Financial Intelligence Centre Act schedule amendments: NT response to public submissions

Meeting report

The Chairperson welcomed the Members of the Committee and the National Treasury’s delegation.

Mr F Shivambu (EFF) informed the Committee that he would be departing early from the meeting and that the South African Reserve Bank (SARB) had still not answered the questions the EFF sent them regarding the Phala Phala Game Farm saga. The SARB had agreed that they would respond, but they had not done so yet.

The Chairperson noted Mr Shivambu’s concern, and said a follow up would be made.

NT response to public comments on FIC Act

Mr Ismail Momoniat, Acting Director-General, National Treasury, took the Committee through the presentation. He briefly referred to the comments received on the Schedules to the Financial Intelligence Centre Act (FIC Act) during the parliamentary consultation process. Entities had suggested proposed wording on certain items, particularly in Schedule 1. Many entities had requested exclusions of their business sectors, and requested clarity and guidance on certain aspects of the drafting.

Mr Pieter Smit, Executive Manager: Legal and Policy, Financial Intelligence Centre, took the Committee through the comments made by the 11 entities. He said that eight of the 11 entities had raised issues about item 2 (trust and company service providers), item 8 (life insurers), item 11 (credit providers), and item 20 (high-value goods dealers). 

He said it was important to keep in mind that the framework of the FIC Act required institutions to apply a risk-based approach. This was inherent in the fabric of the FIC Act -- that institutions must understand the risks that they face for their products or services being exploited by their customers to launder money or to finance terrorism. They needed to structure the level and intensity of their compliance in accordance with their understanding of that risk. That inherently meant that there could not be a one-size-fits-all approach to the manner in which institutions complied with the FIC Act. The exposure to money laundering depended on the nature of the business, and the nature of the business would determine the extent to which the business complied with the FIC Act and protected itself from exploitation. The mitigation of risk was a mechanism for the institution to shield itself from money laundering. This also meant that supervision of compliance followed the same approach.

The comments received in respect of life insurers were mainly proposing that certain types of life insurance products, such as pure risk life insurance, should be excluded from the scope of the FCI Act. The response was that the FIC Act's current scope relating to life insurers envisaged no exclusions for certain types of long-term insurance business. The provider of life insurance was fully covered, regardless of the type of insurance product or policy they offered. The proposed exclusions would therefore reduce the current scope of the FIC Act. It would be difficult for the FIC to make a convincing argument that such a narrowing of the current scope was justified.

When the FIC Act was amended in 2017, there were a number of exemptions in place that excluded certain categories of business and life insurance institutions from complying with the FIC Act in respect of particular transactions. Even though they were accountable institutions, they did not exclude the institutions from the scope of the Act. The institutions did not have to comply with the FIC Act in certain instances because of those exemptions in place. It was a considered decision that time to withdraw those exemptions because of the implementation of the risk-based approach just mentioned, and because of the need for institutions to understand whether they had an exposure to money laundering risk and what they needed to do to mitigate that risk where that decision could not be taken on behalf of the institution by the authorities, the regulators, or the Minister. This was also pointed out in comments included by some service providers in the insurance industry that they had received in the Minister’s consultation process, that they would create confusion by including certain exclusions from the FIC Act for insurers, which would then be accountable institutions in certain instances and simultaneously not be an accountable institution in other instances. That would complicate life for the insurance industry and the supervisors and regulators.

Item 8 provided the basis for a risk-sensitive approach at an industry level by requiring life insurers to apply enhanced measures in cases where they assess money laundering or terrorist financing risk to be high, and allowed them to apply simplified measures where they assess the risk to be low. Simplified measures could include having a name and identity number for a customer. There was no prescription on what enhanced measures or simplified measures should be. The only requirement was that the institution should be satisfied and have verified who they were dealing with, and that they could provide the information relevant to finding the customer when it might be necessary. The only exception to this approach in respect of life insurance business was concerning reinsurance business. The reason was that the insurance business was typically between two accountable institutions.

