The meeting began with the Committee trying to clarify its position on the clauses in the Bill which were the subject of the Constitutional Court judgement. The essence of the amendments to section 45B of the Financial Intelligence Centre Act were to remove the provision which allowed inspections without a warrant. Further, based on the principle that accountable institutions subject themselves to a regulatory system inspections at business premises to check for compliance would not require a warrant. However, inspections at private residences or where there was a suspicion of criminality a warrant would be required.
Members concerns about the amendments included the loss of the element of surprise because of the need to get a warrant. It was explained that where there was an urgent need to inspect, because information was being destroyed and waiting for a warrant would defeat the purpose of the inspection it could be conducted without a warrant, but this would be subject to challenge by the inspected party. Further, it was emphasised that the routine inspections under section 45B were mainly to check institutions for compliance with the Act more than to investigate a particular instance of wrongdoing.
The meeting the moved on to a discussion of the five areas of concern identified by National Treasury from the public hearings:
Here Treasury indicated that it understood the concerns raised by the stakeholders about restricting storage of records within the Republic.
The Chairperson questioned what the inspiration had been for restricting access in the first place. Treasury explained that the concern was accountable institutions arguing that the records were outside of the jurisdiction of the regulatory agencies. It was also a concern that storing records in other jurisdictions could potentially allow foreign authorities to access information about South African clients.
National Treasury was of the view that in order to move towards the risk based approach transitional arrangements would be required. These should be determined on an industry specific basis.
Members had a broad discussion under this head around the specifics of the arrangements to be made. In sum it was agreed that the transitional arrangements would not be effected by delaying the effective date of the Bill, rather it would be managed by the supervisors for each sector of the industry on the authority of the Minister.
National Treasury was of the view that there was no disagreement with the need to identify beneficial owners and the only concern was how to structure the requirements.
Members discussed the need for a threshold before a person became classified as a beneficial owner. A minimum shareholding was put forward as a possibility for the threshold. However, the Financial Intelligence Centre proposed keeping the current clause intact, because the crux of beneficial ownership could not be identified by a certain percentage of shareholding. Rather, it was important to determine the relative control a shareholder had in relation to other members. Further, the importance of the clause must be understood in the context of the risk based approach and that the accountable institutions only have to do what can reasonably expected under the prescripts of the clause.
Prominent Influential Persons versus Politically Exposed Persons
The Bill refers to Prominent Influential Persons (PIPs) and within PIPs there are various categories, including domestic PIPs and foreign PIPs. This is to a large extent what is required by FATF. The Bill also refers to private sector PIPs and the key is that even though the title is different from the international title the substance is pretty much the same. Where the Bill goes beyond the international definition is the inclusion of private sector PIPs and the debate is around how practical the this can be as there are no lists of private sector PIPs. This is where the Committee will have to guide Treasury. NT is in engagement with industry and there are some possible solutions to the issue. One is keeping both sets of PIPs, but acknowledging the problems with private sector PIPs and suspending those provisions until the right mechanism is in place.
Members had an extensive discussion under this head and were concerned about the definition of the term Prominent Influential Persons and the scope of person that it would cover. As the main criterion for determining whether someone falls into the category is whether they have access to public funds, the Members agreed on a more limited definition which would not include people such as trade union leaders.
A Risk Based Approach
Treasury felt the key point here is that the international financial regulatory environment acknowledges the importance of entities and supervisors moving towards a risk based approach rather than the more tick box style rules based approach. The challenge will always be whether a level of minimum rules is always required, because to a certain extent international trends do entail some minimum standards, allowing flexibility beyond that point. Treasury is engaging with the industry in this area and is one of the areas where further representations will have to be made to the Committee on the progress made. Parliament may also have to make a final determination on the matter.
Given that further consultation with stakeholders was required here, not much discussion was had by Members aside from agreeing that there should be a risk based approach with some latitude for rules.
Constitutional Court Judgement and Processing of the Bill
The Chairperson said the Committee had received a tentative and cursory response from National Treasury (NT or Treasury) and the ANC would put forward its position on the Financial Intelligence Centre Amendment Bill [B33-2015] (the Bill) later in the session, after consulting the Chief Whip. It would likely be what was agreed to the previous day.
The Chairperson requested Treasury to deal with the clauses which were the subject of the Constitutional Court judgement. While the content and approach were covered the previous day, he wanted to ensure the text of the Bill met the Court’s standard.
Mr Pieter Smit, Executive Manager Legal Policy: Financial Intelligence Centre, said clauses 32 (a)-(b) dealt with the constitutional issues and amended section 45B of the Financial Intelligence Centre Act (FICA). The amendments in clause 32 (c) and beyond dealt more with the type of information which an inspector may access, which was not dealt with by the judgement. In the Constitutional Court decision, confirming the High Court decision, the fundamental principle was that a clause which provided for an inspection without a warrant was inconsistent with the rights to privacy and dignity. The old clause 45B (7) stated that no warrant would be required for an inspection under FICA. The principle of the amendment was that a regulated institution, by virtue of being licenced was subjecting itself to the supervision of the regulator within the reasonable bounds of its business undertaking. The amendment provided that for licenced and regulated businesses an inspection to check for compliance with the rules governing that business could be without a warrant, as long as it was at the premises of the business. Anything outside of that scope, such as an inspection of an unlicensed entity carrying on business in an industry which was regulated would require a warrant. Further, inspection of regulated persons which operated out of private residences would require warrants. This is for pragmatic reasons, was because there were many small or single person entities operating out of homes such as estate agents or attorneys. Theoretically, the portion of the home used for business could be taken as a private residence.
The Chairperson asked about the element of surprise being lost with the need to get a warrant, but said it would not be lost in relation to a business premises.
Mr Smit said if in the registration process an entity disclosed a particular address as its business address then it was treated as such. From a pragmatic point of view, the Financial Intelligence Centre (FIC) believed it was safer to get a warrant relating to a business attached to a private residence. Especially as the records being sought may not be confined to the office in the residence and with the warrant the search would not be restricted. Whether to acquire a warrant would be up to the individual regulatory agency. The grounds which would have to be shown to obtain such a warrant included suspicion that a regulated business was being conducted at the premises and reason to believe there was a failure to comply with the applicable regulations. This would have to be supported by evidence under oath submitted to a judicial officer. The procedure for applying for such a warrant would be similar to that of a normal search warrant by way of an application directly to the judicial officer in chambers. If the party to be inspected objected to the warrant, the search would be stopped and the merits of the warrant argued in court. To maintain the element of surprise mentioned the proposed amendments included a provision which allowed an inspector to proceed with an urgent search without a warrant. If this was challenged, then they would have to explain why they believed they were justified in entering the premises without a warrant. This was a common principle which applied to search warrants in general. On whether it was a challenge to obtain such a warrant, this depended on the information available in a particular case. If credible information was available, the procedure was not a serious impediment. If reliable information was not available then the domain of questionable searches was entered and it could infringe on a person’s privacy and dignity. Overall it was believed that an appropriate balance had been struck in response to the judgement; maintaining the ability for regulators to supervise the industries they were responsible for while providing the necessary protection for a persons privacy and dignity.
The Chairperson asked whether under exceptional circumstances an inspection could be carried out at a person’s private residence if it was felt that a magistrate or judge could not be gotten hold of. Then the person could challenge the search and if they were successful whatever was seized must be returned.
Mr Smit agreed and said then a warrant would have to be applied for.
The Chairperson asked whether the procedure would be under the Criminal Procedure Act.
Mr Smit said it would be under the FICA as amended by the Bill.
The Chairperson asked what would happen if a case was not urgent, but a warrant was not obtained. By the time the person challenged the search in court, information had been acquired and this was done maliciously. How could the Committee be assured that the procedures would not be abused? His personal view was that the power should be there and if the person had nothing to hide then what was the problem.
Mr Smit said in circumstances where evidence of wrongdoing had been obtained through an unlawful inspection such as where there was no justification for not getting a warrant any reliance to sanction the institution would then also be invalid or subject to challenge, based on the doctrine of the fruit of the poisoned tree. The practical implication would be that whatever was obtained there would not be taken into consideration for a decision to sanction an institution. It would then have to start a proper inspection process within the requirements of the law. This was why there was the opportunity for the institution to challenge a sanction to raise these sorts of defects.
The Chairperson asked how supervisors were appointed to the FIC.
Mr D Maynier (DA) said if it was assumed that the proposed amendments were enacted, then what scope would there be for the regulators to conduct warrantless searches. He was uncomfortable with the FIC being able to conduct any inspections whatsoever without a warrant.
