Financial Intelligence Centre Amendment Bill [B33-2015]: public hearing, National Treasury Response

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Finance Standing Committee

02 February 2016
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Meeting Summary

The meeting began with the Chairperson putting forward National Treasury’s and his view about the need to meet the constitutional deadline for section 42(b) of the Financial Intelligence Centre Act, but saying it would be better to process the Bill as a whole given that the invalidity flowing from the judgement would not put a stop to operations.

Banking Association South Africa emphasised the importance of the risk based approach, because under this approach institutions’ compliance will be varied based on their ability to determine low, medium and high risk clientele. This therefore allows the compliance burden to be shifted to where it is needed most. However, the provisions of the Bill do not allow this as the same due diligence requirements are required for all categories of juristic person and the sanctions for non-compliance are the same.

Further, concerns were raised about the introduction of the concept of Politically Influenced Persons above the internationally recognised Politically Exposed Person. This presented a problem not only in the scope of the definition which could not reasonably be complied with in certain hypothetical situations, but also because there is not available data sources for Politically Influenced People making compliance near impossible.

Association for Savings and Investments South Africa covered several points in the Bill including ones raised previously and new issues. The old concerns included the need for transitional arrangements due to the need for guidelines and processes to be put in place by industry. There was also the concern about accountable institutions having to keep all the records in the Republic which is incompatible with technology such as cloud storage. The Bill does not give effect to the Financial Action Task Force (on Money Laundering) (FATF) recommendation 1 on national risk assessment, although there was agreement with Treasury that this ought to happen. Lastly, an indication of the changes to the current regulations and exemptions is needed.

The new concerns focused on beneficial ownership and Politically Influenced People. On beneficial ownership it was argued that this information is difficult to obtain for insertions and therefore there ought to be a minimum threshold for shareholding for a person to be deemed a beneficial owner. On Politically Influenced Persons it was argued that the definition in the Bill is too broad and vague and a targeted list of positions and persons should be used to give proper guidance to accountable institutions.

Casino Association of South Africa highlighted the unique nature of casinos as accountable institutions in this environment. Specifically as the industry is already highly regulated, casinos are secondary accountable institutions as clients are required to gamble using their personal bank accounts which would be held by an accountable institution in the form of a bank. Further, that compliance with the transactional due diligence could impede the functioning of a casino to the extent that it is not profitable, because the flow of the games would be interrupted by the various record keeping activities which would be required. Lastly, the Association argued for the existing exemptions for the industry under FICA to remain in place as they allow a level of compliance which serves all interests.

BankservAfrica did not deal with the specific provisions of the Bill but instead gave an insight into the type of digital solution which could aid in the implementation of the Bill’s due diligence requirements. Particularly on the identification of Politically Exposed Persons.

The Law Society of South Africa was concerned that while the attorney’s profession may be a large whole, the component parts tend to be small if not only one person practices. Therefore, the compliance burden for such an institution to determine whether its clients are Politically Exposed or Influenced Persons could be an insurmountable challenge.

Compliance and Risk Resources highlighted the importance of having clearly defined criteria for risk, because of the detrimental effect of the tendency of institutions towards conservative risk responses, could have on access to financial services and financial inclusion for low value clients.

Corruption Watch spoke to the need for South Africa to comply with its international obligations accepted through the G20 Open Government Partnerships to establish a national and publically accessible registry for beneficial owners. Further, that while it is important to list beneficial owners it is also important to work out the intricacies of the definitions of effective control and indirect control. Concerns were raised about the definitions of Politically Exposed Persons and Politically Influenced Persons. Lastly, the dissolution of the Counter Money Laundering Advisory Council was seen as an impediment to interdepartmental information sharing.

One Campaign amplified the argument for the need to have a registry on beneficial owners as submitted by Corruption Watch.

The South African Reserve Bank gave a supervisory point of view to the concerns raised by the other organisations, particularly on Politically Exposed Persons versus Politically Influenced Persons and the ability for accountable institutions to comply, given the fairly extensive due diligence accountable institutions already have to undertake with regards to Politically Exposed Persons at present. SARB agreed that the requirement that records be kept within the Republic ought to be changed to accessible within the Republic.

The South African Revenue Service welcomed the proposed amendments, particularly the provisions around beneficial ownership, because this would aid in SARS complying with its obligations under the Common Reporting Standard.

The meeting concluded with a discussion of the process going forward for the Bill and what the practical implications are for the operations of the Financial Intelligence Centre and other supervisors.

Meeting report

The Chairperson said this Financial Intelligence Centre Amendment Bill (FICAA or the Bill) was partly prompted by a Constitutional Court decision in early 2014, which required it to be passed by both Houses and promulgated by 26 February 2016. He had discussed focusing only on the relevant clause which would allow the Bill to be passed promptly. However, it was agreed that the effect of not passing the Bill by the deadline would not be a train smash. The Bill should rather be considered as a whole. The budget process and State of the Nation Address (SONA) mean there is little time for Committees and probably by the end of the first quarter the Bill will be completed. Secondly, while public hearings were held the previous year, there was not enough time to hear all the stakeholders. He also apologised for the cancelation of the previous week’s meetings. He asked for Treasury to provide the Committee with a document containing both the stakeholder’s and Treasury’s positions on important clauses. This will assist the Committee in its clause by clause reading of the Bill, more than a summary of the policy issues.

Banking Association South Africa (BASA)
Mr Karmani Naidoo, Financial Crime Compliance Officer FirstRand, said submissions made up to now stand and agreed that the Bill should be passed as a whole. On 11 November 2015 sections 1, 21, 24(5) and compared them to them to the Financial Action Task Force (FATF) recommendations. It was felt that the Bill provides more onerous provisions regarding Politically Exposed Persons (PEPs), Politically Influential Persons (PIPs), simplified due diligence, beneficial ownership verification, consultation processes and implementation periods. BASA still believes these are issues here. It supports compliance with the recommendations of FATF. It earlier indicated that a further section by section analysis of the Bill, including comparisons with the FATF requirements, should be done; particularly regarding PEPs and beneficial owners. This has been done, but was not made available yet because BASA intended to workshop this with Treasury, but it could be made available. An initial engagement with Treasury, SARB and the Financial Intelligence Centre (FIC) on 9 December and a later one on the 29 January. At the later meeting a number of issues were agreed to be work shopped including PIPs and PEPs, ultimate beneficial ownership, ‘know your customer’, simplified due diligence and the risk based approach, including uneven playing fields. This would include discussions of areas of the Bill which are more onerous than FATF. BASA would still like to have these workshops and continue the engagement, however there are some new things which BASA would like to submit to the Committee.

Ms Yvette Singh, BASA Representative, again reemphasised the importance of the risk based approach. This is there to allow institutions to allocate scarce resources to targeted high risk clients and reduce the compliance burden for low risk clients. While the Bill makes provision for a risk based approach clause 21 provides for onerous and detailed customer due diligence requirements for all categories of juristic persons. This is in the words “must” and “addition to” in clause 21 and defeats the stated risk based approach. The anti-money laundering and terrorism financing differs from sector to sector and therefore it is proposed that those institutions who’s risk management and compliance programme have been approved by their supervisors be exempt from clause 21 (b)-(h) and section 42 (2), unless the supervisor decides otherwise. This means the supervisor will look at the institution and determine if it is satisfied that the institution would be able to identify its low, medium and high risk clients. Therefore, this means that the process of client identification is focussed at this determination. Other jurisdictions such as the US have customised their regulations for different sectors. The concern is that clause 46(a) administers sanctions for non-compliance with section 24 of Financial Intelligence Centre Act (FICA or the Act). This means that the compliance burden will be the same for high and low risk clients, which does not allow the compliance burden to be focussed on high risk clients.

Ms Singh turned to ultimate beneficial owner and the ultimate beneficial controller verification as prescribed in clause 21. BASA recognises that this requirement is aligned to FATF, but it will be difficult to implement because there is no database for verification of such details locally or internationally. BASA therefore proposed that international counterparts obtain this information by self-disclosure. This would require self-certification by the client through an organogram for example and has been done in other jurisdictions; as well as the 25% shareholding.

Ms Singh on prospective clients said the provisions of clause 21 provide that an accountable institution must establish and verify the client or a prospective client, when the institution engages such prospective client. Under the current exemption 2 of the Financial Intelligence Centre Act (FICA) prospective clients are exempt from the verification requirements. The inclusion of the words prospective engagement with the client and act of non-compliance in terms of clause 46(1). It may be that the institution does not which to do business with the client, because it has not passed its initial risk assessment processes. Under this section a lot of work will have to be done, otherwise the institution will be non-compliant. Therefore, it is proposed that the word prospective be removed from clause 21.

