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

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Finance Standing Committee

23 February 2016
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Meeting Summary

The Standing Committee on Finance met to be briefed by the National Treasury and to deliberate on the Financial Intelligence Centre (FIC) Amendment Bill.

National Treasury said that public submissions had raised concerns mainly about certain definitions, specifically ‘client’, ‘domestic prominent person’, foreign ‘prominent public official’, ‘prominent influential persons’ and ‘politically exposed persons’. Further concerns had been raised around the proposed sections 21B regarding beneficial ownership, and 21C concerning on-going due diligence.

In the ensuing discussion the Committee decided to remove the definition of ‘prospective client’, but to keep the definition of ‘client’ in its generic form. On prominent influential persons, National Treasury’s solution of allowing the Minister of Finance to amend the list of specified prominent influential persons was accepted. On beneficial ownership, the Committee was convinced that a shareholding threshold, while useful, did not conclusively determine who the beneficial owner was. It would therefore be left up to the sequential provisions in the proposed section 21B(3) – (5), and a threshold could be described in guidance notes by the regulators.

The meeting then moved on to a clause by clause reading of the Bill. The clauses which sparked the most discussion were clause 10, which contained several proposed new sections -- most importantly, 21B and 21C -- and clause 1: definitions. Several definitions were re-discussed and in general they were accepted as drafted by the Committee. On section 21B, there were concerns that the sequential effect of subsections (3) – (5) was not clear enough and the Chairperson requested all parties to try to re-draft the section. Further, section 21C was explained as encompassing two distinct on-going due diligence requirements. Section 21C (a) (i) required accountable institutions to determine whether clients’ patterns of behaviour were consistent with the information they had disclosed, and section 21C (a) (ii) required accountable institutions to check for any unusual or suspicious transactions. Here Members were felt this provision to be important, because money launderers were not going to be obvious in the way they conducted their illicit affairs and would try to make matters seem as normal as possible. Therefore, accountable institutions keeping constant tabs on their clients’ behaviour would aid in achieving the objects of the Bill, and the industry ought therefore to be more amenable this requirement.

The meeting closed with the Chairperson wanting to clarify the Committee’s intended procedure for the Taxation Laws Amendment Bill [B4-2016], given media speculation that the Committee was going to rush the Bill. He wanted to make it clear that the intended fast tracking of the Bill would not be a circumvention of the Rules of Parliament or its norms, particularly regarding public participation. In fact it would be done in accordance with the Rules of Parliament and fast tracking would simply mean the Bill would be prioritised. It should therefore be completed by the middle of March 2016

Meeting report

Briefing by National Treasury

Mr Olano Makhubela, Chief Director: Financial Investments and Savings, National Treasury, said the first item was about the definition of ‘client’, as it was argued that this could differ from one accountable institution (AI) to another. Prescribing the definition of client could have unintended consequences for certain sectors, such as attorneys and the casino industry. National Treasury (NT)  proposed removing this definition and leaving determining what a client was to the institutions in line with their Risk Management and Compliance Programme (RMCP).

Secondly, on ‘domestic prominent person’ and ‘foreign prominent public official,’ Members had felt the wide scope of the definition, and the inclusion of a list of specified persons, was too broad. National Treasury proposed moving the list of specified persons from the definition into Schedule 5 and 6 for the respective categories. Further, a new section 79A should be included, empowering the Minister of Finance to amend the lists after public consultation.

Thirdly, industry representatives had argued for a shareholding threshold to be attached to the definition of ‘beneficial ownership’, similar to the Foreign Account Tax Compliance Act’s (FATCA’s) 10% and the Financial Action Task Force’s (FATF’s) 25%. National Treasury had argued and maintained that a threshold may be an important indicator, but could not be an absolute criterion for an accountable institution to consider around beneficial ownership. The AI would then have to satisfy itself that it was in a position to determine the beneficial owner using, among other things, the shareholding threshold as part of its RMCP. Treasury proposed not including a threshold and instead allowing the Financial Intelligence Centre (FIC) and other regulatory bodies to issue guidance on the determination of effective control, where shareholding thresholds may be a factor.

Mr Makhubela, on additional due diligence measures relating to legal persons, trusts and partnerships, said industry viewed the proposed section 21B as very prescriptive and contrary to the risk-based approach. The Banking Association of South Africa (BASA) had read the section as meaning its members would have to identify and verify both the natural person owner and natural person controller of a client, therefore not providing for the cascading effect aimed for by the section. Further, industry had been concerned about its ability to comply in the absence of a list of beneficial owners. However, the FATF standard did not require a country to have a list of beneficial owners, although this would be preferential. The FIC had managed to clarify the application of the proposed sections 21B (3)–(5), specifically that they apply in a sequential or cascading manner. This meant that if the initial attempt to identify the person with the controlling interest in the legal person did not yield positive results, then the enquiry would proceed to the subsequent subsections. If the inquiry under the proposed section 21B(3) enabled the AI to discharge its compliance duty, then that was sufficient.

Mr Makhubela moved on to the on-going due diligence under the proposed section 21C, where the concern was about doing this for prospective clients, given the possibility that the AI may decide not to engage in the business relationship. This would waste the AI’s resources in carrying out the due diligence when it did not do any business. Treasury proposed that the AI determine when a person became a prospective client according to its RMCP. This was similar to the position on the definition of client.

Mr Makhubela said that the definitions of ‘Prominent Influential Persons’ (PIPs) and ‘Politically Exposed Persons’ (PEPs) were said to be too broad, compared to the FATF standard. Further, that due diligence seemed onerous in certain ways. He noted that it was important for AIs to use whatever means were available to them to obtain the relevant information from the clients. These were challenges internationally and other countries were grappling with how best to give effect to the FATF recommendations. With experience, NT would refine the legislation and the regulators would provide information on how best to comply. NT had considered the comments and proposed that the FIC and regulatory bodies would regularly provide guidance to clarify uncertainties. BASA’s concerns were on the extent of the definition, and proposed removing reference to a previous spouse, civil partner and life partner from the Bill. Lastly, Treasury proposed that the provision relating to domestic and foreign PIPs should apply only to business relationships and would not extend to single transactions.

