Induction & Stakeholder Engagement on their role, mandate & key strategic objectives, with Deputy Minister

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Finance Standing Committee

20 August 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

The Committee considered presentations from the eight entities represented at the induction meeting, starting with the National Treasury (NT), Financial Intelligence Centre (FIC), Government Technical Advisory Centre (GTAC) and the Cooperative Bank Development Agency (CBDA).

The Members sought clarity about the number of entities overseen by the NT -- how many of these were established by law, how many by proclamation and how many were just components of the NT. They agreed that the 6th Parliament should consider the ones that had been proclaimed and re-establish them by law in order to define their accountability mechanisms clearly.

Members asked how the FIC ensured confidentiality of the information it dealt with, its capacity to combat money laundering beyond the borders of the country and how the entity was making the public aware of this crime. There was also a unanimous recognition of the need for lifestyle audits. It was felt that the FIC should be proactively at the forefront of it, not only when prompted by law enforcement.

The Members were concerned about the cooperative banking industry’s lack of status in the banking space and also asked how the Cooperative Banks Development Agency (CBDA) was creating public awareness about cooperative banking for people participating in stockvels. There was a call for an official report on the Jobs Fund, detailing the number of jobs that were created and all the grants that were injected into it, as well as their beneficiaries.

The NT clarified that although public records listed 17 entities as being overseen by the NT, South African Airways (SAA) had been returned to the Department of Public Enterprises (DPE), thus leaving the NT with 16 entities. It agreed that the governance of these entities needed to be reviewed, and the ones that were proclaimed needed to be established based on an Act of Parliament in order to streamline their accountability mechanisms.

The FIC emphasised that although it dealt with sensitive and confidential information, all its operations were determined by the Act. The Act also defined how this information was to be handled by a third-party recipient -- typically an assigned sanctioning officer within a law enforcement agency. The entity also clarified that had not initiated any public awareness campaigns about money laundering legislation, but had focused its efforts on providing guidance mainly to financial institutions that had to comply with the Act, and also on identifying suspicious transactions.

GTAC said that it was working with the Department of Higher Education and Training and any other interested stakeholders to run winter schools through which young economists could be exposed to the challenges of public policy decision-making. The intention of the programme was to get them interested in working within the public sector; even if it were for short internships.

The CBDA admitted that SA’s cooperative banking sector was still far behind from the rest of the world, but also had immense growth potential. The stockvel industry consisted of about 11.4 million members, whose joint revenue generation was currently close to R44 billion, but few benefits accrued to those members in real economic terms. The cooperative banks offered an opportunity of mainstreaming them into the fraternity of the formal financial banking system. For this to be realised, there had to be some changes in the Act in order to accommodate this unconventional financial instrument.

The Committee then considered the presentations from the Office of the Tax Ombud (OTO), the Financial Sector Conduct Authority (FSCA), the Accounting Standards Board (ASB) and the South African Special Risks Insurance Association (SASRIA).

The Members agreed that the OTO should be autonomous and omnipresent to oversee all South African Revenue Services (SARS) branches effectively, because any maladministration by any of them, without recourse, could eventually deter potential investments, business activities and even tax payment. The Chairperson indicated that the Committee would raise the OTO’s challenges during its next meeting with the Minister, and would discuss amendment of the legislation that governed the entity.

The Members said that the NT should finalise the establishment of the FSCA, starting with filling the vacancies of the Commissioner and Deputy Commissioners. They felt that the responsibilities of this entity were widespread and required an optimal and stable leadership structure.

They asked the ASB if there was a timeframe for the Generally Accepted Accounting Principles (GRAP) standard to be adopted by institutions, and to indicate how long it was. They also asked if there was any consequence management for the institutions that were not conforming to the requirements. This was based on the consensus view that the standards needed to be strengthened and compliance should be enforced even more, because too much of the state’s funds were being wasted through bailing out SOEs and other public entities; instead of spending them on service delivery.

There were doubts amongst Members about whether SASRIA would be sustainable when it had such a large influx of claims while offering low premiums and considering clients which other insurance firms were rejecting.

The FSCA acknowledged the point about the need to finalise its establishment. It was treating the matter with urgency and was in the process of recruiting potential candidates to fill the vacancies.

The ASB explained that the timeframes for the implementation of standards were determined by the Minister. The entity had developed transitional provisions that set out the process of adopting the standards. These provisions came into effect once the timeframes were determined, and this could take up to three years because most companies would typically not apply these provisions correctly the first time and there would thus have to be amendments made. They added that consequence management for non-compliant entities was the role of the Auditor-General (AG).

SASRIA said that the insurance claims had been increasing annually by 35% over the previous five years and the entity had attempted to improve its sustainability by increasing the premiums just enough to keep them affordable while it generated more revenue. Although there had been an increase in the claims during the first quarter of the 2019/20 compared to the first quarter of the previous year, the severity of the claims had since decreased notably.

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed the Members and all the delegates representing the different entities that were under the oversight of the Committee to the induction meeting of the Standing Committee on Finance; and introduced the agenda of the session. He said the Committee had a constitutional mandate of oversight over the executive organs of state, and that different sections of the constitution outlined the authority bestowed upon them to ensure that all these organs abided by the legislated directives in their service delivery.

Political Overview by Deputy Minister

Dr David Masondo, Deputy Minister: Department of Finance, said the meeting was taking place in the context of the national economy being in a poor state. This was illustrated by several macro and micro-economic indicators such as the unemployment rate and the gross domestic product (GDP) per capita. Although the National Treasury (NT) was responsible for the coordination of micro-economic policies, it was other departments and institutions that were responsible for their execution. For example, the South African Reserve Bank (SARB) was responsible for the monetary policy, but other crucial policies such as that of trade and labour were implemented by other departments. He mentioned that the NT was overseeing a total of 16 entities.