There had been a few comments in respect of credit providers. These comments also suggested a narrowing of the drafting of this item, or the exclusion of certain economic sectors from its scope. The proposed wording was to exclude credit providers that offered credit in terms of a credit facility, and to exclude certain credit transactions. The FIC’s response to this was that the Financial Action Task Force (FATF) standards required that “lending” business be included in the scope of a country’s measures against money laundering and terrorist financing.  The standards include consumer credit and the financing of commercial transactions, but envisage no exclusions for credit in particular economic sectors.

On the response to high value goods, he felt it was important to address the reason why this item was included. It was not to focus on capturing details about cash transactions, but rather about capturing details of transactions where people had the spending power and could afford to buy expensive items from their disposable income. The intent was to create an audit trail for those cases where a person could afford to make these purchases. This category included dealers in precious metals and stones. The importance of capturing the information and ensuring an audit trail would be important in the future for further initiatives.

There was a comment received in respect of item 2 of Schedule 2, which dealt with the sectors under the supervision of the Financial Sector Conduct Authority (FSCA). There was a proposal from the Johannesburg Stock Exchange (JSE) that it should supervise brokers on exchanges. The FIC's view on that comment was that the supervision of financial institutions that provide broking services were entrusted to the FSCA. The JSE was responsible for applying its rules to its members, but was not generally responsible for supervising the activity of stock brokers.

Mr Smit said that the FIC and current supervisors in the financial sector had come to understand that new institutions could not comply with the FIC Act even if they understood what it meant. They did not have the capacity to immediately meet all the compliance-related expectations of the FIC. A common practice that supervisors followed was to allow time for institutions, through engagement with the supervisors, to bed down compliance systems and policies that may be necessary and to engage the industries for the period that may be necessary for compliance to be bedded down, and not impose any enforcement actions during that period. This process was followed in 2017 when amendments to the FIC fundamentally changed the paradigm from a rule-based to a risk-based process. With this risk-based approach, understanding the necessity to focus resources where the impact would be more meaningful was as much required of the supervisors as it was of the institutions that had to comply with the FIC Act.

Mr Momoniat concluded the presentation by emphasising that in the main, they wanted to implement these provisions for themselves and to improve their capability and mechanisms to deal with financial crimes. There was always resistance when they expanded this to other sectors, because there were always cost implications for businesses, but they believed that the challenge would be in the proportionate implementation of the risk-based approach. An engagement needed to happen with each of the sectors.

Discussion

Dr D George (DA) said that one of the problems with the facts at hand was that individuals and groups that were committing money laundering and financing terrorism were not being held to account. How would the law that was now being changed deal with that problem? One could make any law as tight as possible, but the proof was in the implementation and consequences. He was not quite sure how the FATF process worked. His understanding was that the FATF’s decision on whether they were satisfied that this law would cover the problems was going to be made in February. He raised concern over the significant changes at hand, and said that the industry was concerned about them because it would cost more to comply. However, it was necessary to do something about the problem, as compliance was needed.

What was the process that the Committee could monitor? It got the report from the FATF last year, and they were now in August and were running out of time. They had to move with speed and were now on a burning platform. He understood that the engagement process was complex, but still felt it had been a long time and they were now scrambling. Why had it taken so long for National Treasury to respond? The Committee had heard from the Deputy Governor and now the acting Director-General, and it looked like the country was going to get grey-listed. A plan was needed for that as fast as possible. Implementation of the law and demonstrating progress were necessary to get off the grey-list quickly. He was concerned that there had not been a fast enough response to this very significant event.

