Financial Intelligence Centre 2018/19 Annual Report; with Deputy Minister

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Finance Standing Committee

16 October 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Annual Reports 2018/2019

The Standing Committee was briefed by executives of the Financial Intelligence Centre (FIC) on the FIC’s report for the 2018/19 financial year.

Opening remarks were made by the Deputy Minister of Finance, who said a key priority of the government was to fight corruption and build an ethical developmental state. The FIC was a key agency in this fight. Corruption affected the poor by skewing the distribution of resources.

The Committee was told that the FIC received and analysed suspicious transaction reports (STRs) and produced intelligence for other agencies fighting corruption. It had the power to block funds suspected to be the proceeds of crime, could inspect financial records and could compel an institution to supply information about clients suspected of money laundering or terrorist financing.

During the year, 1 840 financial intelligence reports had been produced at the request of other agencies. A further 1 054 had been disseminated proactively to law enforcement agencies. The FIC had cooperated in 29 judicial actions, which had resulted in the recovery of R2.14 billion in criminal proceeds. It had also blocked more than R53 million suspected of being the proceeds of crime. Steps would be taken this year to widen the scope of information required from some entities. Corporate vehicles such as trusts and legal persons were being used to hide the identity of people benefiting from illicit financial flows.

Committee members heard that the FIC had received an unqualified audit with findings. While no irregular expenditure had been identified in the 2018/19 year, R1.9 million in irregular expenditure in the prior year was still awaiting condonation.

Meeting report

FIC Annual Report

The Committee was briefed by executives of the Financial Intelligence Centre (FIC) on the FIC’s report for the 2018/19 financial year.

Mr Amos Masondo, Deputy Minister of Finance, said in his opening remarks tht a key priority of the government was to fight corruption and build an ethical developmental state. The FIC was a key agency in this fight. Corruption affected the poor by skewing the distribution of resources.

He said the FIC worked alongside other agencies like the SA Revenue Service (SARS), the National Prosecuting Authority (NPA) and the Independent Police Investigative Directorate, the Hawks. Financial crime was an international phenomenon and the FIC did a lot of work at an international level. It also supported efforts to fight money laundering and corruption in Africa.

Adv Xolisile Khanyile, Director: FIC, outlined the powers of the FIC. She said it was established in 2003. Its role was to receive and analyse suspicious transaction reports (STRs) and produce intelligence for other agencies fighting corruption. It had the power to block funds suspected to be the proceeds of crime. It could instruct an institution not to proceed with a transaction for 10 days while the FIC investigated the transaction. It could share the information with the Asset Forfeiture Unit (AFU), which could seize the funds if necessary. The FIC could also obtain warrants to inspect financial records and could approach a judge in chambers to compel an institution to supply information about clients suspected of money laundering or terrorist financing.

During the year, 1 840 financial intelligence reports had been produced at the request of other agencies. A further 1 054 had been disseminated proactively to law enforcement agencies. The FIC had cooperated in 29 judicial actions which resulted in the recovery of R2.14 billion in criminal proceeds. It had also blocked more than R53 million suspected of being the proceeds of crime. Stakeholder relations had been improved with the signing of memorandums of understanding (MOUs) with key partners like the Reserve Bank and SARS.

Adv Kahnyile said the FIC worked closely with international agencies in combating money laundering and terrorist financing. During the year, it had signed MOUs with the intelligence units of Hong Kong and Qatar, bringing the total number of such agreements to 91.

She said obligations to report on financial transactions were spelled out in schedules in the FIC Act:

Schedule 1 obliged institutions like banks, estate agents, gambling institutions, lawyers and foreign exchange dealers to register with the FIC. They were held responsible for client identification and verification, record keeping and providing cash threshold reports (CTRs), suspicious transaction reports (STRs) and terrorist property reports (TPRs). They had to appoint a compliance officer, implement risk management and compliance programmes, and train employees on FIC Act responsibilities.

Schedule 2 obliged supervisory bodies like the Reserve Bank and the Legal Practitioners Council to ensure that sectors under their control complied with the FIC Act.

Schedule 3 applied to sectors such as motor vehicle dealers, or Krugerrand dealers. They were required to register with the FIC, were responsible for client verification, and had to produce CTRs and STRs. Ms Khanyile said the FIC wanted to enhance the reporting duties in this schedule. Motor vehicle dealerships were a particular area of concern.

Regulatory reporting amendments would include raising the prescribed limit above which CTRs had to be submitted, from R25 000 to R50 000. Additional items would be included in Schedule 1 to increase the scope and depth of information available for analysis. Corporate vehicles such as legal persons and trusts were used to mask the identity of persons with interests in illicit financial flows.

Looking ahead, she said an assessment team from the international Financial Action Task Force (FTAF), would submit a draft report in December on South Africa’s implementation of FATF recommendations. South Africa had adopted a risk-based approach to combating money laundering and terrorist financing. A robust approach was required to identify and understand these risks. The government was in the first cycle of of risk assessment at national and sectoral levels.