Ms Singh moved on to PIPs versus PEPs. PIPs presents a challenge, because there are no databases for such persons locally or internationally, while there is data on PEPs. Further, a client’s position may change during the course of their interaction with the institution, by for example winning a government tender. Further, South African banks are at a disadvantage where the stricter of the home or host requirements is applied. The inclusion of close associates and family members presents additional challenges, because this could potentially have a very wide scope. Although close associates is in FATF, BASA proposes a definition for this concept. An illustrative example is where the leader of a political party which is not a prominent, i.e. has no seats in parliament, opens a business account in respect of a business entity. The leader is married and has a step daughter who has a business offering a service to a local government department. The issues are whether the leader of the political party constitutes a PIP. Further, the definition of close family members in the Bill extends to step children, but would section 21(2)(c) and the definition of a ‘domestic PIP’ extend to the daughter in the example? The transactional value of such good or service is important and the Bill requires a low value tender undergo the same transactional due diligence as a high value tender. Another example is a foreign PIP who is a Deputy President and has a business and personal relationship with an attorney which has not come to the knowledge of a bank. The attorney then opens a business account where the foreign PIP is a minority shareholder. What would the implications thereof be? If it is overlooked the institution may be guilty of non-compliance. BASA therefore asked the Committee to consider splitting domestic PIPs and PEPs. If the definition of PEPs is completely aligned to the FATF requirements then the institutions could be fully compliant. Domestic PIPs needs to be discussed with NT to determine what the appropriate line items are required to meet their concerns in the absence of a database. Further, the supervisor should be given the power to extend the periods and deadlines for implementation in the Bill. This comes partly from the Banks Act where non-compliance with specific sections is condoned, because of the difficulty of compliance, because of an absence of the required information.

Ms Singh reiterated that the previous submissions by BASA stand and wants to workshop each clause in detail having submitted a detailed clause by clause analysis to Treasury. Further, BASA requests a preview of the revised Bill for comment, which would require an extensive period before implementation, because of the regulations, guidelines and many systems required.

Associations for Savings and Investments South Africa (ASISA)
 Ms Anna Rosenburg, ASISA Representative, said the key concerns in ASISA’s previous submission, many of which have since been resolved through meetings with NT, included the absence of requirements of consultations with the public. Treasury has indicated that it is in agreement and would model such on Financial Sector Regulation Bill. Further, the need for transitional arrangement due to the need for guidelines and processes to be put in place by the industry. There was also the concern that accountable institutions have to keep all the records in the Republic which is incompatible with technology such as cloud storage. It was agreed that the objectives behind that could be met in other ways. The Bill does not give effect to FATF’s recommendation 1 regarding a national risk assessment and there is agreement from NT that this needs to happen, but not necessarily that it ought to be in the Bill. ASISA members feel it ought to be in the Bill, as it is an underpin for the entire risk assessment approach. It is felt that if it is not provided for in the Bill, it may not happen timeously. Lastly, an indication of the changes to the current regulations and exemptions is needed. Most of these concerns have been partly if not wholly agreed upon, but there is still need to see what the revised Bill contains.

Ms Rosenburg said additional comments were mainly around minor points including asking for legally privileged documents to be excluded from inspections. She focussed on challenges for beneficial ownership and PIPS, because they are big new requirements in the Bill. ASISA still wished to workshop these elements, but have not had time to do so yet. The proposed section 21B establishes the requirement to establish and verify beneficial legal ownership. At present with corporate entities one will only look at beneficial ownership above a 25% shareholding. The requirement in the Bill goes much deeper, because there is no threshold and one would have to look at every single shareholder. If it is a legal person which owns the entity, then one must establish who the natural persons are behind that second entity, which could be an extensive exercise. Further, this information is not available at present in almost all countries. There is an entire movement towards transparency and beneficial ownership, because the industry understands this information ought to be provided and it is rather how to conduct the process. ASISA members are saying that until these records are in place there cannot be a requirement to establish who are the beneficial owners, aside from asking the clients. Further, a threshold is being requested of either 20 or 25% and that some corporates can be exempt given their extensive due diligence requirements such as JSE listed entities and their subsidiaries, as well as regulated agencies. This will help to reduce compliance burden without compromising the effectiveness. It is also important to align requirements with FATCA and the OECD Common Reported Standards, all of which relate to controlling ownership and can rely on the AML requirements in place in the country. So, if there is a threshold in place it will be simpler for companies to comply with these provisions. The proposed 21B (8) extends these requirements to foreign entities, which makes compliance even more difficult.

Ms Rosenburg moved on to PIPs, saying that the definitions together with the proposed section 21H which bring in family members and close associates are impractical, because there is no public database or source. This information will be difficult or impossible to obtain and therefore there should only be an obligation on the accountable institution to ask the client what the position is. ASISA members request that the definition be deleted or reduced in scope from local, provincial and national to simply national. This is standard practice internationally, with the focus being on senior officials. The definition currently includes a member of a royal family or senior traditional leader, which can also be difficult to establish. Further, the head or chief financial officer of a national or provincial department; a municipal manager; the chairperson, chief financial officer or chief executive officer of a public or municipal entity; or senior employees of companies providing goods or services to the state. This information is not available at all and ASISA believes the motivation behind the provisions are to deal with procurement and tender abuses, which can be dealt with through measures outside the Bill. The definition for foreign PIP refers to a senior judicial officer or high ranking military official, which are vague and difficult to determine. ASISA is requesting that once it has been established which are the most important provisions to include in the Bill, that there is an effective data source provided and updated by a government authority. This would be the most cost effective and efficient way to ensure compliance. On family members and close associates, ASISA felt close associates needs to be elaborated upon, because is this simply someone who has been affiliated with a PIP in the media and the definition of family member is also wide including a life partner which is a vague term. Also, the inclusion of previous spouse presents such a distant link that it would be difficult to establish.

Casino Association of South Africa (CASA)
Mr Themba Ngobese, CEO CASA, said CASA represents the overwhelming majority of licenced casino operators in South Africa, who collectively have contributed over R40 billion to infrastructure and 64000 direct jobs. Further, the members contributed around R5 billion in tax revenue over the past financial year.

Mr Lenny Reddy said casinos are highly regulated entertainment venues and are the only accountable institutions which are entertainment based. Casinos operate a very high pace, because of the numerous low value transactions and due to their nature casinos are largely paperless unlike other accountable institutions. Further, casinos pose a fairly low risk for money laundering or terror financing, because casino clients mostly transact by way of credit or debit cards issued by financial institutions after they have been FICA’d as clients of those institutions. Financial institutions are accountable institutions and therefore casinos are secondary accountable institutions. Other factors contributing to casinos being low risk is the submit ion of reports to the FIC and to the supervisory bodies. Casinos by law are required to determine a person’s net winnings to issue winners cheques following extensive internal controls. The casino industry is not aware of any money laundering or terror financing cases which have involved casinos. The exemptions which were granted to the industry have set the legal framework within which casinos operate. With the high volume entertainment environment, it was virtually impossible for casinos to comply with FICA when it was introduced. Effective collaboration between the FIC and industry culminated in reasonable exemptions being granted. These exemptions contributed to the design of casino operations and systems to give effect to FICA. It cannot be overemphasised that these are paramount to the casino industry and it is therefore imperative for the current exemptions to remain in force. Further, due to the entertainment nature of the industry it may be necessary to grant further reasonable exemptions in the future, to enable casinos to comply with the proposed amendments. Therefore, CASA submits that the comments made have always been and continue to be made in the view that the current exemptions will remain intact and where necessary reasonable exemptions will be granted.

Mr Reddy on clause 5 said CASA is of the view that the Counter Money Laundering Advisory Council played a crucial role to date, having given accountable institutions a platform to formally consult with the FIC. If the Council is dismantled, then it would be reasonable to expect that the Bill should provide for a mechanism for private sector participation. It is a concern to the casino industry that exemptions could be changed or repealed without the relevant accountable institutions being consulted. The only requirement proposed in the Bill is that the FIC must be consulted and the exemption regulations tabled in Parliament. These concerns could be remedied by amending section 72 of FICA to provide for consultation with affected institutions, prior to the amendment or withdrawal of existing exemptions.

Mr Reddy moved on to clauses 8 and 12, saying that casinos could comply with these clauses to the extent that existing exemptions remain intact. However, as casinos do not maintain business correspondence for the conclusion of single transactions, it would be reasonable to exempt casinos from the corresponding requirement. Alternatively, this could be remedied in clause 12 with the insertion of the words “where applicable” after “business correspondence”.