Discussion

The Chairperson said the first issue on the threshold had been resolved, but asked what kind of threshold there would be. He did not think it would be proper for Treasury to simply wilt to the demands of industry. Further, how prevalent were the problems of money laundering and terror financing in South Africa as compared to other countries. If they were more prevalent, then the Committee should be more stringent in regulating, but if the cost was greater than the benefit then a more relaxed approach would be appropriate.

Mr Pieter Smit, Executive Manager, Legal Policy: Financial Intelligence Centre, said the FATF undertook regular peer reviews of its members. The last time South Africa had undergone this was in 2009, when the standards were slightly different. South Africa’s regulatory framework and compliance with the standards ranked in the 60th percentile, which was just above the standard of FATF members. One area where South Africa went further than the FATF standard was single transactions. For the decade the Financial Intelligence Centre Act (FICA) had been in force, FIC had never set a threshold for the application of the requirements. The requirements had applied to every transaction, no matter how small and this was unusual, with most countries setting a threshold below which the transaction was negligible. The FATF standard provided for setting a threshold no higher than $50 000 or €50 000, but this amounted to a fairly high rand threshold. FIC would be looking at something around R5 000 to R10 000 for a threshold.

The Chairperson said Mr Smit was explaining how much South Africa had complied with the norms, but he wanted to know how prevalent the financial crimes were. However, the information being given was valuable.

Mr Smit said that would be a very difficult study to undertake, although there had been a few which tried to take a guess at criminal proceeds floating around in a financial system as a percentage of gross domestic product (GDP). The last time this was done for South Africa was in the early 1990s, where it was placed at around 5% of GDP.

The Chairperson wanted to draw Members’ attention to the fact that the submissions were coming from the sectors of industry affected by the Bill. The Congress of South African Trade Unions (COSATU), the Federation of Unions of South Africa (FEDUSA) and the non-governmental organisations (NGOs) were not represented, which skewed the discussion. The civil society submissions were from parties with vested interests in the legislation. He asked for the view of the Committee on having a threshold for single transactions, barring which National Treasury’s view would be accepted. With no view being expressed, he asked for views on the definition of client.

Dr M Khoza (ANC) said leaving the definition of client to the AIs defeated the purpose of the Bill, because an institution may decide that because it was convenient, client would be defined in a particular way, excluding something in particular. She did not see anything wrong with the way client was defined in the Bill, because anyone who consumed products or services from a particular institution was a client. Why was the industry opposed to this definition? She worried whether the Bill would be enforceable, because the AIs would be able to determine their own definition and therefore the extent of the required compliance. She understood the need to remove prospective client, but not to avoid defining a client as someone who had entered into a contractual relationship with an AI. She agreed that “prospective” was vague, but remained to be persuaded regarding “client.”

Mr R Lees (DA) asked a general question which applied to definitions. Under the risk-based approach, each AI would determine the risks and what a client for it was. In the event that there was an inspection and it turned out the AI’s risk assessment was not acceptable to the regulator, what happened to the AI? If he were an accountable institution, he would err on the conservative side in order to avoid repercussions. In his understanding, the risk-based approach was supposed to make things easier and avoid overly conservative approaches. He would be more comfortable with the proposals from Treasury if he had a better idea of whether they made the risk-based approach less onerous, including regarding the determination of a client. 

The Chairperson said he felt the NT had wilted a bit and he agreed with Dr Khoza in asking whether the concept of client was not fundamental to the Bill. He wanted to clarify what Mr Lees was asking. Was he saying that with the current proposals, the AIs would take an overly conservative stance, because they lacked the certainty that should be there? He asked for Mr Lees to clarify.

Dr Khoza said she was going to deal with the issue of risk later, because she wanted to understand from whose perspective the risk was assessed. Was it the general government perspective or was it from the AI’s perspective, because these may not be the same? If the Bill allowed the industry to define the parameters, then the Committee was defining itself out of relevance. Each industry had its own risks associated with its business, and leaving it up to industry may be problematic.

The Chairperson said what Dr Khoza was saying was new and interesting, but he wanted Mr Lees to clarify first, specifically around what he thought the consequences would be if the proposal regarding the definition of client were adopted.

Mr Lees said an AI may identify clients in a far more conservative and onerous way in order to avoid any kind of penalty when a regulator conducted an inspection. As he understood the risk-based approach, this was not what was trying to be achieved. The aim was to enable an AI to assess its own risk, which would be different from that of another accountable institution. So a client to one institution may not be a client to another institution, because of the risk associated. He was concerned about the conservative approach, which was why he had asked what the consequences would be following something being picked up by a regulator in an inspection. For example, a regulator may not be happy with an AI’s risk assessment and definition of client, and what would happen.

Mr Smit said he would deal with the client issue first, and then move on to risk. The legal effect if the definition was not in the Act, was that the words carried the normal dictionary meaning as their legal meaning. The definition in the Act was already basically a verbatim dictionary definition, so it did not take the meaning much further. The point then was that the institution would have to decide when a particular person met that definition or not. So was this person someone with whom the AI had entered into a business relationship through a formalised contract, or was it not? Applying the ordinary dictionary definition of the term was also what a regulator would have to do in deciding whether the AI’s identification of a person in a particular circumstance as a client or not was correct. The question for the AI to determine on a case by case basis was when the prospective customer in fact became a client of the institution, rather than the risk or features of the prospective client. The reason it had been proposed that the definition be removed, was because it was so generic and it had been pointed out that in some instances AIs engaged with persons in a business environment who were not necessarily their clients. For example, when an attorney did a property transfer, they acted for one party but engaged with the other and needed to get information or interact with both.

Coming to risk, which he felt was the fundamental issue of the legislation, he said the Bill was a balance between regulatory-type legislation and criminal-type legislation -- using the financial sector to fight crime, but also by hardening the financial sector against being abused for criminal purposes. So it was not regulating for regulating’s sake. This was the context for understanding risk, in that not only must the institution understand its business risk of failure or being penalised by a supervisory body, but the risk of its services and products being used by a criminal. It must therefore think about its business and try to see how a client could abuse its products or services. It was a risk which was specific to an AI and the type of business it conducted. In assessing that risk, an AI must take into account information which government provided. For example, if government had a set of priority crimes, then this must be made known to AIs so that they knew what was most likely to come up. There was an enrichment of the information which AIs gathered, with information from government, which was why submissions had been made about government having to do a risk assessment and communicate the results to the industry. In the final analysis, the risk assessment must be particular to that institution, because it must determine how it would pick up a person trying to abuse its services.

