Financial Action Task Force Mutual Evaluation Report: Financial Intelligence Centre briefing

Meeting report

The Chairperson indicated that the Committee would be briefed by the FIC on the Financial Centre task force report, which has been long-awaited.

Mr Ismail Momoniat, Deputy Director-General (DDG): Tax and Financial Sector Policy at National Treasury, indicated that officials from National Treasury and the Financial Intelligence Centre (FIC) would brief the Committee. He added that it was an important hearing for the country.

Briefing on the mutual evaluation of South Africa’s AML/CFT System:
The Committee was briefed on the mutual evaluation of South Africa’s AML/CFT system by Mr Momoniat; the Director of the FIC, Adv Xolisile Khanyile; the Executive Manager: Legal and Policy at the FIC, Mr Pieter Smith; and Senior Legal and Policy at the FIC, Mr Phineas Moloto. To begin with, Mr Momoniat indicated that the country underwent peer review (in line with the FATF standards) of its AML/CFT, which commenced in April 2019, with the report finalised in September 2021. The purpose of this review was to enable countries to make continuous improvements to their AML/CFT system.

There are four ratings used to measure the effectiveness of the system (high, substantial, moderate and low) with the country achieving the lowest rating. The assessment gave the country a low rating for its legal persons and arrangements; its terror financing preventative measures and financial sanctions; its investigation and prosecution of money laundering offenses; and that the supervision entities do not apply proper risk-based approaches.

To improve on this rating, National Treasury believes that the AML/CFT strategy should be broadened into all financial crimes and not just money laundering. The Department suggested that there is a need for better forensic capability in the criminal justice system and better information sharing between LEAs. Further, as a step to improve the country’s AML/CFT system, the Cabinet established the IDC on AML/CFT, led by the DG of National Treasury, in 2018. This Committee promotes collaboration, communication and information sharing within and amongst the relevant LEAs, government departments and regulatory authorities.

Mr Momoniat mentioned that both Treasury and the FIC would table legislative amendments to Parliament in April, which will deal with some of the weaknesses identified, one of which is the lack of cooperation between the entities.

He recommended that the Committee source the opinions of the other law enforcement entities regarding the combating of illicit financial transactions.  

The Chairperson opened the meeting for discussion.

Discussion
Dr D George (DA) agreed that the current state of the country’s AML/CFT system is troubling.

He stated that several regulations and processes currently in place are onerous for ordinary people who use banking services. As such, he asked whether the current regulations (which are in place to catch individuals involved in illicit financial activities) are overburdening the average South African.

Ms M Mabiletsa (ANC) indicated that she was concerned by Treasury’s assessment which states that government should develop capacity to deal with crimes and corruption, that there needs to be better forensic capability in the critical justice system and that there is a need for better sharing of information amongst the various agencies. She said the Committee would continue to monitor the progress of resolving each of these issues because if they are not resolved, the LEAs will be unable to achieve their current goal of fighting corruption and theft in the country.

Ms P Abraham (ANC) commended the Department and the FIC for their teamwork up to this point.

She highlighted that the presentation was unclear on whether the IDC commenced with the evaluation in April 2019 or May 2018. The Committee needs to know the exact dates so that it is better able to monitor the progress.

She then posed several questions to the officials.

First, she asked whether FATF was able to conduct some of its work virtually during the height of the COVID-19 pandemic.

Second, she asked which government departments FATF has worked and continues to work with.

Third, she asked why the Cabinet has not yet endorsed the allocation of funds to the IDC-AML/CFT to ensure that it effectively deals with cross-border financing.

Four, she asked whether the FIC has assisted the Zondo Commission in any manner.

Five, she asked whether the closure of Oakbay and other Gupta-owned companies constituted a tipping offence [in terms of the Financial Intelligence Centre Act (FICA)]. If it did, did the FIC take action against the implicated banks?

Six, she asked if the FIC managed to freeze the funds found in the accounts.

Seven, as the FIC is an intelligence organisation, she asked if it fell under the jurisdiction of the Inspector-General (IG). If not, which department or entity has oversight over the FIC. 

Eight, she asked whether the FIC has managed to ensure that owners of spaza shops have bank accounts. Which she believes is one of the reasons why they do not bank their money locally. She also asked whether the entity has picked up suspicious transactions in the sector.