The first quarter had seen a 3.2% decline in the economy, and this was affecting business investment. This, in turn, was affecting job creation as well as the rate of generating the revenue required for service delivery. Members would be able to ascertain both the objective and institutional challenges that were being faced by the South African Revenue Services (SARS) during their oversight visit in the following week. Some of the key fiscal challenges that the NT was facing was a high wage bill, a high debt servicing cost ratio, and the bailing out of state-owned entities (SOEs), at the expense of service delivery for key sectors such as education and health. There had also been questions raised by several ratings agencies and public officials on what the NT should prioritise in its expenditure. Henceforth, the NT would rely on the oversight and guidance of the Committee in addressing these challenges and ultimately improving the state of the economy.

Briefing by National Treasury

Mr Dondo Mogajane, Director-General (DG) of the NT, began by summarising the five key roles and functions of the NT, as prescribed in Chapter 13 of the Constitution of the Republic of South Africa (1996) and Chapter 2 of the Public Finance Management Act (PFMA) of 1999. He then reiterated the vision and the mission of the NT in fulfilling its mandate and contributing towards the seven apex priorities of government. He indicated that the NT had structured its objectives by composing 10 programmes, including administration, asset and liability management, international financial relations as well as technical support and development finance, amongst others. These were under the supervision of the DG and other Deputy Directors-General (DDGs) within the NT, as delegated by the Minister.

Briefing by Financial Intelligence Centre (FIC)

Dr Mike Masiapato, Executive Manager: Analysis, FIC first outlined the background the Centre, from its establishment in 2001 to administer the Financial Intelligence Centre Act (FICA) of 2001, to starting its operations in February 2003. He said that the FIC was the only body that was legislatively authorised to receive and to analyse suspicious financial transaction reports, and thereafter generate and submit another intelligence report to relevant stakeholders – mostly law enforcement institutions and agencies within the criminal justice system. He stressed that although the FIC gathered data and provided financial intelligence; the entity was not an intelligence agency and had no authority to conduct investigations. The FIC was funded from the National Budget, reported to the Minister of Finance and was accountable to Parliament.

Some of the functions of the FIC include ensuring compliance and giving guidance in identifying the proceeds of crime, combating money laundering and the financing of terrorist and related activities, implementing financial sanctions relating to United Nations Security Council Resolutions, and supervising and enforcing compliance with the FICA. The financial and non-financial sectors that were identified by FICA as being the most vulnerable to money laundering included estate agents, banks, attorneys, the gambling industry, motor vehicle dealers and forex traders. The FICA enabled the FIC to supervise, enforce and receive regulatory reports from these sectors. In turn, the FIC would then disseminate financial intelligence reports to competent authorities and partners.

Mr Pieter Smit, Executive Manager: Legal and Policy, FIC, indicated that FICA was operating in conjunction with two other legislative facets, the Prevention of Organised Crime Act (POCA) of 1998 and the Protection of Constitutional Democracy against Terrorist Activity (POCDATARA) of 2005. This legislation was operating independently and not under the control of the FICA. In terms of domestic and international footprint, the FIC also represented South Africa at the Financial Action Task Force (FATF) – an intergovernmental body that focused on combating money laundering (ML) and terrorist financing by making policies and setting standards. The FIC also represented the country at the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) – a regional body that was comprised of 19 member states, and also dealt with combating ML and TF. The centre was also a member of the Egmont Group of Financial Intelligence Units (FIUs) to build partnerships and effect timeous information and knowledge sharing via a communication system.

Dr Masiapato then detailed the mechanism that the FIC follows in identifying and selecting proactive financial intelligence. This included triggers to inform selection, data selection models prepared by data technologists, selection, an analysis process and the dissemination of the reports. He also outlined the different criteria for high, medium and lower priority focus of these reports, according to their nature and complexity, monetary value of the alleged crime involved, the profits of alleged perpetrators involved, victim profiles, actions required by the FIC, as well as public interest.

During the 2017/18 financial year, the FIC had dealt with a total of 330 639 reports concerning suspicious and unusual transactions. There were also about 4.88 million transactions that were reported to have exceeded the cash threshold – above R25 000. The total value of asset forfeitures as proceeds to crime amounted to approximately R3 billion; and the value of funds blocked through FIC interventions was R55 million. The FIC had also received 2 243 information requests, contributed to 37 judicial actions and conducted 859 inspections, along with other supervisory bodies.

Briefing by Government Technical Advisory Centre (GTAC)

Ms Lindiwe Ndlela, Acting Head: GTAC, said the Centre had been established and gazetted on 31 March 2012 in terms of section 7A(4) of the Public Service Act (1994). Its mandate, as drawn from the NT and set out in section 6 of the PFMA, was to assist organs of state in building their capacity for efficient, effective and transparent financial management. Its role was formulated in the context of the National Development Plan (NDP) and the Medium-Term Strategic Framework (MTSF). Some of its core functions included rendering technical consulting services to the Centre of Government Departments and organs of state, providing specialised procurement support for high impact government initiatives, rendering advice on the feasibility of infrastructure projects, and also providing knowledge management for the projects undertaken.

The scope of the services it provided encompassed research and policy analysis services, transaction advisory services, project management and appraisal, management support and programme management. She outlined GTAC’s business offerings on key focus areas such as institutional strengthening, economic development, infrastructure development and programme management. She highlighted programme management, stating that it includes GTAC’s Municipal Finance Improvement Programme and the Jobs Fund initiative. She also mentioned that GTAC was also undertaking public economic capacity-building initiatives in partnership with institutions of higher education, focused on training young economists and Master’s degree graduates through an annual winter school and then hiring them as interns within the NT and GTAC. There were conversations currently occurring with the National School of Government and potential sponsors about expanding this initiative across the country.

