakeholders would be given access to documents in order to see the parts of the Bill that had been approved and those that had been rejected by Treasury. There is a lot of contestation around the Bill especially on the issue of Politically Exposed Persons (PEPs) and Personal Information Protection (PIP). It would be important to know from stakeholders if it was feasible to implement the list of PEPs that was so wide.

Ms Tobias stated that Digital Terrestrial Migration (DTT) might be beneficial to the country in many ways but there were other complex matters that needed to be taken into consideration when moving from one system to another. It was important for the Committee to know what was entailed in the intelligence system in the context of the Bill and this was to be juxtaposed with what had been said about “centralisation of information”. She made it clear that she did not believe in the centralisation of information as there was a need to have a back up of information in other files in cases of an emergency.

Mr Momoniat mentioned that the restriction of keeping the data in South Africa was a big issue and needed to be considered. There would be a need for centres to share the information specifically on PEPs in order to maintain a master list for other authorised AIs that have the obligation to report when they found the new person. He wondered if it was not possible to split the Bill so as to have a side that deals primarily with constitutional issues. This was to reduce the possible risk of the Bill being challenged in court for lack of proper consultation.  

Mr Smith responded that the Bill was not primarily focused on the storage of information as this was a completely different issue and it fits more so in the Protection of Personal Information Act. The Bill mostly dealt with verification of identity of international individuals and the access to this kind of information was expensive. In essence, the availability of information would be something that should be considered further by the Department and this could be done by working with different institutions like DHA and SAPS as suggested by Members.

Mr Dumisani Jantjies, Financial Analyst: Parliamentary Budget Office, pointed out that the RBA was always going to be a problem as it was mostly contextual. There is a need to avoid the situation where the costing would be pushed onto the consumers. Treasury was aware that any legislation would result in some form of cost and those costs tended to be passed onto the customers.

Mr Olano Makhubela, Chief Director: Tax and Financial Sector Policy, National Treasury, said that the Bill did go through a comprehensive social economic impact assessment and this could be made available to the Committee. The assessment was very positive and also stressed the benefits associated with the Bill. There is a general sense that the reputation cost would be more than the compliance cost and the cost associated with the institution that had failed to comply with the regulations is enormous. There is recognition that it is quite difficult to quantify reputational cost and damages.

Mr Momoniat suggested that the Committee should also be given the social economic impact assessment of the Twin Peaks Bill.

The Chairperson reminded Members that the Committee would discuss the Twin Peaks Bill in the next meeting. It would be good if Members could be given the social economic impact assessments of both Bills.

Tax Administration Laws Amendment Bill [B30-2015]: consderation
The Committee went through all the clauses of the Bill without any amendments. The Bill will be formally adopted later.

The Chairperson adjourned the meeting.

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