Mr G Skosana (ANC) said that the presentation, to a large extent, addresses the challenges faced regarding the illicit flows of money in the country and the subsequent impact it has on government’s revenue. Further, he agreed that the country’s AML/CFT system should not only comply with the international requirements but it should also assist the country in dealing with criminal activities in the financial sector.

He asked what achievements the IDC in 2018, which is led by the DG of National Treasury, has made.

The Chairperson indicated that the problem statement in the presentation identified that there are deficiencies in the country’s financial crime intelligence legislative framework. Following this, he asked which legislation was deficient. Referring to the FICA Act and its stated objectives, he asked how the law enforcement agencies are unable to deal with money laundering and the financing of terrorism. He believed that if the LEAs were to act in line with the Act, they would be able to tackle the issues raised in the presentation.

He asked how criminal enterprises can channel money through trusts and companies, as both these entities are juristic persons, which are tightly regulated by banks.

As it was mentioned that the National Prosecuting Authority (NPA) does not have the requisite skills to investigate and prosecute criminal activities in the financial sector, he asked what challenges the authority currently faces. He added that cases will not be won in the courts if the investigations are not well-prepared.

Mr Momoniat described the current anti-money laundering legislation as onerous on the average South African and as draconian. Further, this legislation generates the largest expense for banks. Both the department and the FIC feel that banks need to adopt a risk-based approach, as opposed to the current rules-based approach, as it creates several hurdles for citizens. All financial institutions must take efforts to understand the risk-based approach. National Treasury believes that the institutions have not adopted it because it is a much harder approach to take than the current approach.

Large institutions in the country, which are usually enlisted, tend to comply with the legislation on financial transactions, due to their reputational concerns. Whereas smaller companies do not, mainly because compliance is burdensome for them. Both the FIC and National Treasury are currently considering how best to deal with the cash economy.

Regarding the capability of the NPA, he mentioned that the authority’s issues are well documented in the public domain; however, other institutions are also facing the same issues. He noted that there needs to be cooperation between the various law enforcement agencies.

Referring to the question on the bank account closures, he said that due to the Financial Sector Regulation Act (FSRA) the banks cannot alert National Treasury on a suspicious transaction report. Treasury does not have the power to get in between a contractual relationship between a bank and the customer. To ensure that people have a right to banking, particularly poor customers, National Treasury introduced basic standards and amended the FSRA, which has also provided the Financial Sector Conduct Authority (FSCA) with powers.

Still referring to illicit financial transactions, he mentioned that criminals were aware of how to utilise the cash economy, to evade detection from crime intelligence units. Most of the money laundering transactions conducted are detected through the banking system but the challenge is that action is taken by the relevant law enforcement agencies when the intelligence is shared. Whilst he indicated that the government has several administrative powers to recover stolen or illicit funds, he acknowledged that the country needed an agile criminal prosecution system.

Regarding when the evaluation process commenced, he said that National Treasury was made aware in May 2018 that the AML/CFT system would be evaluated and the process commenced in April 2019.

He confirmed that FATF did work virtually during the height of the pandemic. FATF planned large plenaries for November 2020 but with the onset of Covid-19 these were stopped and it did not look into mutual evaluations. 

Adv Khanyile mentioned that the verification of a client’s identity is critical to ensure that a bank knows where his/her source of income is coming from and it can also monitor suspicious transactions, which it can then report to the FIC. However, if the bank does not know its client, it cannot do any of this. FIC and the National Treasury have agreed that banks should move from a rules-based approach to a risk-based approach.

She expressed hope that the anti-corruption strategy adopted by Cabinet will be able to address a number of deficiencies in the fight against corruption. Several activities are currently taking place in the Fusion Centre and the awaited framework strategy will assist in fighting corruption.

She said that the evaluation process did not experience delays and the assessors from FATF conducted an onsite visit in the country. The only issue encountered concerned the discussion of the report, which had never been discussed in a virtual plenary. As a result, the FIC informed FATF that it would only discuss the report once the organisation finalised the rules to run a virtual plenary. Once this was done, the report was discussed.

She confirmed that the FIC had worked with the Zondo Commission and has shared information with it.