Briefing by Cooperative Banks Development Agency (CBDA)

Mr Jeffry Ndumo, Acting Chairperson: CBDA Board, briefly discussed the background of the CBDA and as well as the legislative framework through which it manages its operations to fulfil its mandate. The role of the CBDA was primarily to create an enabling environment for the cooperative banking sector in South Africa (SA). The CBDA currently had 16 cooperative banks.

Ms Nomadelo Sauli, Acting Managing Director: CBDA, said that the CBDA had developed a curriculum that incorporated topics such as financial management, governance and internal auditing. This would form the basis of training some board members who were already stationed within rural areas, possibly working without adequately knowing how to oversee banking institutions. The Cooperative Financial Institutions (CFIs) did not have enough qualified executives and therefore resorted to equipping people internally. This curriculum was aimed at ensuring that these individuals were capacitated and competent. The entity had been working with the University of Pretoria and the University of Fort Hare to facilitate peer-to-peer staff training. There was no budget allocated to market these initiatives, but the entity managed to use word of mouth. The entity had also been running a seperate incubation programme for CFIs who had already obtained their prudential authority from the SA Reserve Bank (SARB). This programme was equipped with imperative skill packages such as the “Cooperative Bank in a Box”, operational support, intrusive monitoring, as well as training and development. The trainees would be monitored through assessments and adherence to performance standards.

The CBDA had also been working towards supporting the CFIs – implementing a digital banking platform project which was funded by the Department of Small Business Development (DSBD), and also connecting them to the national payment system through the assistance of ABSA. There had already been 15 CFIs who were piloting the project. One of the key challenges was that the banks did not have an institution to keep the finances – they still had to use commercial banks. Because of this, CFI members also could not access their funds whenever they were not in proximity to their respective CFIs.

As from 28 February 2019, the CBDA was currently overseeing four cooperative banks located in the Northern Cape, KwaZulu-Natal and North West, and also overseeing 22 CFIs. She explained that the institutions first had to be CFIs before being accredited to become CBIs. The CFIs jointly had 23 170 members, while the CBIs had 4 321. The CFIs had about R149.1 million in cash deposits and R192.1 million in assets, whereas the CBIs had R145.3 million in deposits and R177.4 million in assets. These figures were still minute when compared to the American cooperative banking industry, which was circulating in the range of trillions of dollars. In 2017, the then Committee had recommended that the NT should seek for assistance from the World Bank to develop a national cooperative banking strategy. The World Bank had appointed the Rabobank to head up this development, working with the CBIs and the CBDA. The first draft was expected to be completed by the third quarter. The CBDA and the Prudential Authority had been working together to strengthen the legislative and regulatory framework for the cooperative banking sector.

Discussion

Ms P Abraham (ANC) asked Mr Mogajane how the role of the Intergovernmental Financial Relations (programme three) performed within local government institutions. What was the Department doing to assist those municipalities? Was the Department satisfied with its performance for programme seven, in distributing military pensions to all deserving pensioners? Also, how was this programme related to the Public Investment Corporation (PIC)?

She asked how the FIC ensured confidentiality of the information it dealt with. What was its capacity to combat money laundering beyond the borders of the country, and how was it making the public aware of this crime? How did the entity deal with individual cases of money laundering? Who receives the financial reports and how does the entity follow up on the consequence management necessitated by the findings of those reports? She pointed out that the FIC did not recognise pension funds as a vulnerable sector.

Ms Abraham asked GTAC to elaborate on how they planned to enhance the private sector participation in infrastructure investment and how they would realise job creation on a larger scale, in the context of the NDP. How was GTAC assisting communities with the job funds? Which institutions in the Eastern Cape was the GTAC working with, and were these institutions also hosting GTAC’s winter school initiatives?

She asked the CBDA what their scale of success was in reducing inequality. How had the work of this entity contributed in addressing it? She inquired about the exact role of ABSA in working with the CBIs and CFIs. Lastly, she asked why the CFI members were not able to access their funds if they were not in proximity to the CFIs.

Ms M Mabiletsa (ANC) asked how the FIC was tracking the transactions done within ‘stockvels’ across the country, and also how the CBDA was creating public awareness about cooperative banking for people participating in stockvels.

Mr F Shivambu (EFF) asked how many entities were operating under the NT. He pointed out that the NT had announced them to be 16, but public records listed 17 of them. How many of these entities were established by law, how many by proclamation and how many were just components of the NT? He reckoned that the 6th Parliament should consider the ones that were proclaimed and re-establish them by law in order to clearly define their accountability mechanisms. He added that there should be a board of governance formed within SARS to clarify the relationship between its Commissioner and the Minister of Finance. The Minister should not be the one who determined the salary scales of the Commissioner and other Executives, as it was currently designed. He stated that the relationship between the South African Revenue Service (SARS) and NT also needed to be clarified so that the Committee would know the extent to which it should oversee the responsibility of NT towards its entities.

Mr Shivambu asked the FIC what the role of private banks was in broadly enforcing the Act. Did they have power to conduct investigations? There had been reports about certain banks assuming the role of law enforcement agencies by interrogating people themselves. How did the FIC gather its information, considering that it did not regard itself as an intelligence agency? How many cases had been referred to the Hawks? What had happened to the investigation of the person who had a suspicious bank account in Canada?

He asked why GTAC had never submitted a report to Parliament on the performance details of its Jobs Fund. There was a need for clarity on its impact – how much money had been raised and how many jobs had been created through it? Were the transaction advisory and consulting services extended to municipalities as well?

Mr Shivambu asked what the purpose of the existence of the CBDA was, commenting that it did not even have any oversight authority because it was all transferred to the Prudential Authority. The three cooperative banks that had been established made up only less than 0.1% of the banking sector. There needed to be discussions to redefine the concept of cooperative banking.

