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FINANCE PORTFOLIO COMMITTEE
6 June 2000
PROGRESS REPORT ON THE IMPLEMENTATION OF THE PFMA; MONEY LAUNDERING: BRIEFING
Documents handed out
Progress report: Implementation of the Public Finance Management Act (attached to end of minutes)
Money laundering in South Africa: Uncovering the mystery
Implementation of the PFMA
Mr Momoniat stated honestly that they are not ready to implement the PFMA but that they have to start somewhere. Outcomes for the short, medium and long term have been identified. For the first year or two they will focus on empowering Accounting Officers. In the medium term they will implement the employment of competent managers and Chief Financial Officers (2001-2004). In the long-term they want sound financial management systems and processes and financial statements prepared on the accrual basis (2005-2010).
In discussion it was pointed out that the Bill and the regulations are not explicit that the executive authority (the Minister and the MEC) is responsible for policy matters and outcomes and budget approval while the Accounting Officer (Director General and the Head of Department) is accountable to Parliament for financial management, budget implementation and outputs. The executive role is only an underlying assumption of the Bill. It was noted that this assumption should be made more explicit as it affects Parliament's oversight role.
Current legislation imposes a duty on persons to report suspicious transactions. However this legislation does not define what a suspicious transaction is. This problem will be addressed by the Financial Intelligence Centre Bill (which really could be called the Money Laundering Control Bill). This Bill will place quite a burden on financial institutions in terms of record-keeping procedures and reporting mechanisms. Once it becomes law, South Africa's money laundering legislation should be compliant with international standards.
Progress report on the implementation of the PFMA
Mr Ismail Momoniat, Chief Director of Intergovernmental Fiscal Relations in the Department of Finance, presented (see Appendix 1 for presentation).
The Department is going to put in place institutions and staff to help with the implementation of the PFMA. He distinguished between the desired outcomes of short term, medium term and long term implementation.
Implementation for the short term should be seen as a collective learning exercise. The focus will be on a mentoring approach and they will avoid making hasty appointments. For the first year or two they should focus on an empowering phase to help Accounting Officers (Directors General and Heads of Department). For example, they should not make hasty appointments by employing Chief Financial Officer immediately.
In the medium term they want the employment of competent managers and Chief Financial Officers.
In the long-term they want sound financial management systems and processes and financial statements prepared on the accrual basis.
They have focused on popularising the PFMA. They have had national workshops with Ministers and Directors General and provincial workshops with MECs and Heads of Departments. The provinces of the Western Cape, the North West and Gauteng did not participate in these as they felt they are competent treasurers.
Various subcommittees will be set up to oversee the implementation process. In appointing financial staff, they will focus on the big departments first such as Education, Health and Welfare.
Mr Momoniat stated quite bluntly that they are not ready to implement the PFMA but he said that they have to start somewhere. The approach they will follow is to identify 4 or 5 major objectives and then focus workshops in those areas. They will also prepare guidelines for the workshops.
They also want to embark upon special quality-enhancing projects. They need people with the right skills to make everything function well. They will focus on the big departments first. In the Health Department specifically they want to fast track the appointment of Chief Financial Officers. (Education has a bigger budget than Health but Education is less complicated). They are willing to fund better paid managers in big hospitals such as Baragwanath. They may also use the EU funding to bring people from overseas to help to run these hospitals. These qualitative-enhancing projects are seen as being critically important.
Some sections of the PFMA have been delayed because immediate implementation is not possible. There are technical reasons for the delays. Delays are not a leeway for departments to do as they please. It is simply a way to give them time to adjust.
Treasury regulations for departments are gazetted. There are separate regulations for different entities. This means that public entities have separate regulations. These should be gazetted for public comment soon.
They have told departments that they have to get a Chief Financial Officer within one year. They will push the big departments to comply with this rule. Approximately 1 -2 years is given for full compliance with the Act.
They want Accounting Officers to take full responsibility for financial management. The Treasury will not give them permission to write off debts. They will be responsible for losses. This is a big responsibility. The Treasury does not have the capacity to be involved in every problem. These should be dealt with between the Accounting Officer and the Standing Committee on Public Accounts. Where the Treasury can intervene, it should. If unauthorised expenditure occurs SCOPA will have the authority to hold the Accounting Officer to account. The Accounting Officer may be found guilty of financial misconduct.
The executive authority (the Minister and the MEC) are responsible for policy matters and outcomes and the approval of the budget. The Accounting Officer (Director General and the Head of Department) are accountable to Parliament for financial management, the implementation of the departmental budget and outputs and implementation.