Ms Veronica MarshSmit, Chief Financial Officer: FIC, said the entity had received an unqualified audit with findings. While no irregular expenditure had been identified in the 2018/19 year, R1.9 million in irregular expenditure in the prior year was still awaiting condonation. She said there had been an improvement in procurement and contract management.

Discussion

Mr G Hill-Lewis (DA) asked for more information on the processes involved in blocking funds. He commented that the reported amount of R53 million appeared very small. He welcomed the FIC’s willingness to assist with lifestyle audits, as it had said at a previous hearing that performing such audits was not within its mandate. He believed the time had come for lifestyle audits of every elected official in South Africa. He said the illicit economy was robbing the fiscus of tens of billions of rands. He wanted to know what the FIC was doing to intercept financial flows from illegal cigarette traders and other illicit activities.

Mr W Wessels (FF+) asked what progress was being made in dealing with crypto assets. In a few years, they would become a major player in the illicit economy. Computer hackers were demanding crypto currency to release hacked data.

Mr G Skosana (ANC) commented that the FIC had not received a clean audit opinion for five years. It appeared that they were comfortable about repeated unqualified audits with findings. He had several questions: Irregular expenditure of R1.9 million was still awaiting condonation -- what was the reason for the delay? What were the key objectives in signing memorandums of understanding (MOUs) with stakeholders? Did motor dealerships have to report all cash transactions above the reporting threshold? And what about cash deals between individuals?

Ms Z Nkomo (ANC) asked whether high-end retailers were also required to report large cash transactions.

Ms N Abraham (ANC) asked whether car dealerships received adequate training in making cash threshold reports, and whether there were consequences for those who failed to make reports.

Mr K Morolong asked the FIC elaborate on its contributions to the prosecution of financial cases and the convictions resulting from them. He commented that the Auditor General had raised concerns about the FIC’s management of performance information. What progress was being made with the implementation of an information communication technology (ICT) platform, and were service providers paid per milestone?

FIC’s response

Adv Khanyile responded to the question about lifestyle audits. She said these fell within the mandate of the State Security Agency (SSA) and the SA Revenue Service (SARS) and not within the ambit of the FIC. However, the FIC could assist in ensuring that prominent and influential persons (PIPs) were monitored by the relevant agencies.

Dr Mike Masiapato, Executive Manager, Monitoring and Analysis, answered questions on the blocking of funds. This occurred in two ways. One was when the FIC instructed banks to block funds on the basis of reports from financial institutions. The funds could be blocked for 10 days while a determination was made. A second way was when the Asset Forfeiture Unit (AFU) requested the FIC to work with them.

On illicit financial flows, he said the FIC was involved in eight cases along with the Reserve Bank, SARS, the AFU and the Hawks investigative unit of the police.

Crypto assets were a key challenge for global financial intelligence units. There was clear evidence that money laundering was moving into the crypto space. The FIC was doing a lot of work with the Reserve Bank in ensuring effective regulation.

Dr Masiapato said the FIC dealt with highly sensitive information. The MOUs it had signed clearly spelt out how that information could be used by other agencies.

Mr Oniel Rajnund, Senior Manager, Compliance and Prevention, said the FIC was involved in various efforts to raise compliance awareness. It conducted compliance sessions and roadshows, placed articles in publications targeting different industry sectors, and used live broadcasts to gatherings of people in need of training.

He said all businesses, including high-end retailers, were obliged to report suspicious transactions. If a car was bought for cash from a dealer, the dealer was obliged to report the transaction. However, deals between private individuals were not covered by the FIC Act.

Mr Macs Maboka, Executive Manager, Corporate Services, said the FIC was not satisfied with the audit opinions it had been getting. However, the irregular expenditure had been incurred in a prior year, with none being reported in the 2018/19 year. Things were moving in the right direction. Condonation of the R1.9 million in irregular expenditure had been delayed by the need to demonstrate that remedial action had been taken. A lot of work had been done in training officials in supply chain management (SCM).

Mr Maboka said the FIC was driven by ICT, and a lot was being invested in this area. More than five million reports had to be analysed. The ICT project was overseen by a fully fledged project management office, and clear milestones had been set. The service provider in the first phase of the project had wanted too much money for the second phase, so a new provider had been procured.

Adv Khanyile said efforts were being made to improve the feedback from other agencies on convictions obtained as a result of information provided by the FIC. An amount of R2.1 billion was involved in cases in which the FIC had assisted the AFU.

Deputy Minister Masondo said the work done by the FIC was appreciated internationally. The good work done by the FIC team was necessary to maintain investor confidence.

In closing the meeting, the Chairperson referred to an African Union report on illicit financial flows. He said while technology helped combat these flows, it could also be used by criminals. He himself had been the victim of a scam in which R99 had illegally been deducted from people’s bank accounts. He said South Africa lost R7 billion a year to illicit tobacco trading. A problem was that law enforcers colluded in this, and people were afraid to become whistle-blowers.

The meeting was adjourned.
 

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