Mr G Hill-Lewis (DA) said that there had been reports of at least one provincial government that had begun implementing lifestyle audits on elected office bears in the senior echelons of the civil service, including ESKOM. He commended this undertaking and suggested that the FIC should proactively be at the forefront of it, not only when prompted by law enforcement. He asked the DG and the DM if the national government was seriously considering these audits, and if it could empower the FIC to conduct them on its behalf.

He asked how the FIC developed the criteria for focusing on the reports according to priority. Was this set down in regulations or was it setup internally to guide their decision-making? A politically interested individual should compulsorily be audited on an annual basis. He asked if the FIC had worked with the National Prosecuting Authority (NPA) or the South African Police Service (SAPS) in tracking down gangsters, most particularly drug traffickers. He thought that one of the best ways to apprehend them was through their monetary transactions, because their violence was more difficult to prove.

Mr Hill-Lewis also mentioned that the throughput of the government’s major pipeline infrastructure projects appeared to be too slow, despite the amount of interest and support from the private sector and the asset management industry in funding them. The construction industry had been stagnant and experienced a forced recession. How was GTAC dealing with this problem? He pointed out that the President had set out his ambition to get SA back into the top 50 of the World Bank’s ‘Ease of Doing Business – Global Competitiveness’ report. What was GTAC doing to make it easier for major corporations to do business?

Mr W Wessels (FF+) asked if the FIC’s vulnerable sectors were restricted by the FICA in enforcing their minimum requirements. Who was responsible for initiating GTAC’s work -- the municipalities, the Department or the NT? Had a legislature requested GTAC’s feasibility studies of infrastructure? Did GTAC have the capacity to handle a potential influx of technical advice requests? He also asked what qualified as a high-impact government initiative. He pointed out that a lot of corruption within the construction sector happened through prolonging the planning phases of projects, thus increasing their costs. He asked what GTAC was doing to prevent private consultants from exploiting the government in this manner.

Mr E Buthelezi (IFP) asked if the FIC was also paying attention to transactions that were below the R25 000 cash threshold, because money launderers could potentially segment their transactions in order to not be traced by the FIC.

Mr G Skosana (ANC) observed that the FIC recognised itself as a national centre that gathered transaction data and provided financial intelligence -- the only entity authorised to receive and analyse reports on suspicious transactions. He asked what the FIC did with such reports, given that they were not mandated to conduct investigations. Did the entity submit the matter to the Hawks, the NPA or did it escalate it directly to a court of law? He also asked if the vulnerable sectors were either required to periodically submit compliance reports, or to submit them only as and when there were cases they had to report to the FIC. What did the FIC do if these sectors did not report?

He commended GTAC for facilitating engagements between departments and state organs, assisting them with project planning and budgeting. What prohibited them from initiating these interventions without invitation? Why were there still only four CBIs and 22 CFIs across the country? What were the challenges that were preventing this specific banking sector from growing?

The Chairperson referred to the intergovernmental infrastructural agreements that were forming between certain African states and countries like China, stating that the developments that emerged from these agreements were beneficial for African economies. SA was lagging behind in this regard. The country’s economic progress would stagnate if its procurement framework remained as rigid and prohibitive as it was.

Responses

Department of Finance

Mr Mogajane highlighted the importance of recognising the constitutional constructs, such as the PFMA, that defined the legislative framework through which the NT and other associated entities found their expression. These prescripts led to the formulation of various regulations and instruction notes that had shaped how government considered its infrastructural endeavours. He indicated that his office had sent out letters to all DGs of the provincial Treasury branches, requesting them to suggest the areas they would like to be reviewed concerning the operations and governance of the NT.

He also clarified that the role of GTAC should not be mistaken for that of the NT. It was the NT that was responsible for communicating with the municipalities and, in certain cases, would request specialised services from GTAC. Three years ago, the NT had established a budget facility for infrastructure, recognising that the preparation and appraisal of projects needed to be improved. It had then asked various Departments to submit the project proposals to the NT, and a total of 43 proposals had been submitted; but only one project was approved to commence in the first year. The improvement of the components of these projects was an ongoing process by an appraisal team, with the involvement of private sector stakeholders. The NT was frequently reporting to the Appropriations Committee, presenting an annual report on the performance of the Jobs Fund.

He expressed his support for lifestyle audits, and indicated that the undertaking was being considered by the Department of Public Service and Administration (DPSA), and its framework was being developed to include all office bearers. He had noted Mr Shivambu’s critique on the purpose and effectiveness of the CBDA, and suggested that perhaps there was a need to redesign their roles and functions.

Mr Mogajane responded to the question concerning intergovernmental financial relations and how the NT was assisting municipalities, and said that the NT had delegated provincial Treasuries to assist the municipalities within their regions. The NT was running four projects to provide this assistance, including the municipal finance improvement programme, budget benchmark exercises and the municipal structure of accounts. However, there were still some human capacity challenges within the NT to effectively and efficiently address all of them. There was also the challenge of high staff turnovers within some of the municipalities themselves. The NT was working in collaboration with the Department of Cooperative Governance and Traditional Affairs (CoGTA) to strengthen these interventions. Programme seven, which included benefits for military veterans, was performing well – achieving a payment rate of almost 95% in the previous financial year. The programme was not managed by the NT directly, but also by the Government Pensions Administration Agency (GPAA).

Although public records listed 17 entities as being under the oversight of the NT, South African Airways (SAA) had been returned to the Department of Public Enterprises (DPE), thus leaving the NT with 16 entities. He agreed that the governance of these entities did need to be reviewed -- the ones that had been proclaimed needed to be established based on an Act of Parliament in order to streamline their accountability mechanisms.

Mr Masondo highlighted that the Public Procurement Bill, which was currently in the Cabinet system, presented transformative possibilities within the context of the Constitution. He also expressed his support of lifestyle audits.