One of the big challenges which must be dealt with is overcoming the skills shortage. In this regard they will reassess the remuneration structure and look at making qualitative changes such as with the health special projects.
Mr Andrew (DP) referred to the roles of the Director General and of the Minister and asked whether there was reference to these roles anywhere in the regulations.
Mr Momoniat said that this was not dealt with explicitly in the regulations but it was dealt with ''in the whole approach''. The Minister and the MEC (the executive authority) must focus on policies and budget but the actual implementation of the budget is for the Accounting Officer. The Accounting Officer has many specific responsibilities such as day-to-day management. The regulations say that they should provide reports to the executive authority but it does not say what the executive authority should do.
Mr Andrew reiterated his earlier point that ''nowhere does it say in writing that the executive authority is responsible for policy matters and outcomes.
Mr Momoniat replied ''that is the case''. The extent to which they could ''write this down'' was an issue which had come up. It was true that they do not have power in terms of the Act to say that but it is the underlying assumption of the Act.
Mr Andrew commented that it was an unspoken assumption and not a fact, yet they had put it in the slide presentation.
Mr Momoniat said that the guide for Accounting Officers was mentioned and they are working on a guide for Executive Officers where this might be included. He noted however that a guide does not have any legal force.
Mr Andrew said that it would be a good idea to include this in a guide anyway as it would give it greater status (in terms of who the executive authority has to account to). The Portfolio Committee could use it as a yardstick to monitor performance.
The Chairperson said that there should be a debate on how to make the assumption more explicit as it affects Parliament's oversight role.
Ms Joemat (ANC) asked who would take responsibility if the Minister did not follow regulations. She said that sometimes there was a big turnover of Directors General and asked how the Act would cover financial misconduct cases against people who had already left the employ of the Department.
Mr Momoniat said that there were provisions in the Act which applied to all persons and not only government officials. There are also common law provisions for fraud which could apply. He said that these were ''hard questions'' and that he did not have all the answers. He reminded the committee that they too had been involved in the process of drawing up the Act. How the Act would be implemented was a real challenge. They should look at unauthorised expenditure and write a guide book and legalise it to the extent that they can.
Mr Lekgoro (ANC) asked whether outcomes were results. He then asked why the Director General was not held responsible for results. Mr Momoniat replied that they could debate these issues for a long time because there was no straight answer. He said that the challenge would be to determine what is outcomes and what is outputs.
The Chairperson intervened to say that outcomes is always policy-related. The Director General implements the policy but the Minister makes the policy. Therefore the Minister is responsible for outcomes but the Director General is responsible for outputs. She said that they must define what are outcomes and what are outputs.
In response to Dr Koornhof (UDM) request for a sense of how long the medium term was and how long the long term was. Mr Momoniat said that medium term would be from the first of April next year and would be for 2 or 3 years of implementation. Long term would be from 5 years onward. He said that he was not an accountant so he could not really say, but accrual accounting could perhaps take 10 years to implement. Many of the basics of the Act could be in place in 2 years.
Dr Davies (ANC) asked if the late payment to Small, Medium and Micro Enterprises was only due to bureaucracy and if the PFMA could rectify this problem. Mr Momoniat replied that the problem in the past related to the deficits that provinces ran up. Often cheques were left uncashed or they did not write cheques at all. Now that their finances have stabilised there is no reason why they should not pay their debts. The PFMA treats this as a serious transgression of the Act.
Professor Turok (ANC) asked if there had been discussion with Stats SA about a format for data collection. He said that this would be useful for future analysis.
Mr Momoniat said that there have been no systematic discussions on this. Each province/department liaises with Stats SA for the data they wish to include.
Mr Andrew commented that the number of local authorities has been reduced. The substantial reduction will require substantial reorganisation. When they combine they should be in line with what the new Act requires. If they know the requirements before they consolidate (rather than after) then this will be cost-effective.
Money laundering in South Africa
Ms Ursula M'Crystal from KPMG Forensic and Investigative Accounting Group gave the presentation. She is also the chairperson of the Money Laundering Forum (MLF). The MLF is trying to create awareness around the issue of money laundering. They represent many diverse organisations such as certain parastatals, banks and businesses.
The money gained from criminal activity has to be processed for it to appear to be legitimate money. This is called money laundering.
Two types of financial transactions are distinguished:
Suspicious transactions - One has to look at the specific circumstances of a transaction to determine whether it is suspicious or not. South African legislation places a duty on someone to report a suspicious transaction if he knows about it or ought reasonably to have known about it.
A threshold transaction - This means that any transaction over X amount must be reported whether it is suspicious or not. A cash threshold will be set in the Financial Intelligence Centre Bill. They have suggested that different thresholds be used for different types of transactions.