On the Oakbay matter, she referred the Committee to the High Court matter involving Oakbay Investments, which details the FIC’s involvement. She clarified that the FIC is part of the Justice Crime Prevention & Security (JCPS) cluster and the ACTT. The agency’s role is critical and it wants to support all law enforcement agencies by providing its intelligence services. Recently, the agency has worked with the Asset Forfeiture Unit (AFU) and it has provided the unit with affidavits from its lawyers, to fast-track investigations.

She indicated that the FATF assessment did not find issues within the FIC. Although, the assessors from FATF were not pleased by the fact the LEAs are not utilising the intelligence reports shared by the FIC. She did not lay the blame on the agencies, as institutions such as the Directorate for Priority Crime Investigation (Hawks) currently have 3 500 vacancies. She did not believe that the government has provided enough funds to LEAs and she pleaded that they are sufficiently capacitated with the right skills to deal with illicit financial transactions.

On overseeing the FIC, Mr Smith said that whilst the FIC produces financial intelligence, it is not an intelligence-gathering agency. All the information it obtains is through the legal obligations on financial institutions to report suspicious transactions. Otherwise, it has to access information generally available in the public service. The agency has had interactions with the IP on this issue and it was concluded that the FIC is not an intelligence-gathering agency and, as such, the IP saw no need to exercise oversight over the activities of the FIC.

However, the FIC is accountable to the Minister of Finance, the Standing Committee of Finance. It has also been called to appear before the Standing Committee on Intelligence. This is to ensure that the agency does not overstep its legislative functions. He added that the agency relies on LEAs.

On the Oakbay matter, he mentioned that in the discussions that took place following the banks' decision to close the accounts, it was noted that the Gupta family, their affiliates and the Oakbay accounts were not told by the banks that they had reported them to the FIC, as this would have qualified as tipping off. Instead, the banks decided that they could not continue their relationships with them, due to the allegations levelled. He indicated that the FIC has informed the banks that it does not appreciate the process of closing a customer’s account because it cannot freeze funds once an account is closed and the money is taken out, which occurred in the Gupta and Oakbay case. The FIC believes that the banks’ action was a premature step. He added that the agency usually does not accept a bank’s explanation that the closure is the last resort, as this jeopardises its work.

With the current legislation in place, institutions such as banks must apply a risk-based approach and identify which customers are low-risk. This is something that should have been done in the Oakbay case. During its discussions with other organisations, the FIC indicated that there should be inspections into whether banks are applying the risk-based approach. Although, he admitted that banks have not adjusted to the process yet but the supervisors should provide them with an incentive to change.

On the spaza shops, he said that the promotion of financial inclusion is key. There are several reasons why businesses operate in the cash economy, for instance, spaza shop owners usually have to work with cash, as this is what their customers mainly transact with.

He suggested that these were key policy issues the government must tackle. Presently, the FIC is looking to amend legislation, to ensure that a broader range of people have access to financial institutions which operate in a regulated environment, where banks can interact with their customers and deal with criminal elements.

Mr Christopher Malan, Executive Manager: Compliance and Prevention, FIC, touching on increasing the capacity of forensic specialists within government, said that this is a work in progress within the ACTT and a report is currently being finalised. This report will soon be forwarded to the Secretariat, and the political principals will be briefed on 23 February.

The underlying issue identified by the ACTT is that to have effective investigations and prosecutions, the evidentiary leg is critical, particularly with the complexity of criminal activities conducted during State Capture. However, due to the lack of capability, the investigations drag on, and if the evidence is not appropriate, prosecutors cannot proceed to the prosecution leg of a matter and more importantly, they cannot recover the assets.

The forensic capability of the state within the ACTT is low. As such, the ACTT has proposed that the state provide funds for the organisation to improve its capacity and capability so that it can look into impactful matters, mainly relating to State Capture. Further, to ensure that it can provide the transmission mechanisms from information gathering and the conversion of that to forensic evidence so that investigations are conducted properly for prosecution to commence.