CBDA

Mr Ndumo agreed that SA’s cooperative banking sector was still far behind from the rest of the world, but it also had immense growth potential. The stockvel industry consisted of about 11.4 million members, whose joint revenue generation was currently close to R44 billion, but there were few benefits that accrued to those members in real economic terms. The cooperative banks therefore offered an opportunity of mainstreaming them into the fraternity of a formal financial banking system. For this to be realised, there had to be some changes in the Act in order to accommodate this unconventional financial instrument. This would be one of the ways in which the CBDA would contribute to addressing the social issue of inequality. He said that the CBDA’s budget of about R20 million was not enough for the entity to operate optimally, because about R16 million was allocated to staff salaries. Another key challenge was that the existing cooperative institutions had capitalisation limitations and could not maximise their economies of scale – their membership numbers still had a lot of room for improvement. The relevance of the CBDA would be significantly more evident if the entity had sufficient financial support to help it realise its potential value.

FIC

Dr Masiapato emphasised that although the FIC dealt with sensitive and confidential information, all its operations were instructed by the Act. The Act also defined how this information was to be handled by a third-party recipient -- typically an assigned sanctioning officer within a law enforcement agency. Each of those officers had to be thoroughly orientated by the FIC on how to handle and process the information. The recipients were allocated, based on the nature of a given case. For example. corruption would be handled by the Hawks or an anti-corruption task team, tax evasion by SARS, etc. No individual or entity was allowed to request information unless they were or had an authorised officer. The FIC updated its officer database monthly to ensure that the correct personnel were in possession of the information, and the recipients were expected to submit progress reports after every quarter.

The FIC was one of 165 members of a global organisation called the Egmont Group of Financial Intelligence Units (FIUs), and had signed over 90 Memoranda of Understanding (MoUs) with different FIUs around the world. This enabled the FIC to interface with various FIUs internationally when tracking money laundering cases outside of SA, within their jurisdictions. In cases where the said money had to be repatriated, the FIC would then consult the Department of Justice and Constitutional Development to activate a mutual legal assistance treaty between SA and the said country, and the repatriation process would then be finalised. The FIC would also engage the relevant financial intelligence bodies of countries with which SA did not have an MoU in an attempt to have the funds repatriated. The individuals or states who did not comply would be reported to the Egmont Group.

Dr Masiapato clarified that the FIC was not an intelligence agency in the sense that it did not do conventional spying on people. Other countries referred to their equivalent entities as Financial Enforcement Centres (FECs). He added that it was primarily the financial institutions that reported suspicious transactions to the FIC and the FIC would then assemble a report. Popularising and exposing the operational mechanisms of the FIC would defeat the rationale behind its existence, because perpetrators would find ways to avoid the system. He also stated that the scorecard document was open to amendments.

Mr Smit reiterated that the FIC had not initiated any public awareness campaigns about money laundering legislation, but had focused its efforts on providing guidance to mainly financial institutions that had to comply with the Act and also identify suspicious transactions. The FIC did have the capacity to trace individuals, but because these individuals would often launder through companies they had setup, the FIC would resort to tracing them via the accounts of these companies. He then indicated that pension funds were not subject to compliance with the Act because they were not recognised as a potential money laundering vehicle. However, the fund managers did have to comply. The entity was also reviewing whether cooperative banks, operating under the CBDA, should also be put under obligations in the near future.

There were ongoing discussions between the FIC, NT and the Minister of Finance about revising the cash threshold amount, given the heightened financial activity in the country. The Minister had published proposed regulations for public comment, to increase the threshold up to R50 000. Mr Smith also elucidated how the loophole of these thresholds was addressed, stating that the Act stipulated that the institutions must evaluate whether their customers were doing transactions under the R25 000 threshold just to avoid being reported.

The FIC did not track stockvels -- it was the commercial banks that were obligated to report such transactions to the FIC for review. Because of the high volume of cash threshold reports, the FIC could not review each and every case, but focused only on the ones that were flagged as suspicious. He also stated that although commercial banks and other private financial institutions did not have the authority to address cases themselves, they did reserve the right to terminate accounts and notify their customers to take their funds elsewhere.

Mr Smit added that the FIC would sometimes have to go the length of defending their report findings when they were subpoenaed for court proceedings where, for instance, those findings would be required by a prosecutor to prove a certain fact. The FIC would then testify as an expert witness in that regard. However, the entity did not have the authority to dictate how information should or should not be used by the recipients it was referred to.

Dr Masiapato indicated that, in the 2018/19 financial year, the FIC had referred a total of 1 375 proactive and active financial intelligence reports to the various stakeholders, with over 1 000 of them being referred to the Hawks. There were six high priority reports referred and 300 information requests processed.

GTAC

Ms Ndlela indicated that the NT had published guidelines on public-private partnerships. The NT played a regulatory role and GTAC provided technical advisory support to state organs. She reckoned that these guidelines needed to be updated to respond to the current economic conditions.

She clarified that the rationalisation of schools in the Eastern Cape was a project of a local Department of Education (DoE), up to the office the Premier. There was once a project of accelerating schooling infrastructure but because of the distances between the villages, some schools ended up being overcrowded while others were almost empty. GTAC was in the process of compiling a draft report, recommending the schools that should be closed, subsidised or turned into boarding schools.

Ms Ndlela stated that GTAC worked directly with departments in helping build their capacity for them to empower communities. It thus played an indirect role in this empowerment. The entity was assisting the Limpopo Treasury to capacitate local departments in their infrastructure delivery. The entity was working with officials and a panel of service providers so that it was able to engage quickly upon service requests across the country. This gave GTAC the agility to respond efficiently, depending on the request details. Despite this, it was not authorised to oversee departments or intervene directly to matters arising on the ground.

Ms Subethri Naidoo, Chief Director: Strategy, GTAC, said that the entity was working with the Department of Higher Education and Training (DHET) and any other interested stakeholders to run winter schools through which young economists could be exposed to the challenges of public policy decision-making. The intention of the programme was to get them interested in working within the public sector; even if it were for short internships.