Mr Reddy on clause 14 said confining the holding of electronic records to within the Republic would prevent casinos from making use of cloud computing technology situated in foreign jurisdictions. This is due to economies of scale being available at more efficient costs abroad. CASA proposes that cloud computing based in foreign jurisdictions be permitted, provided the records are readily accessible in South Africa.

Mr Reddy said clause10, specifically the amendments proposing new sections 21F-H, relates to PIPs, PEPs and related persons. CASA submits that the proposed clauses are extremely onerous and impractical as they stand, particularly given the serious consequences for failure to identify the PIP or PEP or their related persons. Further, the determination of whether a person falls within one of those categories is required to be made pursuant to the Risk Management and Compliance Programme (RMCP), which requires absolute measures to be taken. The absence of verification databases further compounds the impracticality of having to identify the individuals concerned. Further, will the providers of such services if they exist, be able to indemnify accountable institutions for information being incorrect. The problems are amplified by the requirements for senior management approval for certain transactions, the determination of the source of funds which will not be readily available to the casino. To compound this further South Africa lacks information sharing legislation such as section 314(b) of the United States’ Patriot Act. CASA submits that in the circumstances it would be permissible for the legislation to only require that reasonable measures were taken to identify such PIPs or PEPs and that such identification may be met after the fact.

Mr Reddy on clause 27 said casinos could comply with the requirements of a RMCP if current exemptions remain intact and the Bill is amended to provide for reasonable steps to be taken rather than absolute measures as implied by the words “must enable”. Further, the RMCP is supposed to be based on a risk based approach, but the language of the section does not support this notion. The Bill should provide that a RMCP should only apply to a casino’s foreign operations if funds are transferred between its foreign and local operations. Lastly, no provision has been made for transitional arrangements or that the Bill will come into operation on a date later than the promulgation date. However, it must be appreciated that sufficient time is necessary for the establishment of the RMCP, training and system developments. Therefore, a minimum transition period of 12 to 18 months is proposed.

Mr Ngobese said the everyday perception is that money comes and goes out of casinos freely. However, the Committee and public need to know casino winnings are a specifically defined term and people need to have a winner’s check to certify their winnings in a casino. There is an audit process to verify that the person did play and won the money being claimed. From a money laundering perspective, the check is having to explain the money in the person’s possession. The FATM recommendations in relation to casinos were inspired by Macau, where most of the gambling was happening through third parties. In South Africa people cannot gamble in casinos using a company cheque or bank account and there is no playing on behalf of someone else. If a PIP wants to gamble, they have to physically play themselves. This will allow for camera coverage and compliance with other verification processes. Lastly, it is not a wise place to try and launder one’s money, because the risk of losing it is ever present and then only the money which has been won will be laundered, with the initial amount still having to be accounted for.

Law Society of South Africa (LSSA)
Mr Leon Rosseau, LSSA Representative, said the LSSA has looked extensively at the other submission and are in agreement with many aspects raised. One thing which he wanted to put into context was that the law society is perceived as a massive conglomerate, the profession is actually made up of a lot of single practitioners. 75% of the profession is made up of single practitioners. When there is talk of the accountable institution in the banking sector there are only a few entities, but the attorney’s profession is essentially small practices. There are a total of 10950 firms in South Africa, of which 6745 are sole practitioners. Therefore, it is submitted that the practical implementation of these amendments are onerous for the attorney’s profession. The sole practitioners on a day to day basis must go through a trying amount of compliance work and is difficult currently. Then the Bill adds further aspects, not all of which are disputed by the LSSA. However, due to the lack of resources faced by the sole practitioner in identifying a PIP or a person who the UN has declared to be affiliated with a terrorist organisation. Such attorneys may not necessarily have access to the facilities required to determine whether a person is a person of risk. While not opposed to the concept, on a practical level for an attorney to establish beneficial ownership or changes over times is difficult for a practitioner. In the ordinary course attorneys will identify and verify their clients, but the framework of a person can change over time. An example is establishing the founder of the trust, who may be dead or abroad and the Bill prescribes large administrative sanctions and criminal sanctions for non-compliance or not fully complying, which could be detrimental to the profession. The LSSA therefore proposes that there should be consideration given to separate regulation for attorneys. By for example prescribing turnover minimums, above which certain levels of due diligence will be required or where specific types of transactions are involved. The Bill at present is largely focussed on the finance environment and does not take into account the specifics affecting the profession or practitioner on the ground. The LSSA is encouraged by the talk of guidance notes which will allow for further engagement between the profession, FIC and Treasury towards specific guidance notes for the attorneys profession. An important note in this regard is that attorneys operate trust accounts and the only money which goes into the business account is fees or money which has been authorised for transfer from trust to business. The trust accounts and business accounts are held by an accountable institution and the trust accounts are subject to yearly audits. Therefore, attorneys are already subject to regulation in that sphere. The LSSA therefore submits that whilst collectively the profession may seem large, however the interface is actually with individuals. This suggests that varying compliance requirements would be useful, with the minimum stipulations being geared towards individual practices. Therefore, the LSSA would strongly suggest avoiding the unintended consequences of overburdening individual practitioners. While not exempting them, allowing for the nature of their practice. He noted that the LSSA had also made written submissions which elaborate on the presentation.

Mr D Maynier (DA) said as he understood it one of the key motivations for the Bill is to comply with a Constitutional Court decision around warrants. In NT’s original presentation it indicts that the Court has given Parliament until 27 February 2016 to amend FICA and comply. He wanted to know why in NT’s view is it not a “train smash” if the Constitutional Courts decision is not complied with.

Ms T Tobias (ANC) said she had a different opinion about third parties in gambling, because presently the South African National Lottery has a system of online registration with companies which will play lotto on one’s behalf and she was unsure whether CASA was aware of that. Secondly, CASA had said that if government were a shareholder they would hold 40% and she would like more information in this regard. Further, she said she was not privy to the US legislation on information sharing quoted to the Committee and asked for it to be shared. Particularly as she was aware that even in this Committee several trade agreements had been signed regarding information sharing and therefore she did not understand how South Africa was not compatible with this legislation. Lastly, there cannot be a separate legislative process manufactured for the LSSA. The South African legislative process ensures all legislation is interlinked and if the LSSA believes what the Committee is considering is in conflict with legislation passed by other Committees, then specifics must be given. Particularly, regarding regulation, because the LSSA is not the specific target of the regulation rather the Committee is regulating financial behaviour and transactions. Therefore, if there is a specific unintended consequence then it should be highlighted so that it can be debated. The LSSA’s only clear point is that the profession is made up by many single practitioners, but this goes more to how the profession is organised than the present Bill. The basic criterion for the Bill is compliance and the first step towards that is the entity being able to disclose. The LSSA had also indicated that it is already required to comply with accounting systems and could a document be presented comparing the LSSA’s current accounting practices and the Bill’s requirements.

The Chairperson responded to Mr Maynier saying when NT was before the Committee last year Members had asked why Treasury was coming at that point knowing that the Constitutional Court deadline was looming. Treasury responded that initially the Bill would be solely around those provisions, but then after considering the FATF analysis of the country the Bill was expanded. When he had spoken to them he indicated that the Constitutional Court must be treated with respect and so when NT says that it is not a “train smash” they are not saying that they do not respect the CC. Rather the effect would be that up until the Bill is passed, which could realistically be done by 1 May 2016, there will not be any inspections without warrants. Therefore, there will be a period of two months where investigations will have to be carried out with warrants. The implementation of the Act will not be substantially affected, as is often the case with other striking outs by the Constitutional Court. What NT would prefer, given that the process has begun, is that the Bill should be taken as a whole as the procedure to break up a Bill will mean it has to return to the Cabinet process and start again. Therefore, for several reasons the intention is not to disregard the Constitutional Court. Perhaps a letter should be written by the executive, as it caused the Bill to be late, to the Chief Justice indicating the position.

Mr Olano Makhubela, Chief Director: Financial Investments and Savings National Treasury, said the Chairperson is correct and Treasury does respect court orders. Secondly, come 26 February 2016, then certain provisions which are unconstitutional will become ineffective. This means that there are two options, either not undertake any inspections or undertake the investigations after having obtained a search warrant.

Ms Empie van Schoor, Chief Director: Legislation National Treasury, said the Constitutional Court confirmed a High Court ruling which stated that routine inspections for compliance can be continued, but supervisors cannot enter private residences or premises on a suspicion of criminal activity. There are other options to consider where a private residence or criminality is concerned. In most cases the institutions consent to the inspections, so there is no problem.