Ms T Tobias (ANC) said she was satisfied with the answer given, because she had been asking herself about a scenario where a seizure took place that was later challenged in court and declared invalid. The search would be based on intelligence which the regulator had, such as a pattern in a person’s finances and the aim would be to check for compliance. Her concern was to prevent people using the law to hide their wrongdoing. Further, it would not be the regulators alone doing the investigations. There would be a level of collaboration with intelligence gathering depending on the regulatory institution’s competencies.
Mr A Lees (DA) said Mr Smit had given a commentary on the clause, but had not linked this to the text of the Bill.
The Chairperson said this would be done in the clause by clause reading of the Bill.
Mr Smit, on the substance and scope of the investigations, said it was important to be clear that this was not an investigation into criminal activity, but an inspection into a person's compliance with FICA. The scope of the inspections is the institutions listed in the first schedule which must comply with the requirements of FICA, such as identifying customers and keeping records. Those were the institutions which were subject to the regulators’ inspection power. All the regulators responsible for the different types of regulated entities had the same inspections powers. The content of these inspections - contained in clauses 32 (a) and (b) - was to determine compliance with FICA or any of the subsidiary rules made by regulators under FICA. In other words it was to measure whether the institution applied the control measures, systems and processes to enable it to meet its obligations spelt out in FICA or any subsidiary rules. Anything beyond that which may relate to criminal activity, such as actively laundering money was beyond the domain of the regulators. That also went to the integrity of the appointment process for inspectors, which was spelt out in other parts of FICA. All FIC staff must be security vetted and inspectors must be specifically appointed and authorised to inspect by the head of the FIC. They were therefore specifically designated to carry out the powers of inspection and not just any member could do that. He supposed similar arrangements existed in other regulatory bodies for designating the persons who were to conduct inspections.
The Chairperson asked to go into a clause by clause reading of the abovementioned clauses.
Clause 32: deliberations
Mr Smit said clause 32 (a) proposed inserting a new section 45B (1). This subsection catered for the inspection of business premises and read “an inspector who is duly appointed under the FICA may enter any premises, excluding a private residence, of an accountable institution which is registered in terms of the registration requirements of the FICA or otherwise licenced by an authorised supervisor; may then inspect the affairs of an accountable institution for the purpose of determining compliance with the FICA…”.
The Chairperson asked where the provisions dealing with warrants were.
Mr Smit said it was contained in a further subclause.
Mr Lees said the new subclause was not reading well for him.
Mr Makhubela said anything in brackets was a deletion and everything which was underlined or boxed is an insertion.
The Chairperson said the Committee should not spend too long on grammar, as a small subcommittee would be set up to look at the textual structure of the Bill.
Mr Lees asked whether the bold text was being deleted and what was happening with the boxed words.
The Chairperson said that was where a paragraph was underlined it was being inserted and asked for the Committee to move onto subclause 32 (b).
Mr Smit said this subclause inserted a new section 45B (1) and dealt with the instances where a warrant was required and excluded the premises mentioned in subclause (a). It provided for an inspection of the same scope as subclause (a) which was determining compliance with the Act or a subsidiary rule. It then added “on the authority of a warrant an inspection may take place at a private residence or any premises other than a premises contemplated in subsection (1)”. It also added the grounds upon which a warrant may be issued and the process of application for a warrant which is “ a written application supported by evidence under oath” and the information must demonstrate the factors listed in paragraphs (b)(i)-(iii) being reasonable grounds for suspecting non-compliance, access to the premises or residence is required to obtain the information about the non-compliance”. Subsection 1(c) was also inserted into section 45B (1) which created the exception for urgent cases by providing for access where the consent of the inspected party was given and secondly where because of urgency or other exigent circumstances when such a warrant would be obtained if applied for but the delay in obtaining a warrant would defeat the purpose of the inspection. Lastly, a new subsection1(b) was inserted which laid down the manner in which an inspection must take place where it was done without a warrant. Specifically, that it must be done at a reasonable time and on reasonable notice. Either type of inspection must be conducted with regard to decency and good order, including respect for a person’s dignity and privacy.
The Chairperson asked whether a person could still challenge an inspection where they have given consent. Further, how would the consent be proven?
Mr Smit said the form of consent would be determined by each regulator itself for its inspection procedure. The FIC would obtain a written consent from the inspected party. Further, once consent had been obtained the inspection became legal and one could not then subsequently contest the inspection.
The Chairperson asked what percentage had been conducted at private residences since the inception of FIC.
Mr Smit said the FIC had not done inspections at private residences, because of the types of institutions which the FIC had mainly inspected were second hand car dealers. In some cases the FIC had done inspections in collaboration with the provincial law societies at attorneys firms which had also been at business premises.
The Chairperson asked what percentage of instances had the FIC not sought a warrant.
Mr Smit replied that surprise inspections had been done on second hand car dealers, but these were not at private residences, which could be done still.
The Chairperson said therefore the FIC had not really exercised the right to enter private residences without a warrant, except on rare occasions.
Mr Smit said this was correct for the FIC, but other regulators also had the same powers. The instance which led to the Constitutional Court decision was a surprise inspection by the Estate Agency Affairs Board (EAAB).
The Chairperson asked why that inspection was challenged.
Mr Smit said in that case the basis for the inspection was not clearly construed in the supporting documents for the decision to inspect without a warrant. In those documents the EAAB mentioned the purposes of looking for criminal activity such as money laundering within the inspected party. This created confusion between checking for compliance and inspecting criminal activity; which was the source of contention. This inspection could have been done without a warrant, because the premises were the registered business premises.
The Chairperson asked why if they fell within the regulator’s scope was a warrant required at all.
Mr Smit said in the Constitutional Court judgement, the section which excluded the warrant requirement was declared unconstitutional. It was held that there could not be a blanket provision under which a warrant was never required and there had to be a distinction between instances where a warrant was required and where they were not. At the time, FICA did not contain a requirement for warrant and the EAAB did not even consider applying for a warrant.
The Chairperson asked whether the challenge in the case was based on not using a warrant or was it based on the fact that the purposes which the EAAB stated were not the true purposes.
Mr Smit said the estate agent had simply argued that it was unconstitutional for a law to provide for a blanket power to search without a warrant. The purpose of the inspection was not in their arguments and it arose when the court considered the case drawing the distinction between an inspection for compliance and an inspection coming close to looking for something like criminality which could not be done without a warrant.
The Chairperson said he was becoming more and more unimpressed with the challenge in court, because if there was nothing to hide then what was the problem.
Mr Lees asked for an example of what would be considered reasonable grounds for not obtaining a warrant.
Ms Tobias asked if the Committee was discussing a policy imperative which arose from the invalidation of a piece of legislation or if it was inspecting the proposed amendments to ensure that they were in line with the judgement’s parameters. In order for the Chairperson’s view to be catered for a constitutional amendment would be required, because of the scope of right to privacy. She also had her own view on how it should be, but the thing was that when the Constitution was crafted, it was based on the way government institutions behaved under apartheid. She remembered a case where her door at home had been broken down in the early hours of the morning by the police without a search warrant. The law at the time protected those types of practices, but the unintended consequence at present was the limitation on the element of surprise. Particularly if regulators got excited and did not prepare for inspections properly. The constitutional question was not as important as the work which must go into the inspection beforehand. In this instance at least there was administrative justice in the event that the regulators had been found wanting and the courts could review the actions. As long as the element of surprise was there, then if there were qualms later there was recourse. The issues were more about the guidelines of how inspections would take place, rather than the scope of the provisions in the Bill. A fundamental principle had been explained to the Committee in that these were inspections to ensure compliance, which would guide the interpretation of the parameters of the inspection such as the reasonable time requirement. Her view was that the proposed amendments were within the law, due to the inserted limitations. The only problem would be where the regulators had not abided by these limitations. The Committee therefore could not use the case which inspired the Constitutional Court decision to question the amendments proposed.
The Chairperson said the Committee was generally in agreement that the amendments proposed were what was required by the judgement. However, nothing stopped the Committee from highlighting that there were instances which could only be dealt with through a surprise inspection. There was no intention to change the Constitution, rather a frustration was being expressed as some people got away with wrongdoing under the guise of the law. The broader issue was managing the broader public interest against some abstract right of an individual. Saying these things should not be regretted as the Committee was not undermining the Constitutional Court.
Ms Tobias said the point was amplified by the fact that where the search was unlawful, even if there was evidence of criminality it would be excluded as invalid.
