Financial Intelligence Centre Amendment Bill [B33-15]: briefing ; North West Provincial Treasury on its 3rd & 4th 2015/16 Quarter performance

Meeting report

The Chairperson noted that money-laundering was a global challenge and that numerous laws had been adopted in South Africa to protect the integrity of the domestic financial system. South Africa was among the members of the United Nations who had committed themselves to fight against money laundering and financing terrorism. The commitment was strengthened by bilateral agreements culminating in the creation of the Financial Action Task Force (FATF). The Financial Intelligence Centre Act (FICA) was adopted in 2001. In 2015, amendments to FICA had been proposed. Since the adoption of the UN Convention against Corruption in 2003, South Africa had been under pressure to adopt it domestically. The current legislation was falling short of the recognised international standards for combating corruption and money laundering. Added to this, section 45B of FICA was declared unconstitutional by the Constitutional Court in 2014.  

Briefing by the National Treasury on the Financial Intelligence Amendment Bill [B33-15 (s75)]
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy in National Treasury, noted that financial crimes should be clarified in that South Africa had joined with other countries to fight these crimes. The commitment to fight these crimes went back to 2001, however the cost of compliance seemed to be high. At the same time, the abandonment of the fight would be too risky. He compared a financial system to the blood system in the body because if the blood was infected, all blood circulating in the body would be infected. This was applicable to the financial system. Money laundering which were used to support terrorism affected global peace and stability. Financial crimes were mostly about officials stealing money. Most cash was taken across the country and was deposited in foreign banks. These were some of the issues the new law would be dealing with. The Bill was so strong because it required a service provider to know his or her customers or financial institutions and to know where their customers were sourcing their monies.
In the financial sector, money was mobilised more than any other industry and the main challenge was to control the flow of the money between two countries whose financial control was regulated by two distinct sets of domestic laws. How one could ensure there was consistency when a crime was committed in country A and country B? Consistency would be possible only if these two countries incorporated international standards in their domestic law. Advanced countries had created peer reviewers whereas other countries relied on the International Monetary Fund (IMF) review. Financial ministers established the Financial Action Task Force (FATF). It is an intergovernmental body responsible for understanding terrorist financing risks, developing global standards and evaluating countries' compliance. In 2003, it was chaired by South Africa.

With regards to international standards, there are some countries that were either lagging behind or did not express their concerns. The United States enforced sanctions against non-compliant countries in that it was difficult for such countries to have access to dollar stock market. If a country did not have access to the dollar stock market, it was difficult for it to trade. Trade was done in terms of dollar currency.

There was the Tanzania case where it was alleged that Standard Bank bribed Tanzanian officials. People would say that no one who was found guilty. The issue here was not about pronouncement of guilt but about having suspicion of guilt. It was not desirable to wait until someone is found guilty, otherwise other institutions would impose sanctions. It was not the first time that the Standard Bank was fined. The case of Tanzania was the second matter in which the Standard Bank was fined.

The amendment to FICA was aimed at extending the objectives of the Financial Intelligence Centre (FIC) to provide for the FIC to assist in the implementation of financial sanctions and to administer measures pursuant to resolutions adopted by the United Nations Security Council (UNSC); extending the functions of the FIC to provide guidance to accountable institutions in respect of the freezing of property and transactions pursuant to UNSC resolutions; deleting provisions relating to the Counter Money Laundering Advisory Council; providing for a risk based approach to client identification and verification; providing for the strengthening of customer due diligence measures including making provision for customer due diligence measures in respect of beneficial ownership and prominent persons; providing for the obligation to keep identity and verification records as well as transaction records; setting out the procedure in respect of financial sanction control measures pursuant to the notification of persons and entities identified by the UNSC; providing for Risk Management and Compliance Programs, governance and training relating to anti-money laundering and counter terrorist financing; providing for a warrant to conduct inspections; providing for a financial penalty to be paid into the National Revenue Fund; providing for further procedural issues in respect of appeals; and making further provision for offences.

Discussion
Mr S Mohai (ANC; Free State) welcomed the Bill and commented that it was a good legislation. He sought clarity on whether the Bill would contribute to peace and security and on how it would, in practice, fight against money laundering and corruption at international level. How would the legislation be implemented with regard to a country which was not a signatory to the Corruption Convention?

Mr L Nzimande (ANC; KZN) welcomed the Bill and sought clarity on record keeping. Normally, records were kept in South Africa. According to the Bill, records could be kept anywhere. Was it not a risk to keep records under another jurisdiction? What were the challenges of keeping records somewhere else?

Mr T Motlashuping (ANC; North West) welcomed the Bill and sought clarity on what impact the Bill had on what the former President Thabo Mbeki had said with regard to money laundering.

Mr Momoniat responded that he believed the Bill would enormously assist in combatting money laundering and corruption. However, the Bill alone could not be expected to respond to all problems. It ought to be assisted with other domestic policies and strategies to achieve its goals. He gave the example of tax evasion. This needed to be addressed by the South African Revenue Service (SARS). The Bill will focus on issues involving officials taking public money illegally and on fraudulent transactions in the context of import and export of goods and services.

Mr Momoniat noted that some of the challenges that might be faced at international level were that some countries lacked expertise or resources to implement the Corruption Convention. The compliance costs were a major problem and countries could not merely be penalised for lacking resources.

On the question of records, Mr Momoniat responded that nowadays data was not kept in files, but rather they were kept electronically. The real risk of keeping e-data was the possibility of being hacked. The problem was not where records were kept, but if they were to be stolen through hacking the data system. Types of records kept included records of financial institutions about customer accounts and financial transactions. The issue of what types of data ought to be kept was still debatable.