Ms Naidoo indicated that the World Bank’s “Ease of Doing Business” report programme was directly supported by the World Bank at the request of the NT’s IGR business unit, raised under a project called the City Support Programme (CSP). The CSP directly provided support to the eight metropoles across the country, in collaboration with the IGR unit and GTAC support. The support provided for the Ease of Doing Business proved to be an expensive model when done through the World Bank alone. GTAC was therefore called upon to support the CSP in helping the World Bank. This, in turn, helped build capacity within the country.

Committee comments

Mr Hill-Lewis felt the FIC was in an ideal position to spearhead lifestyle audits, because it had unprecedented access to the financial affairs of individuals. There was already an invasion of privacy when any transaction above a certain cash threshold triggered the inquiry system, anyway. The audits conducted by the DPSA applied only to civil servants and not elected office bearers. If the inclusion of elected office bearers required legislative changes, then these must be effected.

Mr Shivambu proposed that there should be an official report on the Jobs Fund, detailing the number of jobs that were created and all the grants that were injected into it as well as their beneficiaries. This would enable the Committee to clearly monitor the fund. He also suggested that the policy positions of procurement should be discussed more substantially as part of boosting economic growth.

The Chairperson asked the Deputy Minister to follow up on the request for the Jobs Fund report. He then encouraged the Members to continue the engagement on the components of the Procurement Bill.

Briefing by Office of the Tax Ombud (OTO)

Judge Bernard Ngoepe, Head: OTO, contextualised the mandate of the OTO, stating that although SARS’s drastic powers were necessary, there had to be an external body that was independent of SARS that would ensure that these powers were in accordance with law. Parliament had passed legislation that provided for the establishment of the OTO in 2013, as recommended by the Tax Commission. The role of this entity was to ensure that taxpayers’ rights were protected, and to mediate between the taxpayers and SARS in an impartial and independent manner. It did not help individuals and companies to avoid paying their taxes.

Judge Ngoepe said that the office was growing and had a staff body of 43 employees. However, an initial challenge was that the Tax Administration Act (Act No. 28 of 2011) stipulated that every appointment made by the OTO had to be approved by the Tax Commissioner. He had since appealed for the Act to be amended to remove this clause, but had been rejected. He had also appealed for an amendment that would obligate SARS to provide reasoning for not implementing any recommendation issued by the OTO, and that appeal was approved. These and other structural constraints contained in the Act, such as finances and investigative powers, limited the independence of the OTO to such an extent that even his travel requisitions for his trip to Parliament had to be approved by the Commissioner, who was effectively also the Accounting Officer. He gave an example of an instance where SARS was withholding tax refunds. Many taxpayers were affected and businesses had to close down, but he had to first obtain permission from the Minister before addressing this problem. He also mentioned that the OTO was denied access into the International Association of Tax Ombuds because it was said to be very much dependent on SARS. The entity was, however, invited to the Association’s events as observers.

Judge Ngoepe had the view that the OTO should be established as a public institution. He had contacted GTAC, seeking technical advisory support. GTAC had recommended that the OTO should be established as a National 3A Public Entity (with or without shared services), just like the Community Schemes Ombud Service, Ombudsman for Banking Services, Office of the Ombud for Financial Service Providers, Office of the Pension Funds Adjudicator and many other such entities within the Ministry. The implementation of the GTAC report had awaited the Minister’s approval for over a year.

He indicated that his term was expected to end in September 2019, also pointing out the need for the foundations of state institutions not to depend on the individuals for their operations to survive the departure of successful office bearers. He acknowledged that he would not have achieved some of the minor milestones without the intervention of Parliament, but also pointed out that the entity had not yet reached its potential. He implored the Members to help strengthen the OTO.

Briefing by Financial Sector Conduct Authority (FSCA)

Mr Olano Makhubela, Divisional Executive: Retirement Funds Supervision, FSCA, said that in 2011 the NT had published a policy document titled, “A safer financial sector serves South Africa better.” The document contained four key objectives, including financial stability and soundness of institutions, consumer protection, financial access and transformation, as well as combating financial crime. The “twin peaks” model was established based on this document through the facilitation of the Financial Sector Regulation Act (Act No. 9 of 2017). The Act provided for the Prudential Authority and the FSCA.

He said the FSCA was formerly known as the Financial Services Board (FSB), and outlined the key differences within the entity under the two brandings. The FSB had been responsible for supervising the non-banking financial sector, whereas the FSCA was overseeing all financial institutions. The FSB had focused on regulating both prudential and market conduct, while the FSCA was to regulate only market conduct. The differences in their governance structures were that the FSB was only overseen by a board appointed by the Minister, along with a governance sub-Committee, while the FSCA was overseen by an executive committee consisting of the FSCA Commissioner and Deputy Commissioners appointed by the Minister, along with governance sub-committees appointed by the NT. Also, the FSB was entity-driven and comprised sector-specific divisions focused on sector-specific laws, whereas the FSCA had a largely functional organisational design, with cross-cutting licensing, enforcement and conduct of business supervision groups. The latter had also strengthened its research and technical analysis capacity. He briefly discussed the FSCA objectives as conferred by the Act.

The FSCA had strategised six priority areas, including building a new organisation, establishing an inclusive and transformed financial sector, realising a robust regulatory framework that promotes fair customer treatment, having informed financial customers, strengthening the efficiency and integrity of its financial markets, as well as understanding new ways of doing business and disruptive technologies. There also had to be a regulatory paradigm shift within the entity. The FSB had been backward-looking and compliance-driven, but the FSCA had progressed to being forward-looking and outcome-based while being pre-emptive and proactive in enforcing regulations.