Legislation on money laundering
The Prevention of Organised Crime Act of 1998 was adapted from the American system and has proven to be very successful in South Africa. Section 4 of the Act makes money laundering a crime. Section 5 and 6 says that one cannot assist in money laundering. Section 7 provides that any financial institution must report to the South African Police Service if it knows or ought reasonably to have known that the money in its possession comes from crime. This has presented a practical problem because the police do not have the resources to deal with suspicious transactions that are reported to them.
This legislation does not allow ''wilful blindness''. This means that someone aware of a suspicious transaction cannot simply look the other way. For example, if someone does not report a suspicious transaction perhaps because they are afraid, non-reporting remains a crime. The reasonable man test will be applied in each particular case. The penalties are quite severe (also dealt with in Sections 4, 5, and 6). You can be fined up to R100 million or 30 years in prison for money laundering. The penalty for non-reporting is 15 years in prison.
Assets used in the commission of a crime may be seized. For example, a car used in a robbery may be seized because it was an instrument of the offence. In the same way all the funds in a bank account may be seized even if only a portion of the funds in it comes from money laundering because the account is the instrument of the offence. These assets will go into an asset recovery account which could be used for victim compensation.
The Financial Intelligence Centre Bill is being drafted as the problem with previous legislation that imposed a duty to report suspicious transactions, did not identify what a suspicious transaction is. How does someone report a suspicious transaction if they cannot identify it? This will be addressed in this new Bill which is really just another name for the Money Laundering Control Bill.
The Bill places a big burden on accountable institutions. These institutions are expected to follow a strict ''know your client policy'' and strict record-keeping procedures. Accountable institutions have to keep the information about a client for five years after that person has stopped being a client. There are also reporting mechanisms within time limits which have to be followed if there has been a suspicious transaction. Internal training has to be undertaken by staff of the accountable institutions. Once this Bill is in place then South African money laundering legislation should be compliant with international standards.
Dr Rabie (NNP) referred to the R20 billion untaxed revenue which SARS does not collect because of tax evasion. He asked if there was any indication of how much money was laundered.
Ms M'Crystal said that it was very difficult to estimate and there were no figures available. For an indication one could look at white collar crime figures.
Professor Turok noted that many institutions (such as insurance companies) made appeals for self-regulation. How have these institutions reacted to the legislation?
Ms M'Crystal replied that the members of the MLF are eager to get this legislation in place. Generally there has been a lot of support from all sectors. The only problem is that there are cost factors involved. There is a huge financial burden placed on banks and financial institutions in terms of reporting.
Ms Taljaard (DP) noted that South Africa is the second biggest destination for American counterfeit money. She asked if there has been interaction with the American government with regard to the issue of money laundering.
Ms M'Crystal replied that America has been very supportive of South Africa. They have presented courses on the issue in South Africa and they have even offered assistance with setting up the Financial Intelligence Centre.
The meeting was adjourned.
Progress Report to PCOF on implementation of the PFMA
6 June 2000
Date and Application
Act took effect on 1 April 2000
Five year phase-in allowed
Applies to ALL departments, constitutional institutions, public entities, parliament, legislatures
Discussions on Parliament and legislatures
Implementation for Short Term
Popularising PFMA (little green book)
Put in place institutions and staff
Empowering phase to help Accounting Officers
- Less emphasis initially on sanctions
- Focus on developing plan and capacity
- Avoid hasty appointments
- Collectively learn and mentoring approach
Projects for QUALITATIVE improvements
Develop long-term plan by October
Desired Outcomes : Medium Term
Employment of competent managers, Chief Financial Officers
Standardised chart of accounts across departments
Data on assets and liabilities recorded and maintained
Performance measures defined (budget/outcome based)
Personnel trained on new PFMA requirements and processes
Public entity financial management framework agreed
Desired Outcomes : Long Term
Sound financial management systems and processes
Transparent budgeting process
Effective management of revenue, expenditure, assets and liabilities
Unqualified consolidated financial statements, prepared on the accrual basis
Improved accountability of public entities & external agencies
Popularizing the PFMA
Little green PFMA booklet