Mr Maynier asked why there was no test? As the clause was directed at ensuring compliance, surely the inspector would only have cause to inspect if they had reasonable grounds to suspect non-compliance. Secondly, would Mr Smit confirm that section 45B (2) remain unamended. Such that where an inspector conducts a search without a warrant their power included causing any person to produce a document, opening any strong room or contained, use any computer system on the premises. That clause appeared to give the inspector vary wide powers to invade an individual’s privacy, without a warrant. He therefore wanted a confirmation that this section would stand. Turning to a broad question on the exceptional circumstances where searches could be done without warrants and there was a suspicion of criminality; was that consistent with the principle in the Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA) where there were circumstances where security services could intercept information? In those circumstances these security services had to apply to the relevant judge retrospectively for authorisation.
Mr Lees reiterated that he would like to hear examples of the reasonable grounds to inspect without a warrant. He was looking at the use of the words reasonable grounds in two slightly different contexts. In clause 32(1) (B) it was the magistrate who had to determine that there were reasonable grounds, while in (1) (c) it was the inspector who must make the determination.
Mr Smit said an example of the (1) (b) scenario, where a warrant was applied for would be where a person held themselves out to be a financial advisor and claimed they had access to a lucrative investment opportunity. If on further investigation it was clear that the person was not a licenced financial services provider then one already had reasonable grounds, because they were not complying with the FICA. This would be provided in evidence on oath to support an application. Such a person would most likely not be identifying their clients or reporting suspicious transaction. The reasonable grounds in subclause (1) (c) were about the timing of the investigation and the risk of defeating the purpose of the inspection if one first had to go to a judicial officer to obtain a warrant. These grounds would have to relate to something very pertinent in the inspection, such as information was in the process of being destroying or bank accounts were being cleared. This would demonstrate the urgency and show that waiting for a warrant would render the inspection useless. This was not something which would be demonstrated to a judicial officer, unless the inspection without a warrant was challenged. FICA did not provide for a retrospective process where after the fact one went to court and attempted to ratify or condone the warrantless inspection. Those reasonable grounds would only be considered by a judicial officer where the inspected party challenges the urgency of the inspection.
Mr Lees said in a case of (1) (c) how would the inspector establish that records were being destroyed or bank accounts were being cleared?
Mr Smit explained that the regulator itself or the inspector would have to be provided with that information. Someone would have to complain and the inspector would not independently secure the information. It would have to be credible information which the inspector believed would stand up to judicial inspection. On a test for section 45B (1), it was important to realise that 99% of inspections, particularly on business premises and in the context of the subsection, were routine inspections and there was no suspicion of wrongdoing or expectation of non-compliance. The whole purpose of the inspection was to test the compliance of the institution. That was a purely regulatory inspection such as where banks were inspected in the normal course of the supervisor’s business. Therefore there did not have to be an upfront expectation of a compliance failure before an inspection was justified. That was within the context of a licenced authorised institution which had subjected itself to by doing business in a regulated environment. This was the principle which lead to institutions having a lesser expectation of privacy in the regulated environment in one’s business conduct. Further, there had been no amendments proposed to section 45B (2) and the powers would apply to the inspection whether or not a warrant was required. Those were the sort of powers an inspector would need to sample test and verify the institution’s records and whether these business records in fact comply with FICA.
Mr Maynier asked for an expanded response to retrospective authorisations. Secondly, he noted that Mr Smit represented the FIC and intelligence gathering was quite a different remit from law enforcement. To him, the effect of the amendments seemed to give inspectors police powers and allow them to begin to investigate criminal activity. Why at the point where one suspects criminal activity, did the matter not simply become a police matter and be handed over to the South African Police Service (SAPS). Why should the Committee give the FIC essentially police powers.
The Chairperson said the Committee could not deal with the original Act and must deal with the amendments. Previously, Committees would look at the Act and the Bill and the Chairperson would take the overall responsibility to check cross references between the Act and the Bill. Therefore, Members should refer to the Act as it applied to the amendments being made. If fundamental issues were being raised, such as why inspectors had these types of powers, it raised questions beyond the purview of the amendments in the Bill. That was something which a Private Member’s Bill should be brought for. He would allow it, but it should be remembered that through this process the entire Act would not be overhauled.
Mr Lees said the previous day a lot had been said about routine inspections. He had looked at the Act and the word routine was used once outside the clauses being spoken about. However, routine remained unclear.
Ms S Nkomo (IFP) expressed a concern, that since Mr D Van Rooyen (ANC) left the Committee it had not had a whip. She requested a whip be appointed for the Committee.
The Chairperson said the whip would be appointed by Friday that week, although he was not sure how this would affect the Committee’s work as the whip only dealt with the ANC Members.
Dr M Khoza (ANC) said there was an aspect of Mr Maynier’s question which she did not understand, because she wanted to understand whether he was questioning a context where there is prima facie evidence of criminality or right at the inception of the onsite inspection.
Mr Maynier said his question was a high level question about the institutional arrangements and specifically where there is prima facie evidence of criminality why this was not simply handed over to the SAPS.
Mr Makhubela said the FICA was generally enforced by the regulatory bodies and the South African Reserve Bank (SARB) should be afforded the opportunity to explain how it practically enforced the Act.
Ms Abi-Gail Marshman, Manager South African Reserve Bank, said as a supervisor the SARB’s duty and utilisation of inspection powers to test institutions within its mandate for compliance with the primary legislation governing the industry such as the Banks Act and FICA. The regulator’s duty was to check whether all the legislative prescripts in FICA had been complied with, to get the accountable institutions to the end goal of being in a position to detect and report suspicious transactions to the FIC. The inspections were therefore a mechanism to see whether the processes in the institutions were capable of detecting and reporting suspicious behaviour. It was in very specific circumstances that an inspection would be conducted based on prior information which created a suspicion of criminality. The circumstance could however possibly arise, where the SARB came into knowledge that an institution or individual was operating without a banking licence and was taking illegal deposits. That would overlap into what would result in suspicious transactions which should be reported to the FIC, but there may be a circumstance where there was simply not enough time to go through the process of getting a warrant. Concurrently with the SARB processes, the FIC would be informed and the matter would be referred to law enforcement. At the point where SARB obtained any information from the institution it would be handed to law enforcement, because it was not within the regulator’s domain to pursue criminal investigations. In sum such inspections were done in very rare circumstances, while routine inspections were done in the ordinary course of business to determine compliance with the laws they were required to comply with. The institutions would receive notice in advance of the inspection and they would respond to that notice either accepting that the inspection or not.
Mr Maynier said the response made him question whether the clause was necessary at all or even desirable.
Mr Stephen Makwazi, Manager South African Reserve Bank, said that FICA aims to ensure that institutions are not abused for the purpose of money laundering and terror financing and that SARB helped to protect the integrity of the system. If a bank was abused in that way, then it affected the confidence of investors in the industry and therefore the regulator must ensure that the banks were safe. FICA helped to do this, in the sense that a regulator could put together programmes either on or offsite to ensure that banks at all times adhere to the principles of FICA which in turn is based on the FATF principles. SARB therefore had to put together a programme of what to do to encourage compliance. The focus was not going where it was believed that there was criminality, rather it was to ensure that banks had the necessary controls, processes and governance so that where they on-board a client or effected a transaction it was not abusing the banking system. SARB’s primary objective as a regulator was to ensure that the public’s deposits were safe and they could only be safe if criminals were not part of the system.
Dr Khoza wanted it to be confirmed that non-compliance was not necessarily tantamount to criminal activity. From her experience in the retirement fund industry she remembered the Financial Services Board coming in to inspect and would sometimes pick up weaknesses in the organisation's systems. The Financial Services Board would inform the organisation and ask for the weakness to be corrected. If corrected, then the system would work and it would not lead to a criminal matter. She asked whether this would apply in the present context.
Ms Marshman said that was the aim of routine inspections, testing compliance with the provisions of law applicable to particular accountable institutions. The majority, if not all inspections by the SARB had related to routine inspections rather than having prior information of wrongdoing. Even if the SARB were to became aware, it would be because the processes and systems of the institution had not enabled compliance as opposed to a suspicion of criminal activity.
The Chairperson asked whether the counterparts of the FIC elsewhere in the world had similar powers as those in FICA. He suggested that it was not necessarily the best idea to hand everything over to the police, because SAPS was a more porous organisation and other reasons.