On the regulator’s role, the FIC tried to engage with other supervisors on how to engage with risk assessments. Generally the understanding in the financial sector was that where a regulator did not agree with an AI’s assessment of risk, where the institution had missed something or had severely underrated the risk, the AI would be required to remedy the problem. This may not necessarily entail a fine, but if at the end of process there had not been remedial action or the problem had not been resolved, there could be a fine. At what point the penalties should be imposed and how severe they should be, was a matter of debate internationally. US regulators fine an institution on the first instance of a compliance failure, while others have a more tolerant approach. It also depends on the AI’s explanation of the decision-making process; a misappreciation of the facts would lead to less severe responses than wilfully not complying. All of this needed to happen in a manner which allowed business to flow, but also hardening it against crime, which was a difficult balance to strike.

Mr Lees asked whether there were concerns around the link between single transactions and allowing the AI to identify its clients.

Dr Khoza said her view was that the definition of client, risk and the threshold were intertwined. Capitalism was a very creative economic framework and if the Bill left certain things to AIs to decide, she believed AI’s risk assessments would be impaired or distorted by the pursuit of profit. The Committee had to understand what it wanted to achieve from the governance perspective, because approaching the Bill from the industry’s viewpoint may not serve its purpose. Members must be careful, because the industry had interests to protect and would be eager to avoid being pinned down to requirements which they felt might cause compliance burdens. The legislation must at the same time be sensitive to industry, because the intention was not to cripple the financial sector.

The Chairpersons said listening to what the President had said during the State of the Nation Address (SONA) and what the Minister of Finance was likely to say, government and the majority party felt that there needed to be more space for the private sector to grow. The fiscus simply could not maintain the state-led growth path some may want. At the same time the Committee should guard against allowing the industry too much rein. What he was asking for was a way to compromise. As he recalled, the point about the use of the word “client” was that it was a generic term and what constituted a client for an attorney may not necessarily be a client for the banking industry. The Committee had asked Treasury to work something out, because Members felt it was correct that a single person attorney’s practice would need specific requirements and the casino industry could not be expected to account for every transaction. It was very difficult to find a word which could cater for all the varieties of regulated business. The question was what to do now, because he would suggest that Dr Khoza and Mr Lees were right, but the industry also had a point. Was there no way to compromise and have the concept of a client, perhaps in a schedule, which could be determined by the Minister specifying a category or recognising a particular form? 

Mr Smit said a way of striking a balance could be by retaining the definition of client as generically as it was, which catered for a lot of flexibility, and removing the definition of “prospective client.” In the section which dealt with the RMCP, there could be insertion of a clause which required the institution to expressly include in its programme how it would determine what a client was. AIs would then have to make the process by which they identified when a person became a client part of its express management process. This would give the regulators a test to use to determine whether an institution’s assessment was sufficient.

The Chairperson asked whether Members agreed and thanked Mr Smit. He then asked for views on domestic PIPs.

Dr Khoza said she would support the proposal, because there would be a schedule which may be altered at the discretion of the Minister. 

The Chairperson moved on to beneficial ownership, saying that it was quite complex. He was beginning to be persuaded that a threshold would not be required.

Dr Khoza said she was in favour of the proposed solution.

The Chairperson asked if there was anyone who was opposed to it.

 Mr Lees said he would reserve his position until he had seen the proposed wording.

The Chairperson said that because this was such a complex area, he would like to hear the industry. It had been agreed that when the final version of the Bill had been drafted, it would be sent to the public participants to comment, but they must remember that they could not co-govern. They would have to come up with something formidable and new to change the Committee’s position from what the NT had currently proposed.

Ms Yvette Singh, BASA Representative, said BASA was happy if the threshold was contained in the guidance from the regulators. The reason this was being said was that the international norm was contained in a guidance note.

The Chairperson asked the Committee to move to the issues around ongoing due diligence regarding beneficial owners of legal persons.

Mr Lees said he understood the idea of the cascading effect, but would there be an amendment to make that clear?

The Chairperson said the Committee and Treasury must clarify the provision. He however, did not understand NT’s proposal.

Mr Makhubela said the concern had been that it sounded a bit awkward for AIs to conduct on-going due diligence for a single transaction, because there was no business relationship. NT therefore proposed that it would require on-going due diligence only where there was a business relationship.

Ms T Tobias (ANC) asked whether the National Treasury team saw eye to eye on this matter.

The Chairperson said NT was not obliged to answer that.

Ms Tobias asked further whether it was urgent for the Committee to pass the Bill and whether it would not be possible to have another week.

The Chairperson clarified that the Committee was not voting on the Bill now. The Committee had decided to not meet the Constitutional Court’s deadline, as it was not practically necessary, as what was in the Bill was what would come into effect. He had spoken to the Minister about writing to the Court out of courtesy. The Committee would not plunge into the Bill, and there was no urgency on the executive’s side and the next sitting on the Bill was when the Money Bills processes were over, around 8 or 9 March. He reiterated that Mr Makhubela was not obliged to answer the question.

Mr Makhubela said he was not aware of any division within the Treasury or the FIC.

Dr Khoza said she hoped Members did not expect NT to be homogenous.

The Chairperson agreed and said disagreements brought creativity. Members disagreed all the time, but there was broad agreement about the framework. He then asked Members to consider the proposed solution for PIPs and PEPs.

Mr Lees said his initial comment was that it looked alright.

The Chairperson asked why the NT proposed removing a former spouse, civil or life partner, because he had seen in the media that people used these people to effect illicit activities.

Mr Smit said there were two reasons, and this was contained in the substantive section which extended the due diligence requirements beyond the PIP or PEP. If the scope included previous spouses then whenever an AI encountered a PIP or PEP it would have to not only assess the person’s particular risk, but the risk of those around them, and this was a bit more difficult to do where the people had ostensibly ended their relationship. To treat them in the ordinary course of business as people who could potentially be hiding something for a PIP or PEP was difficult to argue. Secondly, almost all the industry submissions pointed out that it was very difficult to find information about these people, especially knowing how a certain person was married to someone or was another person’s life partner. NT tried to see how to alleviate that practical difficulty, which was available only in the area of former relationships.