Treasury Regulations for depts gazetted
2 national workshops for Ministers/Director General
6 provincial workshops for MECs/HoD
3 provinces had own workshops
Financial practitioners forum
Workshops with public entities
Popularizing the PFMA
Subcommittee of DGs
PFMA unit in the National Treasury
PFMA units in provincial treasuries
Chief Financial Officers and other financial staff
Training of managers and other staff
PFMA website www.finance.gov.za/pfma
Workshops & Best Practice Guides
Accounting Officers guide
Monthly workshops and best practice guides
Monthly reporting (end-June)
Dept Implementation Plan (July)
Strategic Plan (August)
Internal Audit & Audit Committees
Special Quality-Enhancing Projects
National and provincial health depts
- Appointment of Chief Financial Officers
Pilot hospitals (eg 5)
CEOs and finance personnel for hospitals
Dept of Welfare contract
Sections Delayed (Gazette 21053 of 31/3/2000)
Immediate implementation not possible
Consolidated financial statements (s 8 & 19)
Schedule 5 on direct charges (s15(1)(a)(ii))
Provincial treasury instructions (s18(2)(a))
Exclusion of revenue (s 13(2), 22(2) & 27(3)(e))
Measurable objectives (s27(3)(e))
Sections Delayed (Gazette 21053 of 31/3/2000)
Commitment to liability not appropriated (s 38(2))
Submission of budgets of Sched (s 52)
Borrowing and Guarantees (s 66(3),(7)(b), 70(1)(b)
PFMA Exemptions (Gazette 21054 of 1/4/2000)
S 7 (1) - framework for cash management of public entities
S 38(1)(j) - transfers to schools, hospitals
S 40 (3) (a) - fair presentation of financial statements and reporting on performance against predetermined objectives
S 66(1) - public entities borrowing
Regulations gazetted 8 April (Gaz no 21082)
Public comments on regulations in by 2 May
SCOPA and Select Comm on Fin
Final regulations gazetted 31 May 2000
Regulations took effect 1 June
Separate regulations for public entities
- Gazette for public comment by 8 June
- Take effect on 1 August 2000
Parl and provincial legislatures - own rules
Implementation in 2000/2001
Dept. implementation plan (31 Aug)
Employment of financial personnel and chief financial officer (CFO) by 31/3/2001
Monthly reporting (in-year monitoring) by July
Internal Audit & Audit Committees
Financial Statements and Annual Reports
Departmental implementation plans to include an assessment of:
- The impact of the PFMA
- Financial management and accounting capacity
- Financial skills of line managers
- Effectiveness and efficiency of internal control systems
- Strategy for risk assessments and performance management
Audit committee at least 3 persons
- One from outside public service
- Majority not employed by department, unless approved
- Chairperson may not be in employ of department or political office-bearer
Audit committee may be established for two or more departments if treasury considers appropriate
Accounting Officer must establish and maintain a system of internal audit under direction of audit committee
Not new but more clearly defined as management (NOT treasury) tool
Constructive role: aid to risk assessment and pro-active approach to contribute to management
Contracting expertise, when appropriate
How Accountability may work
Suppose 'Unauthorised expenditure' occurs -
SCOPA MAY ask Accounting Officer these questions:
- Did you appoint a competent CFO?
- Were Monthly reports produced on time?
- Was remedial action instigated timeously?
- Are Internal Controls operating as designed?
Clarity of Roles: Minister & Director General
'Executive authority'(Minister/ MEC)
- Policy matters and outcomes
- Approval of departmental budget
Accounting officer (Director General/ HOD)
- Outputs & implementation
- Accountable to parliament for fin management
- Implementation of departmental budget
Consistency with PSA regulations
Essentially a new approach
Specification of minimum requirements
Not process oriented, but guidance on best practice
Phase-in approach for continuity
More changes to follow
(e.g procurement, performance measures)
TR 2-4: Management Arrangements
Appointment of chief financial officer
Audit Committees and Internal audit
- Accounting officers must enforce discipline
- New PSA regulations
TR 5-6: Planning & Budgeting
Strategic planning and performance evaluation
- To be formalised from 2002
- Best practice - start now!
- Timing to coincide with budgetary cycle
- Virement, roll-overs
TR 7-9: Revenue & Expenditure
Approval of expenditure
- Payment within 30 days
- Expenditure with regard to personnel
- Transfer payments
- Unauthorized, irregular, fruitless & wasteful
More realistic (and lesser) role for treasuries
TR 10-16: Assets, Liabilities, Borrowings and Frameworks
Asset and LiabilityManagement
Borrowing - don't do it!
Management of debtors
Management of losses and claims
Framework on banking and cash management
Framework on Public-private partnerships
TR 17-23: Accounting & Reporting
Defining GRAP as cash-based accounting
Basic accounting records and related issues
Monthly and annual reports
- Trading entities & Commissions
- Gifts etc
Treasury Regulations on Public Entities
Contingent liabilities and borrowing
Internal controls and Audit Units
- Special projects (eg health)
Overcoming the skills shortage
Role of Auditor-General
Role of Parliament
Consistency of approach between Parliament and provincial legislatures