Mr Smit said some counterparts had similar powers, such as in Australia and Spain, because they also facilitated a regulatory function. It was important to understand that in FICA the FIC’s functions were manifold and not just analysis or criminal investigations or support function, which was just one aspect distinct from its regulatory or supervisory function. The latter function was more important especially in industries which did not have their own regulators, such as motor vehicle dealers. Therefore the FIC was the de facto and lawful regulator for the motor vehicle industry as far as compliance with FICA was concerned. There the FIC was the same as the other regulators and these types of functions were why the inspections functions were there. The section also stipulated that the information gathered during the inspections was to be used for testing compliance with FICA and was not to be used for supporting a criminal investigation. Section 26 of FICA dealt with access to information under warrant for the purposes of criminal investigations, which FIC officials other than inspectors or law enforcement could undertake. This was the difference between purely regulatory functions and criminal investigations which the FIC handled. If in the course of a compliance inspection information pointing towards criminal conduct was discovered, then it could not simply be used in a criminal complaint. Rather it must be used as the basis to lay a formal complaint which would initiate a new criminal investigation governed by the normal law relating to criminal evidence gathering and procedure. This meant the stopping of one process and hand over to the Criminal Procedure Act governed investigation. On retrospective authorisation, there was no requirement for this under FICA where an investigator had done an inspection without a warrant. There was also no available procedure for getting such authorisation and the inspector therefore did not have to follow up with any further actions. The reason for this was the assumption that if the subject of the inspection objected, it was up to them to challenge that in a legal proceeding and put the inspector’s opinion to the test. It was not reasonable to expect an inspector to do so after the inspection had been carried out and the process closed off. Further, this was not the process applied to normal search and seizure under criminal procedure. On the use of the word routine, the word was not used in this context in FICA and in the development of this clause the team tried to see whether this would be a useful distinction. The challenge is that there was no neatly defined concept of what is routine for legal certainty, as it simply meant it was planned sometime in advance against the basis for the inspection. The amount of time to pass for the inspection to count as planned could not be determined and the term would therefore be arbitrary. The fact was that almost every inspection involved prior preparation and if there were six institutions priority would be given to the ones which the regulator had the most information on. All these things had a role to play in how inspections were planned and scheduled, but routine was still not useful to distinguish when a warrant was required or not. Therefore, the team rather chose to use the principled distinction of the inspection of regulated and unregulated premises.
Mr Lees said if that was the case, why was the word in the one clause of the Bill.
Mr Smit said it was in the current version of FICA to describe a situation where a regulatory entity had to inform the FIC of a surprise inspection rather than a routine inspection. The amendment proposed the deletion of the term, to avoid this very confusion.
Dr Khoza said her view was that routine should not be defined in the Act, because it has to be viewed within the entire risk management system which the Committee was trying to create. A strict definition of what was routine was inconsistent with the need to gauge a response depending on the risk level of an accountable entity. To one accountable institution routine could be several times a year and to another it could be once a year.
The Chairperson said on one hand Members said “we need to be tougher on criminal transgressions, but on the other hand they also say that the private individual needs to be protected almost at any cost”. He was not singling out anyone, but that was the latitude of the debate. He asked for an explanation of the rest of the amendment.
Mr Smit said subclauses (d) and (e) were also being amended, but did not relate to the Constitutional Court judgement and related specifically to the types of information an inspector could call for and the synergy between different regulatory entities inspecting the same institution. This was especially in relation to reports on suspicious transactions to the FIC and when a regulatory body later inspected that institution it would call for that report from the FIC. This confirmed the principle that inspectors had the authority to call for records of information reported to the FIC, by the FIC’s inspectors, SARB inspectors and those from the Financial Services Board. For other inspectors a test needed to be done to determine whether they were capable of protecting the reported information, because there were sections in FICA which regulated how reports to the FIC may be communicated to other parties. This was sensitive information and was protected because it could lead to tip offs. Subclause (f) deleted the clause which referred to routine inspections as mentioned earlier. Subclause (g) deletes 45B (7) which stated that no warrant was required.
The Chairperson suggested not spending too much time on the actual wording, but as far as the content was concerned the Committee had processed the matter. There may be disagreements about emphasis, but these could be resolved through a vote.
Mr Lees said clause 32 (d) dealt with section 45B(4) and it was deleting “or person”. Under this clause the supervisory body may recover all expenses related to conducting an inspection from the inspected party, regardless if it required a warrant.
Mr Maynier, suggested on process, as a constitutional matter was being dealt with, that the Parliamentary legal advisor should be asked to provide an opinion on whether the provisions as amended did in fact comply with the Constitution.
Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said he felt the provisions did comply with the Constitution.
The Chairperson said because the 27 February 2016 deadline would not be met what was in the Bill would come into practice and will become ‘legal’ after it was passed in May. In any case what the Constitutional Court decided was invalid could not be used and therefore it was not like other provisions which had come to Parliament which had huge implications.
Mr Lees clarified that he was asking about where the inspection finds that nothing was wrong at all and yet the institution could still be held liable for the costs of inspection.
The Chairperson said this would likely lead to a challenge in court.
Mr Smit said the exercise of this power must be reasonable and the FIC had a policy of not recovering the costs of inspections. Other regulatory bodies may do so, but it would have to be within the parameters of their policies.
The Chairperson asked whether anyone had ever challenged the use of this power and how long the FIC had been in existence.
Mr Smit said not to his knowledge and that the FIC had been in existence for 12 years.
Ms Nkomo asked for the Chairperson to meet informally with the Chairperson of the Constitutional Review Committee.
The Chairperson asked to move on to the broader policy issues of the Bill.
Briefing by the National Treasury on its Responses to the Public Hearings
Mr Makhubela said the presentation would first go through a high level analysis of the issues raised and then refer to the specific clauses involved. He emphasised that Treasury was seriously considering the input coming in from the public and they require careful thought. There was also the need to check with the other supervisors or regulatory bodies, to make sure they were comfortable with whatever policy decisions come out. Further, the difference s between NT and the public were more around the intricacies than the principles.
Mr Makhubela said financial crime was being emphasised internationally and concerted efforts were required to ensure that South Africa keeps pace with these trends. These international developments were largely driven by the Financial Action Task Force, which was the leader in anti-money laundering and counter terror finance. There were other influences from the UN stance on sanctions and the OECD’s work on corruption and beneficial ownership. South Africa as a member of these multi-lateral bodies is expected to keep up the standard. NT has identified gaps in the current regulatory framework identified through the mutual evaluation undertaken in 2009.The need for urgent improvement has been recognised, through the experience of the supervisory bodies in implementing FICA.
Mr Makhubela said five key policy issues had been identified from the public hearings:
Mr Makhubela said regulatory authorities needed to be able to access information when required and after following due processes. This was a key principle which was generally agreed to and the issue was around how best to access the information. Accountable institutions must ensure the security and protection of confidentiality of the information. This was required by the Constitution and at all times the Bill of Rights must be adhered to. NT and FIC appreciate that the development of technology and need for efficiency in the managing of information means it is becoming increasingly difficult to determine where information is stored. Treasury acknowledges that confining the storage of information to South Africa could pose certain challenges. Therefore, institutions should be free to choose the most efficient means to store the required information, as long as it was accessible to the regulatory authorities. In summary, NT heard the public and would propose to Parliament how best to tweak the Bill.
Mr Makhubela said the introduction of the risk based approach would require fundamental changes, not only regarding how accountable institutions manage their risk, but also how the supervisors discharge their supervisory functions. The management of transitional arrangements must be done on an industry specific basis and must be entrusted to the regulatory bodies to oversee. NT was in favour of the legislation coming into effect upon the President signing off, but this did not necessarily mean that institutions should be in compliance from that date. To do this some of the provisions can be suspended, but secondly various implementation plans could be provided to industry about when they should be try to achieve what. The idea was to keep the momentum, which could be lost if the implementation date of the Act was delayed. Lastly, NT would like to rely on the regulators to communicate these transitional arrangements as clearly as possibly to industry.
Mr Makhubela said again there seemed to be general acceptance of the need to identify beneficial owners and the question was how best to achieve this. International standards require a legal framework which compels accountable institutions to identify the natural persons who own and control legal entities. Therefore, it was important that accountable institutions understand the ownership and control structures of their corporate customers and identify the natural persons at their root. This requirement would have to be linked with the accountable institution’s implementation of the risk based approach and Risk Management and Compliance Programme (RMCP).