Mr Zakhele Hlophe, Committee Advisor, had clarity-seeking questions. Was the regulation of new sectors to determine the risk of money laundering, not an expensive way of doing this? Why not assess the risk first, and have that national risk assessment of money laundering before expanding the regulatory net? Did “high value goods” also include “high value services”? Sophisticated criminals enjoyed expensive services. If it was not included, why not? Was it perhaps because they did not have the risk assessment required before they regulated? How many new businesses and individuals that were not regulated before would be affected by the amendments? Did they pay annual levies if they registered with the FIC? If so, how much were those levies? What were the cost implications for all of this -- especially for new and small businesses?

The Chairperson told Mr Momoniat and Mr Smit that the South African Institute of Chartered Accountants (SAICA) and others were very worried about the financial and non-financial impact the schedules would have on small, medium and micro enterprises (SMMEs). How could they mitigate this impact? How could they comply, but not at the expense of SMMEs? Were these regulations not going to destroy the SMMEs? How was that going to be mitigated? He also raised concern over Mr Momoniat’s statement that South Africa was a safe haven for criminals and people involved in money laundering. He asked for clarity on this statement, because making such a statement on a parliamentary platform had a serious impact.

Responses

Mr Momoniat replied to Dr George’s questions by affirming that they were relevant questions. The schedules were part of the story, but regarding the process. He explained that there were two aspects to the mutual evaluation. The first aspect was that 40 FATF recommendations were standards members were meant to comply with. The second aspect was the effectiveness measures; here, 11 measures were termed “effective outcomes”. NT's problem was that it got 20 out of the 40 recommendations, which included the two low categories – effectively a fail. It got Cabinet’s approval to bring a General Laws Anti-Money Laundering Bill. Cabinet had approved this. The State Law Advisors had certified it, the National Treasury’s staff were reading the first proofs, and the second proofs would hopefully be done tomorrow. They hoped the General Law would be formally tabled to the National Assembly by Thursday. If they got it passed before the end of the year, the Bill would deal with 14 of the 20 recommendations.

There was another Bill which the Minister of Safety and Security had introduced in July. This Bill dealt with two important recommendations because there were three core recommendations that Treasury had failed on. Sixteen recommendations had been accounted for. The other four recommendations would be dealt with through regulations and other processes, as not all recommendations had to be dealt with in one Bill. The FATF required the laws be in effect by February, and NT thought they should be able to pass. It would be a huge step forward in South Africa, making real progress and demonstrating the progress made in its anti-money laundering and terror financing framework. However, it would not be enough. They had to show they had the will and capability to implement those laws.

The FATF was saying that South Africa’s capability to deal with criminal syndicates was poor. A credible national risk assessment that got all the authorities aligned was needed. That was something the NT was dealing with, and was one of the recommendations. They then had to show that they had numbers three, four and five, which were more about how they regulate. The regulators had a manual to turn to when dealing with money laundering. They could not just say that they did risk-based assessments -- they had to show that they actually had it as part of their routine work so that there was consistency in their work. They had to demonstrate that they were implementing beneficial ownership and making it readily available to criminal justice authorities. Many designated non-financial sector providers include the legal profession, gambling institutions, motorcar dealers, estate agents, etc. There were no supervisors there, and that was where the FIC came in to fill the gap. The tough parts were numbers two, six, seven, and eight, which deal with the Hawks, the National Prosecuting Authority and the police, to investigate money laundering and related crimes. They had to demonstrate that their authorities were actually succeeding and were making progress.

Then there were nine, ten, and eleven, linked to number two. Two looked at how authorities tried to recover the money stolen during these financial criminal activities. The concern with nine, ten and eleven was not just terror financing for acts conducted in South Africa, but also for groups operating in South Africa but funding conduct outside of the country. Much progress needed to be demonstrated in that regard. They had committed through international agreements to follow through, but had not done so for five years. Progress could be made to follow through on nine, ten, and eleven, but the toughest aspect to demonstrate progress was the criminal justice system.