Mr Makhubela also gave an overview of the organogram, mentioning that the entity was currently being run a transitional management committee made up of an Acting Commissioner and other subsidiary executives. He mentioned that the Licensing and Business Centre Unit had centralised all licensing applications.

Briefing by Accounting Standards Board (ASB)

Ms Erna Swart, Chief Executive Officer: ASB, first briefly introduced the role and mandate of the ASB, and then touched on the interaction between the entity and key stakeholders such as the Minister, the NT and the Auditor-General (AG). She indicated that the ASB would set its standards based on principles rather than rules. This posed a challenge, because individuals had to be trained to apply their minds in setting these standards.

Ms Swart said that the Constitution required the ASB to have uniform reporting requirements, but the entity was still far from achieving that. At the national government level, the departments and other government components were still reporting on a cash basis, or using the Modified Cash Standard (MCS). Public entities were using accrual and Generally Recognised Accounting Practice (GRAP) standards, much like trading entities and constitutional institutions. State-owned enterprises (SOEs) were using accrual and the International Financial Reporting Standards (IFRS). At the provincial and local government level, the different entities were all using accrual and GRAP. The Minister of Higher Education had also determined that technical and vocational education and training (TVET) colleges were required to use GRAP, and not IFRS.

Ms Swart said that the ASB was wholly funded by transfer payments from the NT and reported to the Minister of Finance, although it had established its own operating procedures. The ASB had translated its standards into IsiZulu, Sesotho and Afrikaans, but the official versions used English. She added that the standards were available on the website.

Briefing by South African Special Risks Insurance Association (SASRIA)

Mr Cedrick Masondo, Managing Director: SASRIA, first gave a background of SASRIA and the Act through which it had been established. He also discussed the vision, mission and values of the entity, mentioning the mandate and pieces of legislation that govern the entity. He explained the business model and the products offered by SASRIA.

The entity’s key strategic objectives included digitalisation, sustainability, customer-centricity and socio-economic impact. These objectives formed the basis of the entity’s 17 key performance indicators (KPIs) and performance targets for the 2019/20 financial year. Some of the high priority targets regarding sustainability were to have no findings on unethical behaviour by any staff member; achieving no irregular, fruitless, unauthorised and wasteful expenditure; and submitting all PFMA submissions within deadline. For customer-centricity, they were to settle 90% of fast-track claims within 25 days, and reduce customer complaints relating to poor service by 50%. For digitalisation, it was to complete the Economic Recovery Programme (ERP) system project and also to complete the automation of claims and accounting management. On a broader scale, the entity also planned to contribute in reducing social problems such as unemployment, inequality, poverty and thus economic growth.

The entity had faced some challenges in the previous financial year. There had been a massive increase in the frequency and severity of insurance claims. The gross claims to loss ratio had increased from 36.4% in March 2018 to 77.0% in March 2019. For the first time ever, the entity had recorded a -1.7% return on equity and a net loss of about R1.7 million. This loss was driven mostly by claims. Despite this, the entity was still well-capitalised.
Discussion

Mr I Morolong (ANC) referred to the annual performance report (APR) of the OTO, stating it stipulated that the top ten tax cases resolved by the entity amounted to about R450 million worth of tax returns, and this gave a sense of the nature of cases the entity dealt with. He also pointed out that the accessibility, or possibly the lack thereof, of the entity to the majority of South Africans may have been reflected in the demographics of the complainants. He asked how the entity was creating public awareness of its existence and functions.

Ms Abraham requested the NT’s response and progress on GTAC’s recommendations for the restructuring of the OTO Office. She was saddening to hear about the challenges that the OTO was facing.

She asked Mr Makhubela about the financial market -- who was responsible for its ups and downs? Was it manipulated politically or by the wealthy?

She asked the ASB if there was a timeframe for GRAP to be adopted by institutions and to indicate how long it was. Was there any consequence management for the institutions that were not conforming to the requirements? Were there any capacity building initiatives for GRAP? She believed that the ASB should conform to the Constitution by incorporating other official languages for translation, and asked if there was any particular reason why they had not.

On a lighter note, Ms Abraham asked if SASRIA also considered emotional damage claims.

Ms Mabiletsa asked the OTO when, where and how they would be creating public awareness about the existence of the entity.

Mr Shivambu agreed that the OTO should be autonomous and omnipresent to effectively oversee all SARS branches because any maladministration by any of them without recourse could eventually deter potential investments, business activities and even tax payment. The autonomy was a sine qua non for a progressive taxpaying environment. He added that the Committee needed to work closely with the OTO to ensure that this matter was conclusively dealt with.

He said the NT should finalise the establishment of the FSCA, starting with filling the vacancies of the Commissioner and Deputy Commissioners. The responsibilities of this entity were widespread and required an optimal and stable leadership structure.

He said that the conceptualisation of the Twin Peaks model provided not only for dealing with prudential matters, but also those of conduct. The credit space was most aggrieved – some commercial banks were issuing exorbitant amounts of credit without conducting proper due diligence. He asked if the FSCA dealt with credit conduct errors by the National Credit Regulator (NCR).

Mr Shivambu said he was appalled by the way SASRIA had characterised the 1976 student uprising, referring to it as a riot. This demonstrated political illiteracy, and he suggested that this description should be revised.

Mr Hill-Lewis lauded Judge Ngoepe and his team for the commendable work of the OTO. He supported the need for the entity to be fully independent, legally and operationally.

He noted the tension between the FSCA and the NCR, and asked how the relationship was being mended. Who was taking responsibility for market conduct enforcement between the two institutions?

Mr Hill-Lewis thanked Mr Masondo for his management of SASRIA, and indicated that he did not particularly care how he chose to refer to the 1976 student uprising. He was surprised by the drastic increase in the insurance claims during the previous financial year and pointed out that this may have been caused either by the claims inherited from previous years or by increased vandalism during protest events. If not, what had caused it? What work was SASRIA doing with the SAPS to combat these events?