Prominent Influential Persons versus Politically Exposed Persons
Mr Makhubela said this was the area which had raised a lot of discussion. NT had decided that it may be best to use a slightly different title from the internationally accepted term which is Politically Exposed Persons (PEPs). The Bill referred to Prominent Influential Persons (PIPs) and within PIPs there were various categories, including domestic PIPs and foreign PIPs. This was to a large extent what was required by FATF. The Bill also referred to private sector PIPs and the key was that even though the title is different from the international title the substance is pretty much the same. Where the Bill goes beyond the international definition is the inclusion of private sector PIPs and the debate was around how practical the this can be as there are no lists of private sector PIPs. This was where the Committee will have to guide Treasury. NT was in engagement with industry and there were some possible solutions to the issue. One was keeping both sets of PIPs, but acknowledging the problems with private sector PIPs and suspending those provisions until the right mechanism was in place.
A Risk Based Approach
Mr Makhubela said there had always been a tension between principles, the risk based approach, and minimum standards, the rules based approach. The key point here was that the international financial regulatory environment acknowledges the importance of entities and supervisors moving towards a risk based approach rather than the more tick box style rules based approach. NT appreciated what was happening internationally and this would have been seen with Basel II which was introduced into South Africa in the early 2000s and will be seen in the proposed insurance legislation. The challenge would always be whether a level of minimum rules is always required, because to a certain extent international trends do entail some minimum standards, allowing flexibility beyond that point. NT was engaging with the industry in this area and is one of the areas where further representations will have to be made to the Committee on the progress made by Treasury. Parliament may also have to make a final determination on the matter.
The Chairperson asked for Members to identify any other policy issues which emerged from the previous session, apart from the ones raised by Treasury.
Mr Lees spoke to the question of prospective clients and the due diligence which a bank would have to do before it can on-board the client.
The Chairperson asked for this to be captured and then asked to discuss record keeping. He asked for confirmation that Treasury would be conceding and allowing the storage of the records in electronic form, without restricting it to the Republic. Did NT have any reservations in this regard?
Mr Makhubela said NT was completely in agreement and would be comfortable as long as the regulators have access wherever data is stored.
The Chairperson asked why that was not the case in the first instance and why these comments were not accepted in the first round of public consultations outside of Parliament.
Mr Makhubela said it was a fair question and he took the criticism.
The Chairperson asked which was the relevant section of the Bill to be changed. Further, he asked Mr Dumisani what other policy issues where identified the previous day by the researchers.
Mr Dumisani responded that the Committee staff were looking at the social impact assessment for the cost of the Bill.
Mr Maynier asked whether it was said that a regulatory impact assessment had been conducted for the Bill and whether the Committee had a copy.
Mr Makhubela said his understanding was that the study was publically available, but it would be tabled.
Dr Khoza asked whether the second bullet point under record keeping was linked to the issue of transparency.
Mr Smit said two objectives were a concern to many of the law enforcement agencies which dealt with information held by the FIC. The type of information which was required to be in a financial institution for the benefit of an investigating authority should be available when required. There had been complaints from prosecutors that they had arrived at accountable institutions with search warrants, but had been turned away because the information in fact was held in another jurisdiction. The other problem was that if the information was in a foreign jurisdiction, foreign authorities had access to information about South African customers doing business in South Africa. The crux was setting a minimum standard which achieved both those objectives.
The Chairperson said now it was clear why the provision was there in the first place. He asked how the concern about not having jurisdiction to access the information would be resolved.
Mr Smit said from a regulatory point of view a minimum standard would have to be set for access stating that information kept under FICA was subject to the jurisdiction of South African law, to overcome the argument.
The Chairperson said in effect the argument would be nullified. He then asked to look at the actual Bill and how it reflected the policy decision.
Mr Smit said clause 14 was the relevant clause.
The Chairperson said without a revised text the Committee would not be able to adopt anything and asked how section 22 (a) would be changed.
Mr Smit said the current section 22 did not speak to the location where the records must be kept and clause 24 spoke to the manner in which records were kept, which would result in the insertion of a subsection 5, which required records subject to section 22 (1) to be kept within the Republic.
Mr Smit said currently the Bill contained a long list of items which accountable institutions must keep records of. The proposal in clauses 12 and 13 was to distinguish between records which related to transactions and records which dealt with customer information. Clause 12 dealt with the record keeping obligations regarding transactional information as a new clause 22A and subsection 2 listed the type of information to be reflected in those transaction records. All that information must be reflected somewhere in the accountable institutions records. Clause 11 dealt with information on customers which was used for identification. Both of these types of information gave a picture of the customers financial activity with the institution. Customer information included data on the nature of relationship with the customer and information provided during the take-on process when the business relationship started including the source of funds to be used during the relationship.
The Chairperson asked for comments on the wording of clauses 11 and 12.
Mr Lees said clause 11 went back to clause 10 and there was an interrelationship and the issue raised by the Casino Association of South Africa (CASA) had not been brought up, which revolved around the recording of every transaction.
The Chairperson clarified that he had ruled that the Committee would be solely looking at record keeping being restricted within the republic.
Ms Khoza asked whether it was assumed that the accountable institutions would be keeping the records for a determined period or were they to be accessible whenever they were needed.
Mr Makhubela said his understanding was that the records had to be kept for five years from the date of the transaction.
The Chairperson recanted and said the Committee should perhaps look at the record keeping as a whole.
Mr Smit said the record keeping provisions were related to the provisions which came before them which stipulate what accountable institutions are required to do to identify their customers.
The Chairperson then decided that the focus should be retained on whether the records should be kept within the Republic.
Mr Smit said clause 24 stipulated how the records were to be kept and subsection 5 was the only prescriptive clause which required it to be kept in the Republic. Given the concerns raised, this would be the section which was to be deleted. It was not necessary to propose anything alternative to go into the Bill, but it would be along the lines of keeping records in accordance with the prescript of the regulatory authority. The supervisors should have authority in this regard, reading this with the consultation provisions in the Act.
The Chairperson said perhaps it could be necessary to state what was included in the generic clause, but he would tend towards stipulating the power for the sake of clarity. He asked how Members felt and after receiving no objections, it was agreed to.
The Chairperson asked for input on the issue of transitional arrangements.
Mr Lees said he felt there was agreement about the need for transitional arrangements, but perhaps there should be a proposal before the Committee before a discussion could be had.
The Chairperson said there needed to be guidance from the Committee so that the discussion did not restart. Firstly, he asked whether there was agreement that the Bill’s coming into effect would not be delayed. Further, transitional arrangements should not be confused with exceptions. The Committee had said that some clauses in the Act would not be implemented immediately and there would have to be some provisions which state that the Minister would regulate the implementation date for certain provisions, after consultation with the supervisory bodies and perhaps the public.
Ms Tobias recalled that in the previous day she had made a request for the stakeholders who had requested transitional arrangements to present their opinions after consultation with Treasury and the FIC.
The Chairperson agreed and said now the intention was to put forward suggestions to be the basis for Treasury and the industry’s discussion. The Committee must be clear what it was mandating NT to do. Will the clauses be identified which will be subject to the Minister’s regulation or will minimum standards be required from the beginning to be fully implemented later? There had been a suggestion that the transitional arrangements must be different for sections of the industry. If that was the case, how was that being identified? Thirdly, how did this topic relate to exemptions? Should Parliament not say that the Minister should have enacted those provisions within a stipulated time period. Further, if there were transitional arrangements surely something had to be done to ensure that the capacity to fully implement was established and how would this be done. He felt that CASA was probably one of the more unique parts of the industry and they may have somewhat of a case. So will any exemptions be given to specific industries, although Ms Tobias was not very happy about that. However, the casino industry was quite a different industry from a bank. He asked for Members to raise other issues around transitional arrangements.
Dr Khoza said she was unsure how this could be discussed without inputs from technocrats who would know how this could be implemented. She would prefer some guidance, because she felt the provisions related to the operational space of the regulators.
Mr Maynier felt these arrangements were important and would be interested to receive more input from stakeholders about how they would propose the transitional arrangements be made.
The Chairperson said the Committee would simply be giving Treasury guidance, based on the public hearings and what was known about the Bill. The Committee should be clear about whether it wanted exemptions, but must set the parameters within which the arrangements were to be made.
Mr Makhubela spoke to how to write the above down in the Bill and what was expected by the Committee from a high level policy perspective. Treasury would prefer having the bulk of the Bill become effective from the date it was signed. With domestic private sector PIPs, the Committee may want to give an upfront exemption and explicitly leave it up to the President to make a proclamation about when the provisions came into operation. NT would have to engage the stakeholders to determine which provisions in the rest of the Bill would require staggering, perhaps for specific industries. Therefore, the bulk of the Bill coming into effect on a certain date did not necessarily mean that accountable entities would have to comply fully on that date.