The Chairperson asked what the FATF guideline was on this matter.

Mr Smit said FATF had no specific guidelines and simply required the regulatory framework to cater for known close associates. A former spouse may fall into this category if there was some link which still existed.

The Chairperson asked if Members were happy with the proposal and explanation, and receiving no indication to the contrary, asked for comment from industry.

Ms Singh said taking the requirements to a schedule would help, but there were certain clauses in the schedule which would be unimplementable, specifically regarding enhanced due diligence verification in the absence of databases.

Ms Anna Rosenberg, Association for Savings and Investment South Africa (ASISA) Representative, said ASISA had not seen the proposed solution, aside from high level discussions. More discussion was still needed on the definition, whether it was to be contained in the Bill or a schedule.

The Chairperson said NT and industry could discuss, but Parliament must move. Some latitude would be given, but personally he felt the stakeholders had been given a very good run at the Bill. In the final stages, anything which had slipped past both NT and the Committee and was picked up by industry would be made space for. The Committee was on a trajectory and for industry to change its mind would require something new and fundamental. He reminded Members that the Committee was considering transitional arrangements and phasing in, therefore when making concessions to industry it was not as if they would be expected to implement everything from day one. The regulations dealing with the transitional arrangements would have to be tabled in Parliament and it would have to retain a measure of oversight. He then proposed moving to a clause by clause reading of the Bill, noting that once the Committee accepted the clauses, they would not be altered without very strong arguments.

Clause by Clause Reading

Clause 1: Definitions

The Chairperson asked for comments on clause 1 (c), with reference to both the text of the Bill and the addendum. He asked what was meant in the addendum by “engagement with the South African Revenue Service was on-going to harmonise the tax legislation with regard to beneficial ownership”.

Mr Smit said in the SARS world, there was a concept similar to beneficial ownership in a person having a controlling interest in companies which were liable for tax in foreign jurisdictions. There were two instances where this arose -- a US company operating in South Africa would still be governed by US tax legislation and have to report to the US revenue service. The US then constructed agreements around the world, under which local financial institutions reported to their revenue service and which in turn reported to the United States’ authorities.

The Chairperson said the second point in the addendum, regarding the threshold for beneficial ownership, had been dealt with. On the breadth of the definition, the Committee agreed with   Treasury.

The third point was that industry had argued that effective control should be defined similar to other legislation, while Treasury felt it more prudent to deal with this in guidance notes. He asked for comment from the industry representatives, because this point was important.

Ms Singh said BASA was happy if it was in the guidance notes.

The Chairperson said the fourth point in the addendum was agreed. Further, that Corruption Watch’s proposal regarding using a quantitative approach was covered by the threshold issue. 

Mr Lees said the DA was happy about the matter going into the guidance note, but how did it become a “must go into a guidance note”. In other words, what obligation was there on a regulator to put this into the guidance note?

Mr Smit said there was nothing in the Act or Bill which specifically delineated what must be put into the guidance notes. The regulator’s powers to issue these, was in the Act, for the FIC specifically in sections 3 and 4. The guidance must serve the implementation of the Act, so where there was an issue where guidance was necessary for the implementation of the Act, it was incumbent on the regulators to issue such. The regulators were responsive to what the industry indicated it required guidance on, because this made life easier for everyone.

The Chairperson said he felt the reply was going to be like that, because these guidance notes were in the regulator’s self-interest to issue. They helped the regulators implement the law and Parliament had some measure of oversight over that. He wanted the industry to note that the Committee was going through even the most trivial submissions made, so it could not be said that Parliament was not giving it the fullest attention. There also needed to be some give and take.

He then moved on to point seven, which was: “registries containing relevant information should be kept by the Companies and Intellectual Property Commission and be publicly available”. He felt this was a banal point, which was agreed with by the Committee.

The Chairperson moved on to subclause (e), the definition of ‘client’ in the Bill. Here a decision had been made already and reference had to be made to the new amendment.  

Mr Makhubela said it had been proposed that the definition be deleted.

The Chairperson on clause 1 (f), said the definition of the Counter-Money Laundering Council must be deleted, because it was being abolished.

He moved on to clause 1 (g) dealing with PIPs, where all the points in the addendum had been covered already. He asked if industry wanted to comment for a last time.

Ms Singh said she had already made the comment that it was fine if the list went into a schedule, but there still needed to be discussion about the clauses which required enhanced due diligence.

The Chairperson asked for Treasury’s response.

Mr Makhubela said Treasury would consider transitional measures.

The Chairperson asked for it to be noted in the Committee’s report to Parliament that there should be reports to the Committee every six months on the continued implementation of the Bill. He asked about the point in the addendum on executive office under clause 1 (h).

Mr Smit said it was not a point on its own, but it was within domestic PIP.

Ms Singh said ‘executive officer’ should be given the common understanding of what a chief executive officer was.

The Chairperson said if he was correct, Treasury had responded that this was not so common.

Mr Smit said there was a specific definition of what an executive officer was, regardless of whatever title was used, and that was the targeted position.

The Chairperson said the Committee agreed and asked about why the definition of ‘legal person’ excluded a trust, partnership or sole proprietor.

Mr Smit said in law a trust or partnership did not have a full legal personality in the same way a company did. These were dealt with in substantive sections of the Act which indicated how to deal with a partnership or a trust.

The Chairperson said the Committee agreed to that, and clauses 1 (i) – (n).

Dr Khoza said while she had supported the removal of ‘prospective client’, there was another aspect. What happened where a person brought cash to a bank and the person asks for an undertaking that the institution would not report them to the regulators? Would that person be a ‘client’, because they had not entered into a contractual relationship? Perhaps the person could become wary and leave with their cash, but what would happen in such a case?

Mr Smit said those scenarios did happen and the person would not be either a client or a prospective client of the bank, but in the reporting sections of the Financial Intelligence Centre Act (FICA) there was an obligation on institutions to report something like that as suspicious. It was the behaviour of the client in not wanting to be identified which triggered the suspicion.