He explained that the FIC has found that during the forensic cycle, a significant amount of state expenditure, within the ACTT partnership, goes towards the hiring of forensic investigators in the private sector–mainly due to the extent of work. Additionally, as the state does not have capacity, there are instances where three to four forensic instructions are underway in one matter and the investigators are not coordinated in their approach–which affects the quality of reports. He expressed hope that the government will establish capacity within the ACTT, the purpose of which will be to service its partners to deal with impact matters.

Mr Moloto, on the regulations being onerous on the average citizen, mentioned that the challenge for banks is identifying a legal person, such as a company or trust and as a result, the person opening the account must provide the documentation they would have received from the competent authority, such as the Companies and Intellectual Property Commission (CIPC). The challenge is to verify the documents presented before them and currently, the Companies Act 71 of 2008 and the Trust Control Property (TCP) Act 57 of 1988 do not require that information on beneficial owners needs to be provided to the Mother authorities.

Further, there is no database similar to Home Affairs, where citizens can be verified; hence banks have to rely on self-declarations, and the chances are where an individual creates an enterprise for nefarious purposes, the likelihood of disguising his/her identity and the intended purpose of registering the company is very high. The challenge for LEAs is who is behind the entities.

He then listed the legislation the entity believes should be amended. The first is the Protection of Constitutional Democracy against Terrorist and Related Activities (POCDATARA) Act (which has not been updated since the last assessment in 2017), by transferring the obligations of the United National Resolution, into FICA, as these obligations are currently done through proclamation. Within FIC, there exists the opportunity to create a similar structure that will look into profit and finance.

The second one is FICA, which first, needs to have its scope expanded, relating to the activities FATF’s requires it to cover (currently there is a deficiency). Other requirements, such as due diligence, need to be strengthened in the Act.

The third recommended amendment relates to the Companies Act and this proposed amendment will provide for a legal obligation, one for individuals establishing companies to provide beneficial ownership information (for the CIPC to verify the information). Next, to have a database that is accessible by law enforcement agencies and financial institutions. A similar structure will have to be set up within the Master of the High court in terms of the amendment of the TCP and the Non-Profit Organisation (NPO) Act, which currently does not provide for requirements to register. He added that the penalty clause in the NPO must be strengthened.

He listed all the law enforcement agencies involved in the IDC, these include Special Investigative Unit (SIU), the NPA (which includes the Asset Forfeiture Unit), the South African Revenue Services (SARS), the Department of Home Affairs, the South African Police Services, the Department of International Relations and Cooperation, the State Security Agency, the Department of Justice and Correctional Services, the South African Reserve Bank, FSCA, FIC the provincial licensing authorities for casinos, the Legal Practitioners Council, the National Treasury and Master of the High Court. 

Mr Momoniat said that one difficulty has been balancing effects that the anti-money laundering controls have on financial inclusion. In fact, a policy paper on financial inclusion has been published for public comment. More efforts need to be made to ensure that every individual has access to a basic bank account, to formalise the system.

Regarding the closure of the Gupta bank accounts, he asked why the banks had not closed their accounts earlier. Further, he considered whether the banks decided to close the accounts because they were frustrated by the government's lack of action on the allegations.

Referring to the IP, he mentioned that the Nugent Commission’s proposal on the IP is a model they will bring to Parliament. He indicated that there is scope for abuse if confidential information is released. The government is looking to ensure that those who have been alleged to have committed wrongdoing are held criminally liable.

Mr Skosana reiterated his question on the progress made by the IDC since its establishment in 2018. 

Mr Momoniat mentioned that some of the IDC’s reports may include sensitive information. He explained that when the IDC was established, the significant challenge was to conclude the mutual evaluation, however, the various institutions were open to sharing information. Presently, the IDC needs to finalise the extent to which the plans will be implemented. To achieve this, the working team meets every week; and the next six months will be critical in the Committee overseeing the plan. He added that the IDC is a work in progress, and it will brief the Committee on its developments. Its biggest issue has been coordination.

The Chairperson asked for the Secretary to write to the IDC, to request that it appear before it in the next quarter. If the report does contain sensitive information, it can be censored.

He thanked the officials for the comprehensive report and he indicated that it will enable the Committee to conduct its oversight functions and report back to Parliament on the current developments in the country’s AML/CFT. He encouraged all stakeholders to work together to tackle money laundering, as it is a serious issue that has affected the country’s revenue collection. 

The meeting was adjourned.