The Chairperson asked NT to be clear about the use of words and use transitional provision and date of coming into effect, rather than exemption. As exemption are distinct, with the person being exempted from the provisions all together, forever.
Mr Makhubela said his understanding was that from the date on which the President signed, he would state that certain provisions are not yet active and would only become enforceable upon his proclamation. This would not exempt parties indefinitely.
The Chairperson said CASA was arguing for a permanent exemption from certain provisions and therefore it was correct to use two different terms. This was distinct from not implement certain provisions during a transitional phase.
Ms Tobias said she had listened to CASA and their insinuation was that they may take the Bill to court, if they were not exempt. This was the reason she made the suggestions she had had, but she had not stated her position on whether they should be exempt or not. The reason she had emphasised transitional arrangements was because it could be a good balance and provide an amicable solution. Because of the need to treat each industry differently, there may need to be a separate dispensation for them, particularly due to their economic importance. The consideration raised by Law Society of South Africa (LSSA) made a similar argument in that small firms may need to be treated differently. She wanted the Committee to grapple with this, so that it could pronounce on an appropriate balance.
The Chairperson agreed and felt the decision should be made to have both transitional provisions and exemptions in the Bill. The first set of exemptions was the ones raised by Ms Tobias. He agreed with Ms Tobias and also felt that the LSSA has also presented some good arguments. These parties should be engaged to determine the specifics. He then asked, regarding transitional provisions, whether it would be appropriate for the Minister consult the stakeholders, beyond the regulatory agencies, in the opinion of Treasury.
Mr Smit said the most important issue around consultation with stakeholders around implementation was between the regulators and the industry, because the regulators were responsible for managing the implementation and improving that implementation. Therefore that was the key point of consultation. The Bill could require supervisors to have a rule or standard in place to manage the improved implementation over time. So that the supervisors could be in control of what must be implemented at what point and how monitoring would be conducted. It would be difficult for the Minister to fix dates for these things, because they could not fix dates per industry as regulations did not operate at the same level of fine detail as the supervisors. All the sectors which were governed by FICA were subject to a supervisory body, which could be in this position to take on this function and manage implementation. On fixing a specific date in the Bill by which full compliance must be in place, he had experience with the first version of FICA where there was a provision that institutions which already existed upon commencement would have two years to come in line. The experience was that by the end of the period there were many applications to the Minister for extensions from the existing industry.
The Chairperson said the Committee was in favour of not putting forward a final end date for implementation. He also asked the Committee to apply its mind to the role of the Minister, because in situations like this the Minister would not do the work regardless and it would remain the job of the supervisory bodies. On the other hand the spirit of the Act lead towards the Minister having a role in determining the dates, because ultimately they were accountable to Parliament. He asked for two options to be put into the Bill and for Members to consider this as in effect the Minister will not be doing the work.
Ms Yvette Singh, Banking Association of South Africa (BASA) Representative, on transitional arrangements, reminded the Committee that in certain instances for the accountable institutions to do the requisite due diligence there needed to be a database, which would probably have to be a government database and that should be kept in mind.
The Chairperson asked for the Committee to move on to beneficial ownership and what issues were raised by the public.
Mr Makhubela said the stakeholders were concerned with the definition and how wide it ought to be, but his sense was that the principle of identifying beneficial owners is agreed with.
The Chairperson then asked what NT’s position was.
Mr Makhubela said this was a provision which Treasury needed to internally engage with.
Ms Tobias questioned whether the definition was broad.
The Chairperson agreed and asked what the real problem was.
Mr Makhubela said the issue was really with whether a threshold would assist in the identification of beneficial owners.
The Chairperson asked whether it would be a monetary value threshold and if so it would have to be linked to inflation.
Mr Makhubela said the challenge there was that this introduced a rule.
Ms Tobias asked who determined the threshold and what kind of work went into such a determination. Further, would the definition speak to a natural person or an institution? She was interested in legal opinions on the matter more than anything else and whether the definition was legally acceptable.
The Chairperson asked who had raised the question of threshold.
Mr Makhubela said the Associations for Savings and Investments South Africa (ASISA) and BASA had made these representations.
Ms Singh said the crux was shareholding and the ultimate control derived from that, but there was no database for this information. Internationally a threshold had been set and for example in the United Kingdom if a person owned 25% of a company then the person beame an ultimate beneficial owner. FETRA placed the threshold at a 10% shareholding in the United States. In certain countries the company was relied upon to self-certify their ownership structure. These were the options available and the recommendation was to align with other countries by making a 25% threshold to make compliance easier. Otherwise, due diligence would have to be done on someone who owned as little as 0.01% of a company’s shares.
Mr Sean Stander, BASA Representative, said the implications for the risk based approach here were a little bit wider, because the ultimate beneficial owner could potentially be a PIP. Part of the uncertainty was how acute did that person’s influence over the functioning of the institution need to be before their risk rating was adjusted. It was more complex than purely deciding the ultimate beneficial owner, because it had implications for how you treat that client with regards to enhanced due diligence amongst others. The representations made by industry were based on the uncertainty about how much influence had to be held, before it materially affected how the accountable institution treated that client.
Mr Lees said some parameters had to be put in place, it could not simply be left wide open. Shares traded on the stock exchange daily and there was no possible way to trace what was happening with shareholdings in listed companies, although it may be easier with private companies. Further, there was no database on such information, as the Companies and Intellectual Property Commission only gave directors’ information. This subject was fraught with problems both regarding simply accessing the information and the amount of work necessary if no threshold were put in place. He would urge looking into a database which was not the responsibility of the industry and secondly some form of threshold.
Ms Tobias asked what influence was wielded by a person who owned a minor shareholding such as 5%, especially as there could be people who owned 25% stakes.
Ms Singh said that was the crux of the submission, because there were people who owned minor shareholdings and were passive owners with no influence on the company. This was why the threshold of 25% was requested.
Mr Makhubela felt that the industry was looking for a proxy for beneficial ownership and that would be 25% shareholding. In the absence of a list, accountable institutions needed something to help identify who beneficial owners were.
Mr Smit said the Bill did not require an institution to identify every shareholder of every company which they do business with irrespective of their shareholding. The Bill required the institutions to identify the natural person who was the beneficial owner and who controlled the functions of the company. It could be the shareholder who owned 90% of the shares or it could be a shareholder who owned 10% where all other shareholders owned 1%. The point which needed to be understood was that in the current regulations under FICA there was a requirement that institutions must identify the 25% shareholder of a company and if that was another company, then so be it, but you have not identified the beneficial owner. The obligation in the Bill would require that having identified a 25% shareholder which was another company, then the accountable institution must find out who was the natural person who owned that second company. There always had to be a natural person who was the beneficial owner and that was the international standard which must be complied with. We would not have met the international standard if the identification requirements allowed accountable institutions to identify a company as a beneficial owner and stop there. The relevance of a percentage of shareholding was useful as a guide to identifying who was most likely to be the person who exercised control over the company. Then a percentage could be fixed to indicate who would probably be the controlling party. However, the question must still be asked whether this was the person who in fact controlled the company and if not the accountable institution must go further and identify the natural person who was the beneficial owner. It was true that there was no database of beneficial owners, but the customer was the best source of the information on what the ownership structure was of that company. Rather than the Companies and Intellectual Property Commission which could be used as a secondary source of such information. Corruption Watch had indicated the high level political commitments in the context of the G20 made by the government about a publically available database of beneficial ownership, but while that was not incompatible with present purposes this was not the sole aim. For this provision to make any sense with regards to the objective it would have to require institutions to establish who the natural person was who and therefore the need for detail about how to go about this.
The Chairperson asked for NT’s summary proposal.
Mr Smit said as far as the clause was concerned, Treasury and FIC were not proposing any changes at present. In the implementation process guidance would have to be given as to how control should be determined if one was looking at shareholding. This guidance should indicate that one of the indicators could be a percentage of shareholding, but what that amount should be would have to be subject to a consultative process. This would have to be done by the FIC for general guidance, after consultation with industry and the other regulatory entities.
Ms Tobias said she wished Mr Smit’s explanation could be captured and put into a footnote verbatim, because it clarified the entire issue and why the natural person should be identified. She asked for that approach to be used in the Bill.
Mr Lees felt the Committee should be cautious to speak about control and beneficial ownership in the same breath. Control of a company could lie in a person who did not have a single share, the aim here was to determine who benefitted from the profits of the company. Those had to be either an employee or more to the point a shareholder. He wanted to know if there was any definition of beneficial ownership, because that would help avoid conflating this with control and clarifying the extent of benefit required.