The Chairperson said the Committee would be guided by the Parliamentary legal advisors, but the period of ineffectiveness is eight weeks and could even be reduced. The problem is that it will be very hard and if necessary Members can sit and complete the Bill. He said that his problem was that Treasury had tabled the Bill so late and the Committee cannot be expected to simply rubber stamp it. While Treasury cannot reply in specific detail presently, a document would be prepared overnight, which would be sent to the presenters on with which they could engage. NT would not be held to that reply, as it is an initial, cursory and tentative response. The full response would be produced by the full NT team in writing. The Committee wants engagement right up to the last stage from the public and executive, but ultimately it must be accepted that Parliament holds the power to legislate. Further, NT states that it has engaged with the stakeholders and they in turn claim there has been insufficient engagement and once the Bill is tabled it is in Parliament’s hands. Therefore, they should be part of all these engagements. In future someone must represent Parliament, at least the researchers, but preferably a Member. Secondly, he also wanted an explanation of what is meant by the concerns around consultation in the Bill. On the burden of compliance of single practitioners and exemptions, he felt that if someone were seeking to do wrong they would use a sole practitioner because there is only one person to deal with. If the Bill is phased in, then categories of institutions could have varying requirements. However, there cannot be a special dispensation around the goals or values, but there could be differences with the processes. He asked whether the presenters were correct in saying that the Bill’s requirements are more onerous than the FATF or OECD requirements? Further, is the vagueness of life partner a real issue, because they would be people in a permanent relationship which has not formalised through marriage or a civil union. Further, did CASA speak to NT about their exemptions? NT should be able to reply, as in the gazetted version of the Bill the interactions would be listed. Has NT thought of transitional arrangements and phasing matters in, particularly for different categories? He noted that the Committee staff were noting the issues and as the Bill has been tabled the work must be done within its framework. Discussions can be held, but a representative from Parliament should be present and the work must be done by the Committee’s deadlines.

Mr Rosseau said the attorney’s profession is not opposed to compliance and have embraced the legislation since the beginning including the “know your client” campaign. As the Chairperson has said the sole practitioner is where people intent on unlawful behaviour would go, because it is easier. The LSSA does not propose that there should not be compliance simply because someone is a sole practitioner, rather there are factors in the background of the profession’s regulation. Attorneys are secondary accountable institutions and the attorneys and clients have already been vetted by the banks. The phasing in approach is an encouraging suggestion, because the attorneys will be swamped with compliance matters. On the accounting systems the business account does not have to be audited, but the trust accounts have to be audited. Further, the accounting profession produces more and more regulations annually. Firms have to complete this process, before they can get their fidelity fund certificates. Therefore, the LSSA has already imposed a measure of regulation. However, the LSSA is not suggesting that lawyers must be freed from the compliance, rather the concern is that the machinery for compliance is arduous.

Mr Busani Mabunda, Co-Chairperson of the LSSA, said the best practices for accounting systems will be made available to the Committee. Presently, attorneys go by IRBA standards.

Mr Ngobese said Ms Tobias should know that the lottery is not gambling in South Africa. A policy decision was made in this regard and it was decided that government should control the revenue generated by the lotto towards public causes. It is not regulated in terms of gambling legislation, but by the National Lottery Act. The third party playing Lotto permits is not in the gambling environment nor in the casino environment. On government being a de facto 40% shareholder, this comes about from looking at all revenue generated by the Casino. About 21% went to employees and government received 37% went to taxes. Lastly, the US legislation will be provided to the Committee Secretary.

Ms Singh said BASA supports the idea of transitional arrangements and particularly looking at the PIPs they are necessary as government would have to provide certain information before compliance is possible.

Mr ASISA on the absence of requirements to consult the public, said the FIC is empowered to issue directives, non-compliance with which can result in administrative penalties. ASISA’s concern is that there is no requirement for the centre to consult before issuing such directives, formulating guidance notes or regulations.

The Chairperson said he felt that was a reasonable proposal.

Ms Tobias agreed that the request is reasonable, but the legislation should not be that detailed. It should be taken for granted that the Centre will undertake to engage the public.

Mr Makhubela said Treasury does take consultation seriously and a policy document was shared with the industry which laid the foundation for the Bill. So NT had started consultation, before the Bill was even presented. The reality is that there will be times where there are differences of opinion and the best way to deal with those is for NT to indicate where its position comes from. This was where there was a challenge, because Treasury could not get the response matrix out in time. It did eventually get released, but at that point the Bill was already in Parliament. Once NT provides written responses to the public, it does help manage the concerns. There will be areas of disagreement and this is where Parliament ought to step in and make the final call. On the transitional arrangements, Treasury appreciates where industry is coming from. However, NT does not want to defer the implementation of the Act, because of the loss of momentum. Rather, NT would prefer the Act coming into effect and have the industry engage with the regulators to determine a timeline for implementation of various sections.

The Chairperson agreed and clarified that Members had not said that the Bill’s effective date should be postponed.

Mr Raymond Masoga, Director: Financial Integrity, on the Bill being more onerous than FATF said the requirements of the FATF include aspects which are non-negotiable such as doing business with an anonymous client. The concern is what financial institutions must do to effect those basic requirements. The Bill does not prescribe the how, because this is where risk based mechanisms come in. The FATF requirements are universal and therefore countries need to consider differing domestic circumstances and design appropriate measures. The FATF recommendations are effective at dealing with corruption, although that is not the primary objective of the Bill. Treasury put in some requirements which are important for domestic circumstances and the question is how there can be a collaborative effort with industry to ensure the provisions are implementable. The transitional arrangements could be the solution, but the issue should not be including things or not and rather should be how can the measures be made implementable. If this is not done, then the country suffers because of the peer review mechanisms built into FATF which measures the effectiveness of the domestic implementation.

Mr Pieter Smit, Executive Manager Legal Policy: FIC, said he felt one area where the Bill goes beyond the FATF is in not setting a threshold for once off business below which accountable institutions do not have to conduct the identity verification steps. In the FATF recommendations there is room to set thresholds below $50000. A policy decision has been made that there is no significant difference in the nature of the risk in once off business versus on-going business. Especially, in industries like real estate where the nature is once off. There is value in considering a threshold for business of this kind, but it will probably have to be a fairly low one and probably worth giving the Minister the ability to fix that threshold. On exemptions, from a policy perspective exemptions from legal requirements not a good idea. Particularly in this area, because by granting an exemption it is publicised that the regulators will not be looking for money laundering in the exempt industry. To achieve what is currently exempted in the Act a way of providing guidance to institutions should be found where the nature of their business would be less risky. For example in the legal profession litigation is not the type of business which lends itself to money laundering. However, setting up trusts or companies and buying and selling shares is the type of business which ought to be inspected. Government needs to work out with the industry where less due diligence is required and where the focus ought to be. The bottom line is that at no point is anonymous transacting allowed in the industry, because the key purpose of the legislation is transparency around who does business in the financial sector.

The Chairperson said the Committee has not come to any conclusions and Treasury should detail what are the FATF requirements and what has been proposed above these requirements. Presenters are welcome to contribute to this process and produce short summary documents themselves for the Members.

Mr Max Soklich, Head: Electronic Solutions BankservAfrica, said BankservAfrica operates the national payments system. In doing so BankservAfrica deals with sensitive information and has to ensure the highest levels of security. BankservAfrica deals with large scale volumes and enable economies of scale. It is proud to say that they maintain high service levels to ensure people are able to make their payments.

Mr Soklich said his presentation would not speak to the Bill itself that much, but how the BankservAfrica FICA solution looks to support the amendment Bill. The entire aim of the solution is to improve anti-money laundering and simplifying the FICA processes for all accountable institutions, the regulators and inspectors. Stakeholders taken on board in building the solution include the FIC, Treasury, the JSA, ASISA, BASA and the Financial Services Board (FSB) who have actively participated on the steering committee. More than 30 accountable institutions have been consulted including BASA, ASISA and JSE members, with more than 100 hours spent work shopping the solution to learn what was required by the accountable institutions. There has been direct input from Treasury and Mr Roelof Goosen, ‎Director: Financial Inclusion Treasury, has been chairing the steering committee. Turning to the service offering summary he said the solution was being built in a way which allows for the accountable institution to opt into services which suit their business. The solution begins with the on-boarding of accountable institutions, where their registration with the FIC is verified. Data provider on-boarding is the next stage where digitised information is requested from participating sources to respond to information requested by the accountable institution. Services include validation, which allows verification of information against trusted data sources. A subcommittee has been established to determine these sources. The second service is a proactive notification of customer data and changes to previously verified record. The aim is to allow consumers to walk into an accountable institution and go through an identification process without having to take physical documentation with them. The screening services allows an accountable institution to screen names against various lists such as PEP, sanctions and Interpol. Although as mentioned earlier the PIP list is not yet available. The adverse media service allows for the accountable institution to searches against a person on social media or press releases. The solution supports the amendment to the Act, because it supports verification of information digitally through trusted and initial data sources, such as the Department of Home Affairs for identity information. While the banks are the shareholders of BankservAfrica the intention is to allow other accountable institutions to gain access to a utility which would allow for allow an easier FICA process. This would be geared towards all customer types and include entities and individuals. Lastly, he noted that the solution would allow for the passing of information, but the compliance responsibility will remain that of the institution. The benefits to SA include improved risk management and reduced cost for accountable institutions.