The Chairperson put the Bill to the Committee for adoption.

The Bill was adopted unanimously.

National Treasury on North West & KwaZulu-Natal 2015/16 Quarter 3 & 4 financial performance
Ms Ogalaletseng Gaarekwe, Acting Chief Director: National Treasury, noted that National Treasury managed fiscal risks in the provincial sphere of government through coordination of the provincial budget processes; monitoring and analysis of provincial spending; briefing the Minister and MECs on fiscal risks in the provincial sphere and capacity building and training.

Ms Gaarekwe noted that adjusted 2015/16 provincial budgets were R10.7 billion whereas provincial aggregated expenditure as at end of third quarter on 31 December 2015 was R3.3 billion. Kwazulu Natal provincial expenditure was 73.5% of adjusted budget and North West spent 74.4%.

The following observations were made about KZN: Newly built schools and clinics and drought impacted on spending because they were not budgeted for; R400 million was spent on housing allowance increments and a 6% increase in transfers to NGOs was experienced. As at 31 March 2016, with the exception of the Department of Human Settlements, all other departments reflected under expenditure.

The following observations were made about North West: The province addressed the overspending on compensation of employees through a moratorium on filling posts; the province bore the responsibility to settle accruals in the Health and Education sectors; and R300 million which was unbudgeted for was spent on public works and roads. As at 31 March 2016, R34.1 billion was the aggregated expenditure, which was characterised by underspending on conditional grants and infrastructure allocation.

North West Provincial Treasury on 2015/16 Quarterly 3 & 4 expenditure
Ms Wendy Nelson, North West MEC: Finance, Economic and Enterprise Development noted that Ms Gaarekwe had furnished the Committee with the financial statistics and that she would be touching on issues which were not raised in Ms Gaarekwe’s brief. She noted that the North West Department of Finance had put some stringent measures in place to deal with shortcomings arising after the 2014/15 financial year. In responding to these measures, the CEO was appointed and one of the departments was closed and the filling of posts was abandoned. This approach was not easy to implement but it had to be done to avoid bankrupting the province. With regards to education, a lot has been achieved. A team from the department was sent to every district to monitor and evaluate teachers. Some teachers were found to be on sick leave whereas others had applied for sick leave. Certain recommendations were made and some of them were implemented. Having teachers on sick leave meant having temporary teachers, which in turn, had implications on the budget. The province was faced with the problem of accrual in its three departments. Accrual in the department of education was astronomical where accrual was R1.4 billion. The accrual was brought down to 50%. Likewise, the accrual of the department of public works was reduced. For all three departments, all critical areas were looked at. Accruals were a big challenge. Another problem was the debt  national government owed to municipalities. The North West Provincial Treasury worked hard to see the matter was addressed to ensure that these debts were paid. An intervention to ensure that bills were paid within 30 days was provided. Mechanisms put in place where an invoice was not paid within 21 days was to notify National Treasury. National Treasury would ensure that an invoice was cleared within nine days. For the North West economy to grow, the focus had been on the development of rural areas with an emphasis on agricultural activities. The North West province was experiencing 28% unemployment. Mining had been the drive behind the province’s economic growth.

Discussion
The Chairperson felt that the monitoring and evaluation approach was very good; hence there was noticeable change in the financial performance. On economic growth, the Chairperson remarked that there was a need to come up with strategies that would attract tourists. Tourism could contribute to provincial economic growth.

Mr F Essack (DA; Mpumalanga) welcomed the presentation and sought clarity on the R400 million spent on housing allowances. He interrogated the presentation in terms of fruitless expenditure and irregular expenditure which had dramatically increased. He asked what caused the accrual increase compared to previous financial years and what the Provincial and National Treasury did to address unauthorised expenditure.

Ms T Motara (ANC; Gauteng) sought clarity on the reason for the drop in compensation of employees. She commented that the accruals went extremely high compared to previous figures and sought clarity on what factors contributed to accruals.

Mr Mohai sought clarity on the provincial economic drive informing national economic growth. He asked if standards of accountability were in place, if there were some corrupt officials and whether the management capacity was efficient.

Ms Nelson responded that previously mining activities were the major economic drive. Taxes on revenue were problematic. On the question of taxing, the Gauteng province was benefiting enormously from mining activities. For economic growth, the North West province had committed itself to allocating 60% of the budget on the rural areas programmes. The larger portion of budget ought to be allocated to municipalities. A document had been drawn up which illustrated what were the economic drivers in each and every village. It also illustrated what the shortcomings were in economic development and what were economic opportunities. The final draft would be released in June 2016. The document identified nine items which were classified as the food basket, including milk and bread. The question asked was from where these items of the food basket come. Could milk be found in X village or was it supplied from village Y or another district or another province?

Ms Nelson noted that monitoring and evaluation was necessary to ensure good operations and to combat corruption. She agreed that the North West province was facing a challenge with fruitless and irregular expenditure and that the matter needed to be addressed.

The Chairperson remarked that the Anti-Corruption Task Team was entrusted with fighting corruption and bribes and it had done some work in North West and a report on what the Team had achieved should be submitted. It also needed to submit its audited financial statements.

The Chairperson thanked the MEC and her team for their time.

Ms Nelson thanked the Committee and invited Members to visit the North West province.

The minutes of 18 May 2016 were adopted.

The meeting was adjourned.