Mr Smit said the definition which FIC used was currently contained in the FATF standard and was followed closely in drafting the definition in the Bill. The point of departure was the risk based approach and what an institution could reasonably be expected to do should be the guide to the required level of compliance. If there was a 25% shareholder who at face value seemed to be the beneficial owner and through voting rights exercised control, but the true controlling party was so well hidden by design that they could not be identified, it would not be reasonable for the supervisors to expect institutions to determine this on their own. In that case the institution would have done what clause 25 required, which was identify by shareholding first. Only in cases where this did not give a clear answer was further investigation required. Only when there is no shareholder which holds enough voting rights to control the company would an accountable institution be required to take further steps, by checking agreements between shareholders or checking for an outside influence. If none of that was apparent, then the fall back position would be to assume that the senior manager was the beneficial owner and if not they must explain who was. What was required of the institution was to get information on who the beneficial owner was, not to verify whether this was in fact the case. The clause required institutions to establish who the beneficial owner was rather than verify who that truly was.
Mr Lees said what he was hearing was that because it was a risk based approach the institution could apply any threshold they choose, as long as when the supervisory body looked at it they found it reasonable in a particular instance.
Mr Smit said that was correct and the management of the institution would accept the responsibility for how this provision was complied with. The fact is that this was not dictated to an institution by a supervisor or regulator which made rules, rather discretion must be applied.
The Chairperson said the approach reflected by Mr Smit was what is being accepted by the Committee for now. He then asked for a final input from the stakeholders.
Ms Singh said the proposed section 21B (5) caused concern, but if guidance was given then it was fine.
The Chairperson asked to move to PIPs and PEPs and said when he had read the Bill he pre-empted some of the concerns, but it must be remembered that it was the national interest rather than the industry’s interests which must prevail.
Mr Makhubela said this is where the issue of going beyond the FATF recommendations had been raised. The concerns were mostly around the domestic private sector PIPs. It was understood that there was no list. With PEPs there were no problems, because there were internationally available lists, even though Treasury cautioned against a tick box approach. Government was working on a list of people who undertook business with government and in the provision it required identification of an entity which engaged in business with government based on a tender above a certain value. This value had been left to the Minister to prescribe. NT had tried to limit the clause, but the challenge from industry was that they still would not know who was engaging in that type of business with government. Treasury would still prefer keeping the provision, but explicitly suspending the effective date for domestic private sector PIPs.
Mr Raymond Masoga, Director: Financial Integrity National Treasury, said at the moment NT was working on an e-portal which would publicise all tenders awarded above a certain threshold. Allowing time before the effective date of these provisions would allow NT to ensure the system was running so that by the time implementation began at least the private sector would have access to a more reliable source of information.
The Chairperson said the term ‘politically exposed’ had a certain connotation that politicians were more likely to do wrong. He accepted that politicians the world over had power and enormous capacity for patronage and nepotism. This was not limited to South Africa and was by nature. His problem was not with people pointing to the corruption of public representatives, rather that in a radicalised society like South Africa there was a subtext that some people were inherently more predisposed to corruption than others. All people were capable of corruption and politicians may be more vulnerable, but did the term in a country like South Africa not have a racial subtext. The phrase came from the FATF and was it trying to imply that public representatives were more likely to be corrupt or was it exposed in the sense that they were more likely to be abused by the private sector. Was the term PEP required and could there not be a different word with the same concept? From what he could see the industry’s concern was how would they get this information from the private sector? In the public sector it seems to be more alright, but would a local government councillor fall within the definition. Is the scope not too wide and is it doable, because at times an overly wide term may be good in principle but in practice nothing gets done? Perhaps, in an emerging democracy with the social inequality and historical legacy that South Africa had it was correct to say that politicians were vulnerable. Therefore, a balance should be struck and the Committee should be cautious of the connotations.
Dr Khoza said when the concept of PIPs and PEPs was presented she had thought that PIPs could cover both concepts, without implying that politicians were more likely to be corrupt. She would urge the Committee to use Prominent Influential Person as the sole category.
Mr Maynier asked why leaders of trade unions were not included in the definition of domestic PIPs, who in the South African context wielded enormous political power. He would amend the clause to include leaders of trade unions and he was interested as to why this obvious omission had been made. Secondly, he understood why the clause dealing with private sector PIPs was included and industry’s difficulties around needing to act off of a state database. Given the procurement system he did not think such a list would be that difficult to compile. He would have a lot of reservation about not including some form of implementation deadline, because otherwise the executive was left with scope to never produce the database. Lastly, NT had indicated that there were publically available lists which institutions use to determine PEPs and he would be interested in knowing who compiled these lists, because it sounded murky.
Mr Makhubela said that the term PEPs had been removed from the draft of the Bill and what would be seen was PIPs. That was inspired by trying to deal with the sensitivities mentioned. It was true that where there was a corrupt person there may be a ‘corrupter’ and therefore the private sector had to be included. This widened the scope and lead to the issues around practicality. At present it was acknowledged that this may be difficult and hence the discussion around phasing in the requirement. On the deadline for implementation of the list, Mr Smit also cautioned against a deadline and there should be an element of trust. One way of dealing with it could be for government to impose its own deadline.
Mr Masoga said the concept of PEPs was normally linked to people who had access to or control over public resources. Perhaps not having trade union leaders was an oversight on NT’s part, but it would remain important to determine how much access to public funds union leaders have. They may be covered by the private sector PIPs, if they do business with government. However, it was something which could be looked into.
The Chairperson asked if the generic definition covered NGOs.
Mr Masoga said not necessarily.
The Chairperson said he was trying to think why trade union leaders would be covered, but not NGOs.
Mr Masoga said there had to be an element of practicality looking towards implementation, because the longer the list the more difficult it was for the accountable institutions to comply. If it was very difficult to comply, then the effectiveness of the legislation was weakened.
Mr Maynier asked for an NGO to be mentioned which wielded political power.
The Chairperson said until recently there was the South African National NGO Coalition and the Treatment Action Campaign was quite powerful. He foresaw land becoming a very important issue in the next few years and therefore NGOs in that sector would also become very important. What should the criteria be and where should the list begin and end. If one looked at trade unionism in South Africa recently, then it had been seen that there had been abuse of their considerable resources; as happened with the COSATU pension fund. He did not know where to begin and where to end then. As Parliament Members must be consistent and apply their minds to what the criteria should be.
Ms Tobias said the prominent and influential in PIPs implied that once a person was prominent they were influential or vice versa, but this was not the case. If prominent was used as a factor, it would limit the list to those who were in the public domain and would ignore certain people who had a lot of influence. Excluding prominence could allow the list to capture all the people in society who carried influence, including trade union leaders, church leaders, business people and politicians. She would urge at least stating prominent and/or influential persons. This would be more legally sound, in a case where the Act is challenged contesting
Ms P Kekane (ANC) said she reluctantly agreed with Mr Maynier on the inclusion of trade union leaders, but she did not want to limit it to trade union leaders as business association leaders also held influence. Therefore, she would have the entire labour sector included. She also agreed that NGOs should be included, by adopting Ms Tobias’ suggestion of using influence as the main criterion. However, the advice about the difficulties around compliance should not be forgotten.
Dr Khoza said she was persuaded by Ms Tobias and the clause should target prominent and/or influential. It was important to not have the clause be so ambiguous that it could defeat the purpose behind it. She was cautious of naming categories of people, because it could be interpreted as a type of covert racism. Therefore, the simple criterion of influence should be sufficient without having to unpack everything. A further complication was stipulating periods of time in particular positions. She wanted to avoid becoming to prescriptive, because this may lead to challenges on technical grounds.
Mr Maynier agreed with the need for a set of criteria and when he had mentioned trade union leaders this was based on his subjective criterion of political power. He felt the Committee should apply its mind to some objective test and this raised the question of what test NT used in compiling the definition. Secondly, he had reservation about including a judge and was this consistent with the internationally accepted definition of PEPs. He repeated his question about who compiled the PEPs lists presently available.
The Chairperson said what the Members were all saying was not inconsistent, but there was an international standard and as far as possible this should be stuck to. On the one hand a long list would be problematic, but the clause needed to be reasonably specific. The gap between the various Members’ points was not that large and it was for NT to tie them all together. Further, the Committee was against any type of racial subtext, but no person of any colour should be allowed to slip through. These balances should be struck and the public stakeholders should also be heard.