The Chairperson asked whether there had been instances where a regulator had sanctioned an AI for not reporting this type of suspicion.

Mr Smit said FIC had not had an instance where AIs had failed to report.

The Chairperson said the Committee agreed to clause 1 (o), but asked for an explanation for the deletion of terms under clause 1(q).

Mr Smit said the definitions were in the wrong place, and they have been reordered into alphabetical order.

Mr Lees asked why the Chairperson had not dealt with the definition of ‘non-compliance’, as per the addendum.

The Chairperson asked for an explanation of the points raised by industry regarding the definition.

Mr Smit said on the first comment, this was inherently what the supervisor must do, because every section where the Bill required an AI to do something it stipulated that this must be done in accordance with its own RMCP. This by implication incorporated the RMCP into what a regulator must consider when testing for non-compliance. A determination of compliance could therefore not be done without considering the RMCP.

The Chairperson understood the response to the second point raised in the addendum, but wondered why the Johannesburg Stock Exchange (JSE) would make the point.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said perhaps the JSE viewed matters through their listing requirements. These included compliance with corporate codes, such as the King III Code, even though these were not law. So when the JSE considered non-compliance, it may be viewing it from the extreme, which was non-compliance with the law, leading to a criminal sanction. Apart from that, there was non-compliance with its listing requirements, which gave it the power to unlist companies. He agreed with NT’s position, however, that non-compliance here was more of an administrative action and would not necessarily lead to criminal sanction.

Clause 2

The Chairperson asked to move to clause 2 of the Bill. He asked whether Members had any comment on clause 2 (a) which in his view simply expanded the FIC’s mandate. Receiving no comment, he moved on to clause 2 (b), which dealt with access to information held by the FIC. He had noted a Member saying that the Minister should be able to regulate further bodies which may have access. He then asked whether any Members felt that the entities listed in the Bill which the FIC may have to share information with, could need to be increased, therefore requiring scope for the Minister to list further bodies in regulations -- particularly as relevant bodies may be created in the future.

 

Mr Smit said from a policy point of view this should be regulated by Parliament, because the information held by the regulators could be very sensitive and should be strictly controlled.

The Chairperson remembered Mr Smit having said this previously. Further, the Committee was bound by the United Nations to enact clause 2 (c).

Clause 3

The Chairperson said with clause 3 (a), the Committee supported the regulators being able to initiate analyses themselves. Regarding clause 3 (b), the same applies as with clause 2 (b) and the Minister should not be allowed to regulate further bodies. Lastly, clause 3 (c) was accepted.

Clauses 4 – 8

The Chairperson said these clauses had all been adopted previously.

Clause 9

The Chairperson said the first point in the addendum regarding the national risk assessment had been dealt with already. He then asked for comments from Members on the issues raised and proposed solutions in the addendum. He noted that Treasury’s response to the concern that smaller firms would have difficulty in implementing the clause was rather glib, being that guidance and training would help to alleviate some of these difficulties. What did this really mean?

 

Mr Smit said there was more which needed to be said, but the point was that it was not necessarily the size of the institution which determined the level of compliance required. The business the AI conducted would determine its risk and the guidance to be provided would help institutions to understand how to apply this. A small single practitioner attorney, which dealt only with transfer deeds for high-end clients, would be engaging in high risk business.

The Chairperson said the next point was that proof of residence should not be required, and NT had responded that regulations would be used to remove this requirement. Did this mean existing regulations, and how was this relevant to the Bill?

Mr Smit said much of the concern about the onerous nature of the compliance burden operated from the assumption that the current requirements would continue.

The Chairperson said this meant it was more germane to the implementation process than the Bill. Further, there was nothing which the Committee wanted to add on clause 9 (1), but he was a bit confused by clause 9 (1) (c).

Mr Smit said that was the current provision and if a client dealt with an AI through an intermediary, then the person that the institution saw was not the client who was the contracting party. The AI must then understand who they were dealing with, what that person’s authority was to act and the identity of the actual client.

The Chairperson said he could understand what it was being said.

Dr Khoza said she unsure whether government had adequately appreciated that the net worth of individuals in South Africa was skewed. People who lived in traditional communities may have huge houses, worth millions, but simply because they did not possess a title deed and had permission to occupy only from a traditional leader, their net worth was skewed. The reason why this was relevant was that the issue of addresses in traditional communities could begin to be addressed through this Bill. It could force South Africa to move towards formalising those settlements. This could possibly assist in addressing the skewed net worth of some individuals. A further issue was that municipalities were not getting their property rates from these households, simply because they were not in the formal fold. In as much as the proof of address requirement may be left out, it could assist in moving towards this direction.

The Chairperson said this was a bigger issue than this Bill. When he had been involved in processing the Property Rates Bill, the ANC study group had felt very strongly in 2004 that it was not acceptable that there were working people who had to struggle to pay municipal rates, but traditional leaders who had huge assets did not have to.

Dr Khoza said industry was also moving into these areas and did not pay property rates.

The Chairperson said Dr Khoza was correct, but this was something which the ANC must deal with.  He then asked to move to clause 10.

Clause 10: Proposed Sections 21A, 21B, 21C

The Chairperson said the ‘prospective client’ here was being dropped. The JSE had indicated that the term ‘prospective client’ was confusing and NT had replied that comment would be provided after further consideration.

Mr Smit said that response had been made before NT had held the last workshop and the responses in red overrode them.

Dr Khoza asked whether the question around the confidentiality between financial institutions and their clients had been discussed in relation to this clause.

Mr Smit replied that it had not been discussed in relation to this particular clause, but it had come up in the most recent discussions and featured a lot in discussion with the banking industry. It was not so much about the banks’ protection of a customer’s information, but rather about where customers refused to give banks their personal information. The banks had requested the insertion of an obligation on customers to provide their information, but the policy problem was that this was not enforceable. One could not criminalise a customer for refusing to hand over their information. The only consequence possible was that the bank could refuse to do business with the person. The regulatory framework needed to ensure that every institution would require that information from the customer, so that customers could not shop around for an AI which was weak in compliance.

The Chairperson said he still felt that the proposed sections 21A and 21B still overlapped, but he had been responded to previously. The Committee accepted 21A, and asked for Members to look at the issues raised regarding clause 21B in the addendum.