The Chairperson asked whether the presentation dealt with the implementation of the Bill and asked whether BankservAfrica felt the provisions were too onerous?

Mr Soklich said as long as the data sources are available to the accountable institutions to conduct the verification will allow it to work. However, the accuracy and availability in real time are things which may need to be addressed.

Compliance and Risk Resources
Mr John Symneton, Director Compliance and Risk Resources, said the presentation focuses on inclusion and compliance challenges. As a compliance practitioner his interest was in the practical application of the law and research into compliance; including the implications of legislation such as the Bill. On the meaning of non-compliance as defined in clause 1, there is value in understanding this in the context of the risk based approach. The risk based approach by its nature introduces a level of uncertainty. In a rules based approach it is easier to determine what compliance is needed. His present interest was to highlight the impact of risk on people’s access to finance. The concept of risk is not defined in FATF 40 or within any of the governance. Therefore, South Africa is reacting to a frame of reference which has not been determined internationally. Inherent risk, which is without mitigation, and residual risk at an institutional or national level has implications for access to finance. This brings the consideration of risk appetite forward and does the country or institutions have risk appetites and at what levels. Compliance risk, money laundering risk and terror-financing risk are all fundamentally different things. The regulatory framework should address them and define them for the purposes of compliance with the Bill. A national risk assessment has been mentioned, but even when such an assessment is undertaken it does not necessarily mean that there is a lot of information for institutions to make risk decisions on. The international standard requires institutions to do more for higher risk clients through enhanced due diligence. Institutions may do less in respect of lower risk clients, but in the frame of the Bill this is not addressed and how this is understood will have a fundamental impact on the compliance responses of institutions and therefore access to finance.

Mr Symneton on the RMCP where each institution will develop its own risk responses and the above definitions come into play. It is not simple and can be costly in regard to lower value accounts leading to an impact on access to finance. The role of a compliance function is to assist management in discharging their responsibilities. The insertion of section 42 A places the responsibility for compliance with those charged with governance, such as the board and this makes a lot more sense from a governance and compliance. Where there is uncertainty and risk may be interpreted by different institutions he wanted to know if there has been an impact study with the potential for access to finance to be impacted. Perhaps a lot of value could be found in such a study. On the exemptions already discussed, here the country takes responsibility for understanding risk and puts in place a frame of reference about where it is safe to do business from a compliance point of view. There is a large body of work which shows that institutions tend towards overly conservative compliance responses. It may be worth addressing this in the Bill or in guidelines.

Mr Barry Cooper, Tech Director Centre for Financial Inclusion, said he would give a perspective on other jurisdictions where risk based approaches have been implemented, particularly Malawi. Leading banks were interviewed to assess the impact of a risk based approach, especially on low income account holders. In Malawi the risk based approach was implemented with a limited transition and the banks discovered that the risk was transferred from a definable compliance risk which could be quantified and dealt with to a nebulous risk which could not be quantified and had no idea of the national risk was. In effect the leading banks took the view that the business case for low income accountholders is fragile at best and adding more costs onto that burden is difficult. Further, adding reputational risk into that matrix is fatal. They therefore deemphasised those accounts and it happened subtly with banks walking away from that business. The question to be asked is where would South Africa be at risk and what would the impact of a poor transition away from exemption 17 be. Especially for people with inadequate proof of address which is approximately 27% of the population. Further, South African Social Security Agency (SASSA) has 2.7 million grant recipients who do not have adequate proof of address who are currently accommodated under exemption 17. This paints the scale of the transition which needs to happen both within institutions and in the broader country. What happens after the transition? How likely is it that financial inclusion would increase, as much of it was done under exemption 17.

Corruption Watch (CW)
Ms Leeann Govindsami, Head: Legal and Investigations CW, said while CW had not attended the November 2015 hearings it had submitted written documents which were still relevant. CW is the transparency international chapter in South Africa and has been leading the way around issues of financial crime as part of the global campaign to unmask the corrupt. One of the focus areas for this project is to create awareness around beneficial ownership. Many submissions have been made around the difficulty in implementing the amendment, but CW wants to reinforce the importance of the issue. The proceeds of corruption, drugs and tax evasion are all changed through an international financial system with the aid of banks, lawyers, estate agents and dealers in luxury goods. These institutions may either be complicit, lack the information to verify their clients or not regulated effectively. The UN Office on Drugs and Crime estimates that between $800 billion and $2 trillion is laundered every year. Emphasising the importance of verifying clients and obtaining as much information about beneficial owners as possible. CW feels it is important to address the definition of beneficial ownership in both domestic and international contexts and to address some of the more general aspects of the Bill which require refinement to meet its objectives.

Ms Govindsami on beneficial ownership said although the FATF recommendations provide guidance for the Bill’s provisions, South Africa has made binding commitments as part of the G20 to the Open Government Partnership. These commitments inform the FATF recommendations and in October last year Cabinet approved the endorsement of the G20’s high level principles on beneficial ownership and transparency. These G20 principles operationalise measures which each member county must take to prevent the misuse of legal persons and arrangements around ownership. The implementation of these mechanisms will be subject to self-assessment, while a reporting mechanism carries out a bi-annual analysis of the countries’ activities. The FIC is listed as one of the key institutions responsible for these commitments and it is important to note that while the FATF provides guidelines South Africa’s commitments as part of its country action plan provide much more information on their implementation. In South Africa’s most recent country action plan a firm commitment was made to establish a national public register containing information on legal persons and arrangements. Essentially it would contain companies’ shareholding arrangements, trustee arrangements and other legal structures. CW understands that the Department of Trade and Industry will be spearheading this initiative and applauds the steps taken towards the creation of this register. However, it is concerned that despite this register there will still be significant gaps in the identification of beneficial owners which could be addressed by the FIC.

Ms Govindsami said the definition of beneficial ownership does not include effective control or indirect control and this should be made clearer. What is clear from the Bill is that it recognises beneficial owners as being more than those who are legally entitled to benefit from legal persons and therefore accepts that natural persons may directly or indirectly benefit and have effective control over the entity. In CW’s view even though the Companies and Intellectual Properties Commission (CIPC) may create a public register from its register, it may not contain information on natural persons who exercise indirect or effective control over companies; depending on how these two terms are defined. CW feels the facilitation of information obtained or provided to the CIPC by accountable institutions will provide important information on who benefits directly or indirectly and controls legal persons. The sharing of this information at an interdepartmental level is important for closing the loops which currently allow the channelling of funds. While it is understood that sensitive information should be confidential, CW feels public access to some of the information ought to be facilitated. Such as information about administrative sanctions meted out to non-compliant institutions, the outcome of referrals to the National Prosecuting Authority (NPA) and other information which would make the processes followed by the FIC more transparent. Further, CW and other civil society organisations carry out their own investigations and sharing of information would aid this. Essentially under this head CW wants to highlight the gaps that would exist even with a CIPC public registry and urges the FIC to fill these gaps by facilitating better access to information, in order to comply with South Africa’s Open Governance Partnership commitments. A father point here is that there should be inter-departmental cooperation, because it is important for accountable institutions to have access to the CIPC’s public registry and up-to-date information.

Ms Govindsami on the definition of domestic and foreign PIPs said CW is concerned about the inconsistent terminology in relation to family members and close associates. The UN Convention against Corruption defines a close associate as natural persons and companies, while FATF only mentions natural persons. The UN Convention leaves the exact definition open, but CW feels that these categories must be further defined. The current definition on PIP places emphasis on influence being defined by leadership roles in public institutions. This was felt to be limiting and should be expanded to public functions considered high risk.

Ms Govindsami on the dissolution of Counter Money Laundering Advisory Council, said CW is unclear how the work of the FIC is to be coordinated with accountable institutions or government departments. While there are existing inter-departmental bodies these are quite specific and CW is concerned with ensuring holistic, practical measures towards information sharing and gathering especially in light of the FIC’s increased powers. CW is concerned about state departments which may not necessarily form part of existing anti-corruption task teams, but would have information to provide to the FIC and accountable institutions, such as the Department of Home Affairs. From CW’s own investigations it has been seen how one individual can have several identity numbers. She was unsure to what extent the FIC facilitates information being fed back to accountable institutions or creates channels of verification for accountable institutors to be able to implement the Act.