Mr Masoga said Ms Tobias had made a good point and this would be worth looking into without hesitation. On the criteria to use, the international standard was specific although it did not prescribe fully, it gave certain examples of who should be considered a PEP. Further, the standards themselves were alive to the need to adapt them to domestic circumstances and depending on what is considered risky in that climate or the scale of corruption to be targeted the criteria can be moulded. The international standards did specifically include heads of state, judicial officers and high ranking military members. However, access to public funds was generally the link which is reasonable to use as a criterion.
The Chairperson said the question which Members had asked, which had not been answered was whether the present definition was more extensive or onerous than the international standard and if so how far beyond did it go.
Ms Tobias asked about the extent of public resources, would church resources be included.
Mr Makhubela said the way Mr Masoga had used the term targeted tax revenue.
The Chairperson asked how this would apply to a trade union, because trade unions and NGOs generally did not get money from the fiscus. Did the FATF say public resources?
Mr Masoga said that public resources were used as a limiting mechanism for the list.
The Chairperson asked why Treasury had not said this before, because the above debate was therefore a waste of time. If that was the criterion then it could not be applied to a church or a trade union.
Mr Maynier asked whether the concept could be applied to the judiciary, because while the Office of the Chief Justice used public money to run the court system it was not like individual judges had access to the funds.
Dr Khoza said she thought that Mr Masoga had said that the international norm was to include the judiciary, if the Committee wished to deviate that would be fine, but then that must be decided.
Mr Maynier said if the strict test is access to public resources, then one could raise a question about whether judicial officers in fact had access to these public funds. If it were only a matter of the international norm, then it would end the matter. Possibly, if the judiciary was included in the international norm it could be because in some countries the judiciary was corrupt.
The Chairperson said the other issue around international norms was that in some countries judges may have a significant say over the use of public money, while in other they may have none. With the establishment of the Office of the Chief Justice it was in between. He therefore felt that judges should fall within the definition, because it was there internationally and they did have some say over public funds.
Ms Tobias said she thought the meeting was to decide the definitions based on the objects of the Bill, because otherwise the Committee may delve into too much detail for present purposes.
The Chairperson said the discussion came from a definition and these must be precise. As judges are always susceptible to corruption, they should also be included on the list.
Ms Tobias said she was raising a broader matter of principle, rather than whether judges should be included on the list. The definition had been limited to the positions listed and this in itself was the problem.
The Chairperson said definitions had to be precise, but if the stipulation of the contents of the list was in the body of the Bill, then the Minister may add to the list through regulations. This would allow the list to be adapted and extended, without the need for a Bill to go through the entire parliamentary process. It could even be stated that the regulations must be tabled in Parliament. He asked whether it was possible to allow the Minister to amend a definition by way of regulations.
Mr Smit said a possibility was to define the term as including anything which is included in a schedule to the Act and give the Minister the authority to amend that schedule from time to time. This is what FICA did with regard to the scope of institutions subject to its provisions, it did not stipulate banks or attorneys and simply stated that it applied to anything listed in schedule 1. This would give flexibility to the list.
Adv Jenkins said he agreed with that, although there was no specific rule which said a definition could not be drafted in the way suggested by the Chairperson. It was simply convention to have the definition refer to a schedule or allow the Minister to stipulate the list in regulations.
The Chairperson said he preferred allowing the Minister to amend the definition for the sake of simplicity.
Mr Smit said it would be easier for the Minister to amend the schedule through a regulatory proclamation.
The Chairperson agreed and asked to move on to the Risk Based Approach.
Mr Makhubela said this was one area where more engagement was needed with industry. The concern from industry was that NT was talking about moving towards a rules based or principled approach, while also loading the Bill with a lot of rules. NT’s position was that the move was towards a rules based approach, but that minimum standards were still required. This was supported by similar standards in the FATF. It was not unusual to have a legal instrument which contained both rules and principles, but the aim was to move more towards principles and the risk based approach. The debate therefore was how far to go in placing rules into the legislation, which NT sees as minimum standards.
The Chairperson said in this context there were a number of things to work out and therefore specifics could not be spoken to now. He therefore suggested the Committee agree that there were certain minimum standards and could work out the permutation between these and the risk based approach. He then asked if the stakeholders have any comments on the five issues identified above.
Mr Maynier said the issues around prospective clients raised by Mr Lees had not been dealt with.
The Chairperson said he thought the issue had been whether having declined to do business with a prospective client the accountable institution ought to inform some authority.
Mr Smit said the point was that one way of reading the intention of the legislation was that an institution must complete everything required of it to identify the client and do the due diligence. At the end the institution may come to the conclusion that it did not want to do business with the client and that the due diligence would then have been wasted. The point of the term prospective client was to indicate to that due diligence must be completed before the institution is in a position to decide whether to do business with that client. There was no point in accepting the person’s money, opening the account and then starting the due diligence process, because the dirty money could already be in the institution. The balance sought was that during the process of customer take on the due diligence must be conducted, so that by the time they in fact become a client the identification and verification is complete. This did not mean that for every customer who came in to inquire the institution must request all their information. It was very important that institutions started this process during the on-boarding phase, because the due diligence process is an indicator of the prospective client’s risk. He felt that the contention was around the timing aspect and therefore it would be important to make institutions understand that it was started during the on-boarding process and completed by the time business commences with the client.
The Chairperson asked for the Committee Section to provide any other further issues.
Mr Dumisani said the abovementioned issues broadly covered the concerns raised. Further issues included what the public’s representatives, as opposed to industry’s, had to say. Also, the November 2015 public hearings had seen a concern raised about the cost to be borne by the accountable institutions. Lastly, the socio-economic implications need to be looked into.
The Chairperson said the issue of cost did come up in November, because this cost would ultimately be borne by the consumer and not by the institution. So, while all the things being done were good and they should be supported, in a time of enormous economic stringency the Bill would be burdening consumers further. Secondly, there were some issues raised the previous day including linking the Bill to international financial flows. Treasury had indicated that the Counter Money Laundering Advisory Council’s dissolution would not be bad, because they were not really doing much in any case and what was proposed was more streamlined. Further, he asked for confirmation that NT would meet with CASA and the LSSA. On traditional leaders and the PIPs definition, this would presumably be something beyond the international standard. While he did not think they should be excluded, because they were funded by the fiscus, he was concerned that traditional leaders would be up in arms and asked whether the Council of Traditional Leaders of South Africa or the National House of Traditional Leaders was consulted and did they comment. As he remembered all Bills which affected traditional leaders, must be put to the National House of Traditional Leaders.
Adv Jenkins said this was only where the Bill would affect traditional law or customs of traditional communities, not necessarily the National House of Traditional Leaders.
The Chairperson asked if the executive would be obliged to send this Bill to the National House of Traditional Leaders.
Adv Jenkins said it was not an obligation.
The Chairperson said perhaps it should be sent by the executive as a precautionary measure.
Dr Khoza agreed with the Chairperson, because traditional leaders could be sensitive around matters such as this. Especially, with the difficulties which had been experienced around accountability around public funds. With traditional leaders being mentioned in the Bill, they may make an issue out of not being consulted. Some things were done out of courtesy, so that when the Bill was passed there were not further problems.
The Chairperson said the Bill should be sent to the National House of Traditional Leaders for comment and if they wish to make representations they are welcome.
Mr Makhubela said in the Bill it states that the State Law Advisors are of the opinion that it was not necessary to refer the Bill to the National House of Traditional Leaders.
The Chairperson said it would be sent as a matter of courtesy.
Mr Maynier asked whether Parliament or the executive would have to ask for comment.
The Chairperson said it would be Treasury and they would indicate that Parliament was open for traditional leaders to make representations.
Mr Makhubela referred to the Counter Money Laundering Council, as indicated the previous day, there seemed to have been some misunderstanding around the purpose of the Council. NT had agreed that it could easily incorporate some form of consultation with the public when FIC and other regulators issue directives.
Mr Masoga said in the socio-economic impact assessment, NT acknowledged that there was a possibility of cost increases for consumers at the initial stage of implementation of the risk based approach. However, going forward this would be mitigated by the positives borne by the risk based approach, because institutions would be better allocating resources to high risk areas.
The Chairperson said the general consumer could save in the end and the institutions should ensure this was done.
Mr Masoga said this was also linked to financial inclusion, because there would be bigger scope to benefit from the implementation.
The Chairperson asked for an explanation of the financial inclusion sentiments at the next session, because he was not convinced.
Mr Smit, on the relevance of this Bill to illicit financial flows, said it may not be explicit in the Bill, but it brought transparency to the financial system which was contrary to illicit financial flows.
The Chairperson then declared the meeting adjourned
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