Mr Smit said clause 10 inserted eight different sections in the Act and it was because they fell in the same place in the Act that they were contained in one clause. 21B spoke to the subject of the most discussion between NT, the FIC and industry. It dealt with what needed to be done about a beneficial owner and what had come out of those discussions was that there was not much difference in the idea of what the section was supposed to achieve. The disagreement was around the way the clause was read and understood. The clause required an AI, when dealing with a legal person, to understand the structure of the company or hierarchy of ownership. Further, subsections (2) to (5) required the AI to determine the beneficial owner and do what was reasonable to verify the identity of that owner. Subsection (2) dealt with the principle objectives, and then subsections (3), (4) and (5) gave the cascading effect which had been discussed. There were three ways in which an AI could identify the beneficial owner and they had to go through the sections sequentially. So if the answer was found at the first stage under subsection (3), then there was no reason to continue on to subsection (4). The threshold of shareholding would be given in a guidance note and assist in discharging the compliance obligation. In many cases, the 25% or more owner was not a natural person, and even if a natural person did own 25%, they may not be the beneficial owner. If this was the case, then the company must move on to subsection (4) and look for an arrangement which would indicate who the natural beneficial owner was. For example, where there was a shareholders’ agreement under which shareholders agreed to vote in a block, this would be used to determine the beneficial owner. The sub-section clause was the default position, where the AI had exhausted routes to identify the beneficial owner and the day to day senior managers were deemed to be the beneficial owner. Behind all of this was the principle objective, from a money laundering combating point of view, that whenever a legal person dealt with an AI, there would be the name of a natural person in the records who would have to account for who ran or drew the ultimate benefit from the company. In many cases this would be the person who ran the company, but when it came to subsection (5) there was a person who would be deemed the beneficial owner unless they informed the AI who the true beneficial owner was. This person would be held accountable for any crimes committed in the institution’s name. The ultimate aim was to ensure companies did not become opaque institutions where there was no transparency about the beneficiaries of the companies’ business.

The rest of section 21B went on to apply similar requirements regarding trusts and partnerships which were not legal persons, but were groupings of individuals which acted in the name of the collective. The principle applied here was that the institution must identify the natural persons who were partners or the trustees of a trust, doing what was reasonable to identify and verify those identities. Questions had been raised about very large partnerships, where it would be very difficult to identify each and every partner. However, it would not be difficult to determine who the senior partners of this entity were, and from there establish who was the controlling mind. The identity of that person would be verified by the AI. The same would apply to very large charitable trusts, which had a lot of figureheads as trustees to lend credibility to the trust. Here there would still be a small board-like structure which controlled it. Again, the object was to determine the controlling minds. The way the AI was to manage this was if it was a large charitable trust or a large firm which operated as a partnership, these were not likely to be institutions which would launder money through the business. Therefore, the risk may be lower and the AI would not have to go to the ends of the earth. If it was a family trust which could be used for tax evasion or to obscure the ownership of property, more questions would have to be answered.

Dr Khoza asked if the intention was to exclude societies which were established, where one could not hold one person accountable. There were many examples of this in townships, where people had collective savings schemes. Were these things factored in?

Mr Smit said societies were a difficult entity to work with, because in many instances societies were constituted as legal persons through their constitutions. They could open bank accounts in their own name and this was often true for sports clubs, which functioned similarly. The AI would then have to determine who the natural person was who represented this body and had signing powers on the accounts, for example. That person would be held accountable, because there were no ownership structures -- the society simply operated as a collective with a legal identity.  In other instances, societies were not considered legal persons and those were difficult to deal with, and those cases could at best be considered a partnership. In such a case, where there was no constitutive factor which bound the people together as an entity, the AI would have to go back to what was in clause 9, where people acted for one another. Here the AI must again understand the nature of the business, whether it was indeed a business, and whether there was risk of the business trying to launder money. A tennis club or collective savings scheme was unlikely to be used to launder money, so it would not be a great risk.

Dr Khoza said there was a case in her province where a person had bought a 25% share in a piece of land, which had not been done through the deeds registry, but through a form of shareholders’ agreement with the aim of hiding the transaction. In a case like that, who would be the beneficial owner be?

Mr Smit said the question of who was a beneficial owner was very closely linked to the proportion of benefit one derived. The person who owned the majority, or significantly controlled a company, was the person who investigators would pursue.

The Chairperson said this was an original point and was valuable for shaping thinking in relation to other legislation.

Mr Lees said he could not see the cascading effect catered for in the text of the clause.

The Chairperson said he felt the same way. If he understood correctly, what was being said was: subsection (3) was in effect, and if this did not produce the desired result then subsection (4), and if still nothing, then subsection (5). Subsection (4) reads: “if an AI was in doubt”, and then goes on to say in subsection (5) “is unable to identify”, having gone through subsection (3) and (4). He thought it would have been drafted more simply. It could say something like: “if subsection (3) above does not achieve the required goal then, you apply the following”. Then subsection (5) could read “still further, if subsection (4) does not achieve it then…” That was not elegant, but it was clear. He was cautious about adopting the provision, because all that had been done in the draft amendments was to move the reference to (3), (4) and (5). This did not make it clear that they were sequential or that they were contingent.

Mr Smit said it had been difficult to come up with new drafting, because it was intended that the original drafting was clear that it was sequential, and the team’s minds had not been changed. What was attempted with moving the reference to subsections (3), (4) and (5) in subsection (2), was to make it clear that when applying subsection (2) this must be done in accordance with (3), (4) and (5). Therefore, when one reads subsection (2), this must be in conjunction with (3), (4) and (5). The sequential nature then lay in the further subsections themselves. When one read (3), it applied subject to (4) and (5). In other words, subsection (3) would apply conclusively if the facts meant (4) and (5) were not relevant. The same would be true if the facts allowed for an application of (4), but not (5). Essentially, an AI would try to apply (3), but if it did not work then it would still be obligated to apply (4), and if it still did not manage to determine the beneficial owner, (5) applied. If this needed to be explained further -- and not in legalese or drafting terms -- then this was where guidance notes would come in. Instead of having a ten page explanation in the Act, the explanation could be formulated in a proper guidance note which the industry would be satisfied that it explained it properly.