Ms Govindsami on the changes of penalties for non-compliance from criminal to administrative sanctions, said CW is concerned that these amendments will diminish the severity of non-compliance sanctions. It proposes that the Bill distinguish between lesser and more egregious acts of non-compliance. It is important for the public to understand the FIC’s processes around this and what repercussions exist for people who shield individuals or entities. CW encourages a visible policing approach to encourage reporting and deter activities captured under the Bill.

One Campaign
Mr Theophilous Chiviru, Policy Officer One Campaign, said One Campaign is a civil society organisation which works globally with governments and institutions to try to bring more transparency to processes and issues of corruption, illicit financial flows and corruption. The issue of beneficial ownership is of paramount importance to civil society, because of the amount of money which is being lost by African countries due to money laundering and illicit financial flows. In 2012 South Africa lost around $29 billion to money laundering and illicit financial flows. This amount accounted for 8% of GDP and is a red flag that beneficial ownership must be thoroughly investigated. One campaign has about 7 million members who have highlighted the need for the Bill to really assist in ensuring transparency and that the public is aware of who own what, which ought to be public information. There are many institutions operating the financial market in South Africa, but the public does not know who owns them and disclosure of beneficial ownership is key to dealing with this. One Campaign is calling for a centralised public registry of beneficial ownership information. In its current form the Bill speaks of accountable institutions keeping this information leading the question of how the public would be able to verify that this information is correct. The only way verification can be made is through a centralised registry system. This will also bring greater efficiency in verifying accountable institution’s information and would give room for the public, media and civil society to verify the information. Given the number of multi-national corporations operating in South Africa a centralised public registry would allow for international access. This will also help investigative processes, because the SARS and the police would be able to investigate faster as they will not have to request information from the institutions. Further, companies will not be alerted of the investigation. This Bill is an opportunity for government to harmonise the commitments it has made to other institutions, such as the G20 high level principles on beneficial ownership and the Open Governance Partnership. One Campaign applauds NT and FIC for putting in beneficial ownership requirements, because it puts South Africa on the same level as countries like Europe and the United Kingdom. In conclusion public registries bring more efficiency and enable other stakeholders to verify their accuracy.

Mr A Lees (DA) asked for clarity from BankservAfrica, because the presentation seemed to be about what that organisation can offer, rather than the Bill itself and he was not sure where that fitted in. Parliament is dealing with the Protection of Personal Information Bill and he was not sure how accountable institutions could rely on the service if it is not itself an accountable institution. On Compliance and Risk Resource’s submission, he said there is already a huge gap in FICA where local government counsellors leave signed letters of residence in the ward offices for people to make use of as proof of residence. This feeds into the statement that 27% of people do not have adequate proof of residence and is something which will have to be dealt with in the Bill. CW spoke a lot about the CIPC, which has a poor history regarding accurate data and is CW suggesting that this database should be trusted when there is so much evidence that in the past it was untrustworthy. To One Campaign, which submitted that public registries would create new economic opportunities, where do they see these economic opportunities?

Dr M Khoza (ANC) said the presentation by BankservAfrica generates the need to ensure that the public participation process is not compromised by not allowing what could be perceived as “ambush marketing”. That presentation should rather be made to NT than in the Committee, because it pre-empts the outcome of the legislative process. It should be avoided in her opinion, particularly as it did not say anything which is relevant to the proposed amendments. Secondly, she thought it would be important that CW puts forward a written submission, because she felt there were aspects raised which are very important. She believed that it would be important for Members to debate the definition of beneficial ownership. Further, that more engagement needs to be had on how to harmonise the current legislative process with existing legislation. As however much transparency can be lauded, it must be remembered that banks are constrained, because they are not allowed to simply disclose confidential information between banks and clients. The idea of linking this amendment to illicit finical flows is important, because if Members do not do so they may drop the ball. While the process is largely in response to the Constitutional Court judgement, as the opportunity has presented itself Members should cover other relevant aspects. She asked Compliance and Risk Resources to briefly define financial inclusion, because this is a dicey are where people may have different definitions in mind. In her former position as the chairperson of SASSA it was discovered that they had a different definition of financial inclusion from Treasury. She would like this explanation so that when the submission is considered what is meant by the impact on financial inclusion is not misunderstood. As much as she hear what Mr Lees was saying about the problems regarding proof of residence here, she honestly felt that ward councillors were not being used as effectively as possible. She did not think that Members could stop the legislation from going forward on the basis that there will be people who are financial excluded as a result. Particularly as there are there are mechanisms to deal with proof of residence.

Ms Tobias said the issue of infoswitch between various institutions has become so inherently intrusive in South Africa, due to the way personal information is passed between institutions without the acknowledgement of the consumer. How this data has been collected and verified has not been in the interests of the consumer. She wanted to flag certain issues for discussion raised by Compliance and Risk Resources. Firstly, how to quantify risk, which she was unsure was an issue but had been raised. Secondly, it was said that an impact assessment had not been done and she left it to NT to determine what it believes should be done. Mr Symneton had also said that risk had not been defined in the international context and this puts an onus on Treasury to engage on the conceptualisation of risk. She requested all the presenters to give an idea of what transitional arrangements should be put in place. Specific suggestions should be put forward, so that it can be taken into account by policy makers. She wanted to know whether One Campaign and CW have intelligence capabilities to do investigations. As they had said that the CIPC does not have the capacity to address the gaps in beneficial ownership, before they have gotten into the role which FIC is to play. Therefore, they are saying that they have investigated and come to the conclusion that CIPC cannot manage. Further, to what extent should government be allowed to inquire about who the beneficial owners of a company are? Is the intention to have a broad list of natural persons conducting business and does CW think government has the capacity. Is CW saying that it has the capacity to record every single business entity, its natural beneficial owners, their family members and close associates in their records? Or ought there be a record of the companies, how they transact and whether they comply with the legislation. What are the gaps in the public register identified by CW, so that the Committee can be on the same page. Lastly, she did not think that this legislation was intended to deal with the meting out of sanctions. The concerns raised about the definition of PIPs family members and close associates should be resolved when the Committee reads the Bill clause by clause.

The Chairperson said he had a procedural matter to raise, which was picked up by Dr Khoza. There was situation previously where he had had to stop a presenter in the middle of their presentation and ask what the relevance of their submission was and they in fact had none. The same question had arisen with BankservAfrica, but when he saw the stakeholders listed by BankservAfrica such as NT and FIC he felt that perhaps they had been sent by these stakeholders. The concern is that if one entity is invited, then what about their competitors and everyone must be heard. He did not think Parliament should be used this way and asked for the Committee Secretary to alert him where borderline cases arise. He asked BankservAfrica whether it was mandated by the institutions enumerated to speak on their behalf?

Mr Shegeram Naidoo, Head: Legal and Governance BankservAfrica, said he agreed that the presentation could be interpreted in the manner which it was by Dr Khoza. The answer is that BankservAfrica was invited, following a written submission to the Committee. The relationship between BankservAfrica and the key stakeholders identified comes from the Jali Commission on Banking which proposed that a central FICA hub be established. On the point, BankservAfrica did not come before the Committee to engage in ambush marketing and would be loath to be charged of such activity.

The Chairperson said BankservAfrica has brought value, although inadvertently, by showing that it is possible to implement the Bill. He wanted the public to know that the Committee is not supporting BankservAfrica specifically, because there may be competitors who are doing the same thing. It is for Treasury to monitor the implementation and Parliament will monitor this.

Ms Govindsami on trusting CIPC data, said it is acknowledged that there are always issues around data integrity, but the point there was that the CIPC holds certain types of information that could be made available in the public registry. Around the public register, this has been derived from the most recent Open Governance Partnership Country Action Plan and is one of the commitments that South Africa would compile a public register of beneficial owners to be run by the Department of Trade and Industry. All that is being said is that if the DTI is spearheading that initiative and information has been obtained from the CIPC, there is still additional information which could form part of what beneficial owners are under the Bill. That information to come from accountable institutions should filter into either the public registry or if it is sensitive information that there be interdepartmental sharing. The point is that there should be a distinction between information on the CIPC registry and on this registry.

Ms Tobias asked how is the Committee supposed to legislate a process issue? As this is an engagement between two institutions CIPC and FIC regarding information sharing. How could this be made an obligation in terms of the Bill.