Mr Skosana reckoned that it may have been necessary for the Committee to have a joint session with OTO, SARS and the Minister of Finance to address the challenges faced by the OTO. This would also finalise Judge Ngoepe’s pending submissions to the Minister’s office.

He asked the FSCA how far they were in facilitating financial education within communities.

Mr Skosana also asked how SASRIA would be sustainable when it had such an influx of claims while offering such low premiums and considering clients which other insurance firms were rejecting.

Responses

SASRIA

Mr Masondo apologised for appearing to be inconsiderate and ignorant about the significance of the 1976 student uprising. He explained that he was using legal terms because the presentation involved legal matters.

SASRIA insurance policies covered only assets and not emotional damage nor expenses associated with health and death.

He clarified that the reason for the spike in the number of claims had been that 80% of the claims received in 2018/19 were because of service delivery protests by communities. There were also an abnormal number of strikes and riots in the year across the country. For example, the burning of trucks that happened in Mooi River had resulted in a claim of about R77 million.

SASRIA would always work with the SAPS. The entity could not prevent claims, but had to be better prepared and have a strong balance sheet against the claims, despite the relatively lower premiums. The claims had been increasing annually by 35% over the previous five years, and the entity had attempted to improve its sustainability by increasing the premiums just enough to keep them affordable while it generated more revenue. Although there had been an increase in the claims during the first quarter of the 2019/20 compared to the first quarter of the previous year, the severity of the claims had since decreased notably.

Ms Kgodiso Mokonyane, Deputy Chairperson: SASRIA board, indicated that the board had also been asking the executive management about the sustainability of the entity. The board had then insisted on an increase in premiums to decrease the number of claims. The entity had also applied the law of large numbers to be able to cover the risks that other firms could not. This law entailed combining all the small risks into one, thus making it easier predict the risk profile of insuring the entire country.

FSCA

Mr Makhubela explained that South Africa still operated a market-driven system, where prices were determined by the supply and demand model across all types of products. Even financial products were driven by this model. The critical component that would determine the state of the market would be information. Around 35-40% of the Johannesburg Stock Exchange (JSE) was foreign-owned -- its investors were able to move their portfolios rapidly in and out of the market, depending on imminent events that they felt could affect certain economies. This also impacted on the market conditions.

He acknowledged Mr Shivambu’s point about the need to finalise the establishment of the FSCA. The entity was treating the matter with urgency and was in the process of recruiting potential candidates to fill the vacancies. Itwas working on improving its relationship with the NCR, but this did not affect the entity’s customers. He added that the FSCA was also authorised to issue standards.

FSCA had an initiative called “Taking regulation to the people,” and was undertaking it nationally, educating communities. The FSCA also warned the public about illegal and unlicensed companies that were out to scam people. This information was usually published on the FSCA website.

ASB

Ms Swart explained that the timeframes for the implementation of standards were determined by the Minister. The ASB could only advise the Ministry. The entity had developed transitional provisions that set out the process of adopting the standards. These provisions came into effect once the timeframes were determined. This could take up to three years, because most companies would typically not apply these provisions correctly the first time and there would thus have to be amendments made. She also stated that consequence management for non-compliant entities was the role of the AG.

Having a staff body of only seven people, the entity did not have the capacity to do capacity building. It did, however host public sector accounting forums at which it shared information with the participants and identified common standards-related challenges. The entity would then either develop a guideline to address these challenges or publish a Frequently Asked Questions (FAQ) report. The previous AG report on municipalities had shown poor results. The entity would conduct post-implementation reviews to detect whether the problem was with the standards or capacity constraints. This was also used as an opportunity to improve the standards.

Ms Swart clarified that the medium of translation was chosen from a litigation perspective. For instance, identifying one universally understood language made it easier to interpret the contents of the standards.

OTO

Judge Ngoepe said that GTAC and the NT supported the OTO throughout their engagements, but the Minister’s office had delayed the response to the recommendations that were made by GTAC for over a year.

He stressed that the OTO treated every client, business or individual, fairly and equally, no matter the amount of money they were complaining about. The entity also conducted road shows in cities like Polokwane and Durban to expand its national footprint. The OTO needed to be independent to optimise these campaigns. He also mentioned that while the Department of Education was considering introducing sex education into the schooling curriculum, it should also consider educating children about tax from a young age.

Mr Gert van Heerden, Acting CEO: OTO, said that the entity generally did not use its success on tax refund cases as a measure of the demographics represented and the value the entity added to the country. More than half of the cases dealt with involved individuals, most of whom came from KwaZulu-Natal, Gauteng and the Western Cape. The entity was now doing more outreaches in the provinces that brought in fewer cases, but due to budgetary constraints these outreaches had to be done in the most cost-effective way possible.

Judge Ngoepe indicated that the OTO had boosted the accessibility of the entity by translating its guidelines and complaints form into all 11 official languages.

Chairperson’s comments

The Chairperson thanked all the presenters for their briefings and the Members for their questions and comments.

He thought that the ASB standards should be strengthened and compliance should be enforced even more, because too much of state funds were being wasted through bailing out SOEs and other public entities, instead of spending them on service delivery.

He also pointed out that there were commercial banks that would allow small amounts of money to be illegally deducted from their clients’ accounts. When the clients complained, the banks would return their funds but would still charge service fees for the reversals. This scam generated millions of rands for the perpetrators, and the banks would also benefit from it. There were also a lot of illegal funeral parlours that were exploiting vulnerable people.

The Chairperson said that the Committee would raise the OTO’s challenges during its next meeting with the Minister, and would discuss the amendment of the legislation that governed the OTO. He reckoned that there were too many regulatory bodies within government, and many of them overlapped in their roles and functions. Some did not have a clear understanding of their mandate.

The meeting was adjourned.

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