The Chairperson said he was not convinced by the answer, and it could be done more simply. If his answer was valid, then why was there misunderstanding in the first place around the subject? He would like Adv Jenkins and the other lawyers in the team to work on it. He recommended that the Committee did not vote on the clause now. He asked whether industry was happy with the formulation.

Ms Singh said she was not happy with the drafting, because it was felt that the cascading effect was not coming through clearly enough.

The Chairperson said while guidance could be given, he did not think Parliament should abandon its responsibility to produce legislation which was simple and clear. He felt Members owed it to themselves to make sure this was drafted more simply, because that was one of its obligations as the legislature.

Mr Makhubela agreed, and the team would work on a way forward.

The Chairperson asked to move on to proposed section 21C, which dealt with on-going due diligence. He directed Members to page 20 of the Addendum, where the Casino Association of South Africa’s point about not being able to do this for single transactions had been accepted. He asked for an explanation on why NT disagreed with the submission that section 21C (a) (i) and (ii) amounted to the same thing.

Mr Smit said section 21C (a) (i) referred to an AI understanding whether a client’s transactions over time corresponded with what the AI knew about the client from the information received when the business relationship was started or provided thereafter. For example, if he had opened an account, the AI would know he had a salary paid on the 15th of each month and that by the 20th debit orders had gone through, and that that pattern repeated itself. If suddenly the pattern of behaviour changed and he were to start receiving payments from foreign jurisdictions or started making transfers to foreign jurisdictions, then he would not be doing what a salary earner did. The AI would need to find out if anything needed to be updated regarding the client’s source of income or whether anything was amiss. While section 21C (a) (i) dealt with an on-going process, (ii) dealt with exceptional transactions. The AI would know that the client’s transactions had a fairly stable value and if a transaction happened which was completely out of the norm, then it should be picked up. This could be because the value was far higher than normal, or an overly complex method had been used to achieve what could be done simply. Therefore, section 21C (a) (ii) referred to spikes in behaviour, more than the patterns of behaviour covered in section 21C (a) (i).

Mr Lees asked about the consequences of a long standing client suddenly exhibiting a stark change in transaction patterns, but refusing to give the AI information regarding the transactions. Did this place an obligation on the institution to cancel its relationship with the client, or was it simply a reporting requirement?

Ms Tobias asked whether section 21C (a) (ii) dealt with spikes of smaller amounts, because banks were able to alert clients of small transactions.

Mr Smit replied to Mr Lees by saying the Act did not place an obligation on an AI to terminate a relationship with a client, other than where they were unable to identify their client or doubts arose about what the customer had told them. When these sorts of pattern changes occurred, the Act explicitly stated that the AI may continue doing business with the client. If the FIC saw some merit in not concluding a particular transaction it had the power to intervene to stop it, but this would not extend to terminating a business relationship. In some instances, if the changes were suspicious enough, then the institution may decide it did not want to do business with the particular person, but that did not happen in relation to every report the FIC received. The FIC received many thousands of suspicious transaction reports, but there was no expectation that AIs terminate all these relationships.

To Ms Tobias, he responded that the obligation in section 21C (a) (ii) did not require AIs to report every single suspicious transaction -- they would be required to make a decision about whether something was worth reporting. The FIC had made AI’s obligations clear in guidance notes, particularly as they were protected only regarding customer confidentiality if they reported as the Act required. If they did so outside of what the Act required, they were liable to their customer. They must therefore ensure they could justify what they reported about their customers.

Ms Tobias said this section was very important, because when a client was involved in money laundering they were not going to be obvious or want to leave a trail. An individual could approach five or more people to transact on their behalf, and split up a transaction which would have been noticeably large. She did not want to suggest a cumbersome approach for the industry, because this would go against the objects of the Bill. However, she wanted to know how such a case would be picked up. She would like to find a way of checking the consistency of such activities, but she did not know how.

Mr Smit said it was correct that the subsection was important, because it was not currently in the Act and was an innovation. One of the lessons which had been learnt since the inception of the Act was that one did not catch a money launderer on a single transaction. It was when they started repeating things, thinking it would not be noticed, or where they had to keep up a particular profile otherwise the AI would notice. On-going due diligence aimed at picking up when a client was no longer able to maintain a lie which they had told an AI at the outset, or they had exhausted all the people they could use as intermediaries, leading to a noticeable change in their behaviour. This was normally the point at which AIs picked up on the behaviour and reported to the FIC. Many of the more sophisticated institutions already conducted some sort of on-going due diligence to protect themselves, but it was not a legal obligation, which was why it had been introduced into the Bill.

The Chairperson said the point about a client splitting up a transaction had not been answered.

Mr Smit said the only way that could be picked up was if the intermediaries had never transacted in that manner, denomination or volume before. If the change became a repetitive pattern, it would also be picked up.

The Chairperson said supposedly the client would find someone who could transact in the required manner, without it being picked up as unusual. What would happen in that situation?

Mr Smit said this was why using institutions which dealt with large sums of money and could justify why they had large sums of money, like front businesses, were very attractive for money launderers. This was very difficult to pick up and institutions which did the required due diligence on who the client was, would be best placed to pick it up. If a customer lied or was not forthcoming with that information, then the chances of catching them were reduced.

Ms Tobias said this was precisely why the Committee was saying AIs must accept that background checks needed to be done on various people, such as close associates and beneficial owners. If the abovementioned concern was not amplified enough, the extent of due diligence required would not make sense. It must be made clear that the intention was not to try to make burdensome legislation, but to zero in on certain activities which were taking place. These activities were occurring and in a very sophisticated manner, and were even being perpetrated by people with industry experience.

Mr H Chauke (ANC) said this was the first time he was coming across the Bill, without any political briefing. He wanted to know the link between the laws relating to donations and the ability of the Bill to deal with the new forms of pyramid schemes. These schemes did not see money moving at first, but at a later stage money moved in bulk. He was concerned that the Bill may be backward in dealing with developments such as these. Lesotho and much of SADC had recently fallen victim to the “MMM Scheme” and he wanted to know if the Bill spoke to such developments.