Ms Govindsami said one of the things CW was concerned about is the dissolution of the CMLAC, which would facilitate this sort of information sharing and with its dissolution there is no such platform. Whether it is the Department of Home Affairs or CIPC providing information or information is being gathered by FIC, there has to be some form of sharing. In the absence of the CMLAC it is difficult to see how that is practically going to happen and therefore it is important that these processes are understood or are legislated either in the Bill or regulations. On the written submission, as the submission has been updated it will be re-submitted. On the beneficial ownership issue, the definition of beneficial ownership in the amendment is much wider than the legal owners of the company and CW is saying that effective control and indirect control are not defined. So it is difficult to pinpoint mechanisms to determine whether a person exercises control, because we do not understand what those terms mean. If one needs to verify people’s identities as defined in the Bill, there must be government capacity developed to support this. When reference is made about sanctions being meted out, what is meant is the sanctions administered by the FIC to accountable institutions. CW feels the public ought to be aware of who is receiving these sanctions and it is important that this become public information.

Mr Chiviru on beneficial ownership, said what is critical is that the FIC look for who is the person who actually own the company, rather than the person who legally owns the company. If there are several people who all own the company, then all those people should be listed on the register. The point is being able to track down how shareholders are conducting their transactions. In the United Kingdom because of the concern of having to list every single minor shareholder a threshold has been set of 20% shareholding and it is up to government to decide if they would like to place a threshold. What is critical is that this information is disclosed, because this is where the movement of money is happen at present, because the public does not know who is benefiting from the profit of the company. On how beneficial ownership will benefit the economy, there have been studies which show that the more transparent a financial system is the more investors it gets and it also builds trust and confidence in the system.

The Chairperson said there is no way that the state could manage to achieve all these things on its own and while there may be some NGOs which are unwittingly falling into a broader agenda, government needs to work with legitimate NGOs towards achieving these ends. The only problem is that NGOs sometimes want to co-govern.

Mr Symneton said the questions asked revolve around the definition of risk and there are two components to that. National level money laundering and terror financing risk where the international frame indicates threats and vulnerabilities. Institutions however are utilising definitions which come out of existing frameworks, which can have a negative impact on access to finance and conservative responses to risk. One of the questions was on the definition of financial inclusion and it is the provision of financial products and services which is appropriate and meets the needs of the underbanked and unbanked.

Mr Cooper added that the purpose is to promote welfare, rather than providing access for access’ sake.

The Chairperson reiterated that the Committee is leaning towards completing the Bill as a whole, despite the Constitutional Court’s deadline, although it did not wish to disrespect the court. Further that Members had the Financial Sector Regulation Bill before them and the Insurance Bill was forthcoming; there will be three other Bill coming up. He had been told by the Leader of Government Business representative that there are 17 Bills coming to the Committee in 2016. His response was if the Committee is absorbed with all this legislative work when will it get a chance to do oversight over SARS and Treasury. He wanted Members to think about this so that there could be a decision on how to structure the He said the Committee would not be doing 17 Bills this year.

South African Reserve Bank (SARB)
Mr Steven Makwanazi, Manager SARB, said he wanted to give the background to what SARB does regarding FICA, with three supervisory bodies currently within the SARB. This may change going forward, particularly in light of the Financial Sector Regulation Bill. SARB currently conducts supervision through a risk based approach and in the absence of national risk assessment or sectorial risk assessment mechanisms have been set up to assess risk before institutions are inspected. SARB visits the five largest banks three times per annum as it has been realised that most of the transactions happen there. SARB conducts both on and offsite routine inspections, which are planned and based on the risk assessment done by SARB. This is done locally and in foreign jurisdictions where South African banks conduct operations.

Ms Abigail Marshman, AML Manager: Banking Supervision SARB , said she would highlight some of the critical submissions made by SARB to Treasury, following the series of extensive discussions aimed at resolving issues. The aim is to give a perspective on matters raised from a supervisory perspective. On the PIPs provisions, the current requirements emanating both from guidance notes from the FIC and FATF, already compel banks to comply with due diligence regarding PEPs. In the Bill at present there is an extension of the known, FATF definition of PEPs. The ability for institutions to be in position to identify the individuals or entities falling within the latter part of the definition may be difficult, but SARB takes note of the transitional proposals. Within the current definition of PEPs, there is no indication of the rankings of influential officials within a state. There have been statements to the effect that this is problematic, but SARB does not necessarily agree. In the framework of a risk based approach it is the institution’s responsibility to assess the risk posed to it and so being too prescriptive does not necessarily reconcile with the idea that there ought to be an assessment of the risk posed by that individual and concomitant due diligence. Currently the regulations to FICA prescribe a host of information which must be obtained from customers and SARB believes that the extent of this information is sufficient to determine whether the client is a PEP. On the PIPs definition, currently there is no means of acquiring that information like members of royal families. Many banks currently screen clients against third party databases, alongside the customer onboarding information. For the most part mechanisms do exist for institutions to be able to comply. From a supervisory position SARB expects institutions to already have systems in place. On keeping records within the Republic, SARB has had discussion with Treasury in this regard and NT has agreed to revise the this provision more along the lines of accessibility within the Republic. This aligns to an existing guidance note by the SARB which already allows the outsourcing of certain processes and functions around record keeping. Whether it is a bank which is registered in South Africa which has cross border operations or a branch of a foreign bank, either way there is a huge amount of cross border information sharing, which is critical to the good governance and proper functioning of such an institution. Such a provision would inhibit the functioning of any institution which operates cross border. Lastly, on the implementation of Risk Management and Compliance Programme within a group SARB agrees with the provisions. The implementation of FICA within a group is an appropriate one as long as it applies to a higher standard. In the Banks Act and regulations, there are provisions which state that where a bank has operations off shore that as far as a provision of either jurisdictions of legislation the bank undertakes to implement the higher of the two standards. Some comments made earlier indicate that some of the provisions require more than the FATF and that implies that where the Bill’s requirements are higher these would extend to operations of South African banks in offshore jurisdictions which may have unintended consequences. SARB understands the concerns, but its supervisory ethos is of equivalence rather than equal. So if a foreign regulation requires due diligence on PEPs and ours requires it to be done on PIPs, SARB would regard those as equivalent and not be pedantic. The seeming disadvantage is not as much of a concern from the supervisory point of view. SARB realises that the implementation of the Bill will require a significant improvement to current systems and procedures. Particularly in the banking sector this is extremely cost and time consuming, both because of the volume of customers and transactions. SARB is open to transitional process on an institutional level, because it would be more prudent to have transitional arrangements which are based on case by case assessments of risk and relevant to particular institutions. There are some provisions where the Bill falls short from a international standards perspective and this puts south Africa at risk of a perception of being open to terrorism funding and money laundering. The sooner we can implement as much of this Bill as possible the better.

South African Revenue Service (SARS)
Mr Franz Tomasek, General Manager Legislative Policy, said when ASISA did their presentation they noted that this Bill has an implication for tax related issues, being the Common Reporting Standards. The reason this is important is that there is a new world of automatic information exchange and tax authorities around the world will be able to learn what is happening with their residents in other countries. South Africa is an early adopter of the OECD Common Reporting Standard, which means that it will be implemented from 1 March 2016. An important point regarding the Common Reporting Standard is beneficial ownership, because it is far too easy to put a company between yourself and the bank account making it difficult to see who the real person is behind the income. From SARS’ perspective the changes relating to beneficial ownership in the proposed Bill are very welcome. Looking at the Common Reporting Standard it states that when determining who the controlling person or beneficial owner is, the authority must have regard to domestic legislation around know your client and money laundering which presumes that local legislation is FATF compliant. However South Africa’s is not at the moment, but it will be once the Bill is passed. SARS is glad that the Committee will be working the Bill as a package and expediting the process, because this will help close the gap which exists regarding the Common Reporting Standard and meet international obligations.

Submission by Ms Ntombizonke Rosalind Nyamane
Ms Ntobizonke Nyamane made a submission covering various aspects Bill including certain definitions such as authorised officer, beneficial owner and Domestic PIP. She was concerned with how the Bill would gel with international law and its impact on herself. She also made a suggestion that the money collected through administrative sanctions be compartmentalised before going into the revenue fund.

Mr Masoga on the CMLAC, said most of the comments reflected a less than full understanding of the Council operated and the purpose for which it was set up. Looking at the Act as it stands, the main objective for the CMLAC was to advise the Minister regarding how they exercise their authority over the operations of the FIC. Although there is one provision indicating that the Council should operate as a platform for stakeholders to engage with FIC. NT’s take which informed the decision to remove it was the realisation that the Council has not functioned the way it was intended. What was clear from the engagements was that an alternative platform needs to be found to foster engagement. Including provisions from the Financial Sector Regulation Bill is being considered, specifically clause 97 -104, with the appropriate changes. This is essentially what the industry was after and Treasury is open to this.