Mr Smit said the expectation was not that the proposed sections would catch every single criminal, but it should improve one’s chances. Many reports had been picked up relating to pyramid schemes, or what was believed to be a pyramid scheme. This would then be reported to the South African Reserve Bank and the Financial Services Board to make investigations. Most of these were where on-going due diligence pointed to a person doing something which they had not done before and which did not make sense for them to do. An example was where fairly low income earners began to make donations to people. This was difficult to pick up, because the transactions were small and it would have to be a large number of these transactions, with two or three institutions. In such cases it may be picked up, but it was very difficult to catch in the beginning and only really showed up at the end where people were losing a lot of money.

The Chairperson said he assumed pyramid schemes would be covered by other legislation, but was there a role for the FIC in this arena? Mr Chauke was right -- there was a lot of abuse of financial institutions to do this. He suggested that the Committee did not vote on the present matter and left it in suspension, to be picked up at this point in future.

Mr Smit said FICA did not specifically address pyramid schemes, which fell under the Banks Act mainly because it was doing banking business without a banking licence, or under the Financial Services Board (FSB) for providing financial services without a licence. The FIC finds out about pyramid schemes only when they have been carrying on for a long time and after the fact was able to trace how the money flowed, towards determining who was responsible. The FIC therefore assists in investigations by the FSB or Reserve Bank.

Ms Singh said in the banking sector there was a daily transaction model, which was informed by what the client disclosed at the beginning of the relationship and the transactions which were going through the account. From there, banks could pick up on whether something could be a Ponzi scheme.  The difficulty at present was that financial institutions had no authority to freeze an account and therefore this had to be reported to the Reserve Bank and the FIC. They would then do investigations and only then could the account be frozen. By that time, there had been cases where millions had already left the account.

Closing Remarks

The Chairperson presented the Committee’s programme to the Members and said some changes may have to be made, because he had been told that the last week would be a constituency week.

Secondly, he noted that the Committee’s researcher would be leaving to become an advisor in the office of the Premier of the North West. While he congratulated her, he said the Committee could work only at the pace at which it gets the necessary support services. That morning, he had heard that another Bill was coming to the Committee and he felt the Committee should decide that if necessary, it would have hour or half an hour meetings. This would be a sort of go-slow. He had notified all the senior people in Parliament of this intent. He had notified the executive that the Committee could not process any more Bills this year. Further, there were rumours circulating in the media that the Committee was going to rush the Taxation Laws Amendment Bill [B4-2016]. He wanted to make it clear that the Leader of Government Business and Parliamentary Council had stated that they would fast track the Bill, but that merely meant that it must be prioritised. The Bill would not be passed by 1 March 2016 -- that would be impossible. The Bill would be introduced by the Minister on 25 February 2016 and only after that could it be ATC’d. Therefore, the public hearings which were intended for 29 February would be deferred. Unless the Opposition co-operated, the Committee could not go ahead, but the Programming Whip and Office of the Chief Whip would discuss the matter. He did not know whether 29 February would happen, as it depended on the Opposition’s cooperation. Nowhere was it intended that the Bill would be passed by both Houses and promulgated by 1 March. He reminded Members that only with Tax Bills were draft Bills looked at. The procedure which he had in mind was to have public hearings and begin to discuss the Bill on 29 February, passing it soon after that, which was not at all irregular.

 

Adv Jenkins said he had provided the Members with a copy of the joint rules dealing with the fast-tracking procedure, approval for which was quite cumbersome. Secondly, what had been done in this Committee was to receive revenue proposals in the budget speech in February, then a draft Taxation Laws Amendment Bill and a draft Tax Administration Bill. Public hearings would be held regarding the drafts. Sometimes the Bill would be changed, but then the subsequent public hearings would be truncated. In this instance, there may not be any changes, which meant that public consultation would have been done.

The Chairperson said the Committee would stick to the rules and conventions of Parliament for the processing of Bills in a manner which ensured public participation. If the Committee were to ignore this procedure, someone would take the Bill to court and the Committee would have shot itself in the foot. In sum, the Committee aimed to deal with the Bill in an expeditious manner, but in a way which was consistent with the rules, norms and conventions about public participation. He felt the Bill could be completed by the middle of March, because in his understanding the Bill proposed a deferment of the provisions which were the subject of contestations. It was in both industry’s and the trade union movement’s interest to have the Bill completed quickly. Industry felt that Parliament was capitulating to COSATU and that since it was likely that the provisions would be postponed for two years, this may as well be completed quickly.

Mr Chauke asked if there would be consultation during the process of putting together the draft, because this could save the Committee a lot of time. The executive was passing the buck and making it the responsibility of Parliament, which had to expedite in a clumsy way and could become an embarrassment.

The Chairperson said the Bill would not be taken to the National Economic Development and Labour Council (NEDLAC), and it was not a requirement that NT take it there. Parties in NEDLAC were saying they wanted to see the draft, but there was no obligation on the Minister or Parliament to take it to NEDLAC. There had been statements made in the media which he did not think Parliament could shy away from reporting on, with it being said that the Member were ‘sleeping’ and had not ensured proper consultation. He would highlight the relevant parts of the Committee’s report to Parliament which outlined the amount of consultation done. He would make it clear when the public hearings started that the Committee had reported on the consultation which it had done.

Adv Jenkins said he had happened upon the Deputy Minister of Justice, whose view was that as the Bill had been on the statute books and deferred, that public consultations were not necessary. He disagreed, because if someone challenged the Bill, a court would always ask Parliament what it had done to ensure reasonable public participation in a particular instance, because this was a constitutional obligation. Joint Rule 216 (7), which dealt with fast-tracking, stated that the rule did not apply to legislation which was subject to section 18 of the Traditional Leadership and Governance Framework Act. In other words, if a Bill must be sent to the National House of Traditional Leaders to comment for 30 days, this must be done and the Bill could not be fast tracked beyond that. These were extra-parliamentary consultations or a statutory obligation to have consultation, and to him there was no difference between that instance and the Doctors for Life requirement that Parliament consult on every Bill. The constitutional requirements cannot be fulfilled historically, and if a Bill was introduced, the public must be allowed to comment.

The Chairperson said the Chief Whip of the ANC agreed to public hearings, with appropriate notice, but the Bill would be completed by the middle of March.

The meeting was adjourned.

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