Mr Smit said CMLAC was not involved in the flow of information between various government agencies. Analysis prepared by the FIC and shared with other government agencies did not happen through the CMLAC. That was an operational level function which happens on an ongoing basis. This is why the FIC participates in the Justice and Economic clusters. On central registries of beneficial ownership, the point is important, but not necessarily in the context of the amendments to the FIC Act. At a policy level it is something South Africa is starting to understand and identify with and is why it was included in South Africa’s G20 County Action Plan. However, such a registry is a much bigger anima; relating to how corporate entities are regulated and how that information is publicised. Not necessarily for the purposes of the FICA, but for a much broader purpose including revenue and corruption.

Mr Makhubela on the risk based versus rules based approach, said it was interesting to hear the challenges posed by the Bill for small entities. It is interesting, because he got the impression that a small law firm may do better with minimum standard compliance rather than a risk based approach. He understood where BASA is coming from about the need to explicitly reflect the shift towards a risk based approach in the Bill. A balance should be sought, because small entities may be served better by a minimum standard of compliance; while more sophisticated entities may be better off with a risk based approach.

Mr Ngobese said at times CASA feels that its regulator does not understand its industry. Despite numerous invitations, it took Treasury a while to come on board. The FIC has never taken up the invitation, which is disappointing as it would give the regulator an idea of how casinos operate and the controls which are in place. So that whatever regulation is put in place is based on that understanding of the operations. Further, there seems to be some confusion around whether the policy is to have a rules or risk based approach. The operations of a casino would not fit with a requirement to record the details of every person playing a game and their winnings after each instance. CASA’s position is therefore that what should be recorded is what a person brings into a casino and what they leave with. CASA therefore wants to take its regulator through the process, so that it can understand. As gambling is a form of entertainment and there is no obligation on anyone to play, if it is regulated too intricately the industry will simply collapse. Internationally, even with the Macau scenario, the FATF regulations provide for a threshold for transactions, but Treasury does not agree that there ought to be such a threshold. His basic plea was for the environment being regulated to be understood as entertainment, while balancing this with combating money laundering.

The Chairperson asked if there were less onerous requirements in foreign jurisdictions like the US?

Mr Ngobese replied that the only reason why the FATF standards were revised again, was because of the situation in Macau. It has been a bit loose in the US, where regulators have only recently moved towards a risk based approach the previous year. When South Africa was crafting its gambling legislation in 2004 it took lessons from other countries and he felt we still lead the pack.

The Chairperson asked whether the Bill is requiring more onerous measures than the FATF.

Mr Ngobese replied most of what FATF recommends can be lived with, but the problem arises where Treasury and FIC feel that the FATF standard is too low.

The Chairperson said Treasury and FIC would reply the following day, but Members should apply their minds. He would suggest that Treasury and FIC meet with CASA, because it is a specific industry which has been accepted into the post-apartheid dispensation.

Mr Lees asked why knowledge of beneficial ownership would be useful to SARS. He also wanted to know how the parallel negations which are happening between Treasury and stakeholders filters into the Bill. Will the Committee be asked to make amendments to the Bill, on behalf of Treasury?

Ms Tobias reminded the Committee that she had requested the stakeholders to make representations on transitional arrangements, because discussing whether a risk based approach is to be used is secondary to practically ensuring compliance.

Discussion on Process Going Forward and Compliance with Constitutional Court Deadline
The Chairperson on process, said he had consulted Treasury, the FIC and the parliamentary team which led to the question of whether or not to separate the Bill. He got the sense that the majority of the Committee was leaning towards going ahead of the Bill, with the understanding that it is not likely to meet the deadline. However, to do so in a way which communicates to the court that their decision is respected. It must be made clear that the Committee will work hard on the Bill to complete it by May. He asked for people to say what would be wrong with that approach.

Mr Makhubela said Treasury would be comfortable with that approach.

The Chairperson asked for a quick run through of what the court decided and what the practical effect would be of the proposed approach.

Ms Van Schoor said the Constitutional Court confirmed the decision of the High Court which found section 42 (b) of FICA unconstitutional to the extent that it allows searches for criminal activity or searches of private premises. It then read into section 42 (b) for a period ending 26 February 2016 a warrant requirement. It did however rule that FIC could continue with routine inspections to check for compliance and these could continue after 26 February. If they wish to enter private residences then a warrant could be obtained. This is why it was said that it is not a “train smash”.

Mr Smit said the important aspect of the judgement for FIC is that the court allowed a dispensation for FIC and other supervisors to continue work during the period given for amendment. It was not an order for amendment, rather the court read in provisions. When the deadline passes that reading in expires and the bridging clause which the Constitutional Court provided disappears. Therefore, supervisors will only be able to do certain types of inspections. This does not mean that the supervisor’s work comes to a standstill, because they can still continue with several categories

The Chairperson asked whether previously supervisors could enter private residences without warrants where unlawful behaviour was suspected, but with the lapsing of the reading in that now they would still be able to do it and to do so would have to obtain an ordinary search warrant.

Mr Smit said then the supervisor would have to convince a judicial officer that there is criminality happening there and the Criminal Procedure Act would be used rather than FICA.

The Chairperson asked whether in normal circumstances a judge would act fairly quickly.

Mr Smit said a warrant could be obtained fairly quickly.

The Chairperson asked how often such inspections are conducted and whether the lapsing would affect the supervisors everyday work.

Mr Smit said these types of inspections are done only in really exceptional circumstances.

The Chairperson asked whether a warrant would also be required for institutions or whether these could continue to be inspected under the Act.

Mr Smit said an institution can be inspected without a warrant, provided it is a routine inspection and not a specific inspection to check for particular wrongdoing. Even where looking for specific wrongdoing, if the institution consents then a warrant is not required.

Ms Tobias asked why the provisions allowing access without warrants was put in FICA to begin with. Her thinking was that there may be cases where an element of urgency or surprise is necessary and going through the warrant procedure would nullify that.

The Chairperson asked whether in the two months where there is no provision whether people will try to act unlawfully, knowing that the supervisors cannot simply swoop in.

Mr Maynier said it would also be useful to hear from Adv Frank Jenkins, Parliamentary Legal Advisor, about the possible effect of Parliament not complying with a deadline set by the Constitutional Court.

Ms Tobias said she had previously asked whether the element of surprise would not be lost and secondly what the effect is going to be on businesses which operate from private residences. There is knowledge of cases where false warrants were obtained in order to pursue people in a very unconventional manner which led to the Constitutional Court making the ruling. She did not want to see a situation where this important element of surprise is repealed and criminal activity becomes safe in private residences, but it must be done in a constitutional manner.

The Chairperson said personally he liked the element of surprise contained in the original Act, particularly given the number of leaks which occur in the criminal justice system. He then asked what Adv Jenkins’ current tentative consideration of the matter is around whether it is appropriate to proceed with the Bill as a whole and write to the Chief Justice informing him of the situation.

Adv Frank Jenkins, Parliamentary Legal Advisor, said what must be understood is the reason the Constitutional Court agreed with the High Court to strike down the provision was because it felt the provision to be an infringement of one’s privacy and dignity. Therefore it ordered that this cannot be done without a balance being struck between the individual’s rights and governments need to fight crime. It therefore read in a provision to allow entry into a private residence on a warrant. The FICA deals with inspectors, who are not members of the South African Police Service (SAPS) and they can enter without a warrant if obtaining the warrant would eliminate the element of surprise and there is reasonable suspicion that a crime is being committed. Therefore the surprise issue is covered, but if this falls away on 27 February 2016 then the inspectors will have to enter with a SAPS member under the Criminal Procedure Act. On what Parliament’s role is in meeting the deadline, firstly Parliament was not a party to the litigation and so the Speaker of the National Assembly could write to the court, but this is not really how courts communicate. His view was that the Department involved in the litigation should go to the Court and give cogent reasons and ask the court to extend the deadline. There should not be a problem with doing this, because the seriousness of the infringement on the rights has been taken away by the Court‘s reading in. If Treasury feels this is not necessary, then that is their view. His tentative thoughts were that Parliament should hold Treasury to account if their view turned out to damage the national interests of South Africa. Lastly, on respect for the Constitutional Court he felt it was not really relevant here, because it was not an order to do something failing which further rights will be infringed. The Court met Treasury halfway and circumscribed the power to bring it in line with the Constitution and failing passing the Bill it will fall away meaning that Treasury will have to make a plan with the Criminal Procedure Act.

The Chairperson said on previous occasions the executive, not Parliament, has approached the Constitutional Court for extensions. Personally he did not feel that the executive should seek an extension, rather they should write for information purposes. What is not wanted is for the executive to seek a three month extension, rather it is to be done as a courtesy. The Chairperson then declared the meeting adjourned.



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