He said the process required a first report to be given at the end of August, which would be on the technical compliance and legislation. Hopefully, by October, they would be able to show that they had made progress through the second report, and indicate that they were reasonably confident that it would be enacted into law. They would also have to demonstrate effectiveness by then. They had been busy meeting with different departments and agencies so that they could report on the progress that they had made. If Treasury could show sufficient progress for all the immediate outcomes, there were still chances that they could be grey-listed, but he was confident that the country could avoid that if they demonstrated progress.

A joint group report was done with a regional body, and a FATF secretariat that they would speak to in December, and in January, they would have meetings with them. They would then go to the FATF plenary in February, where the joint group report would be reviewed and approved, should FAFT be satisfied. This approval would lead to no grey-listing. They would still be subjected to consistent follow ups, however, so that demonstrable change could be seen. Even if they got on the grey-list, it would hopefully be only a few items and they would have their own action plan and not one imposed on them.

He added that the General Laws Amendment Bill would change five laws -- the FIC Act, the Financial Sector Regulation Act, the Companies Act, the Non-Profit Organizations Act, and the current Trust Act. The challenge was going to be what process Parliament had to bring the different committees to process the Bill. Parliament would guide on how the process would work.

Regarding his statement on South Africa being a safe haven for criminals, he replied that when one looked at the FATF regional evaluation report, it effectively states that South Africa’s system is not geared to deal with criminal syndicates and that there is a concern about this. News reports showed that crime syndicates were big in the construction industry and in the scrap steel network. There were zama zama issues also that were driven by clear economic interest. Even when they did prosecute, they were dealing with the runners on the ground, and not the ultimate beneficiaries. As a society, there was a need to accept the level of crime, and that syndicates had become deeply rooted. Because of the lack of investigation, these networks see South Africa as a safe haven. This was a real problem, and ways had to be found to take back the country. He referred to what was happening to the country’s infrastructure, and said syndicates drove these challenges. Some of the findings in the Zondo Commission indicated the need to deal with the cash economy, and what made it difficult to track the miscreants.

When one looks at immediate outcomes six, seven and eight, the whole notion of who the ultimate beneficiary was required them to recognize that they were quite behind their FATF peer base, and they really needed to take a giant step toward what had become the norm in other countries. These were deeply worrying issues, and there was no data to help them tackle them, so they had to find ways to assess how bad the problem was.

Minister [of Trade, Industry and Competition] Patel had put out a gazette on the proposed measures to ban scrap steel and copper-related activities that lead to crime. There were plenty of mechanisms that could help them tackle these criminal activities. Any national risk assessment would have to address these issues, and the country's authorities would have to determine where they put most of their resources when investigating crimes.

On the damage to small businesses, he said there was no doubt that costs would be imposed on small businesses. A risk-based approach would show that small businesses were not an issue, and some small businesses would have almost no reporting requirements. How they applied these requirements by sub-sector was going to be a challenge. SAICA was looking at SMMEs, and by the time the plenary approaches in February, NT would have to have dealt with the legislative measures and moved on to the high risk. He did not think it was reasonable to expect that they would have solved their problems by February, and they were not signalling this to the FATF.

On concerns of the Committee being on a burning platform, he replied that the Committee and National Treasury had indeed been scrambling since the FATF report. He acknowledged that National Treasury could have moved faster by two or three months, but in a sense, he could not see how much faster they could have gone. The comment period was important, and changes would need to be made. It was tough to get all the departments on board and convince them to be included. The key issue was that they were still within the time available to do the technical compliance. They could hopefully reduce some of the risk through the public comment process. On the implementation side, they did not have to wait for the law, as they had been having a lot of meetings with the core legal authorities to get them on board. There were areas they had not been able to cover. They could not do the national risk assessment first -- they had to include the sectors, but the approach was to assess the risk as they went.

Regarding the inclusion of high value services, he replied that there was a need to go beyond the individual and look at the people connected to the individual, and what services they enjoyed. This was a case-by-case matter, and enforcing this could have huge economic implications for small businesses. The channel was for Treasury to come and account so it could be seen that they had excluded most small businesses once the risk-based approach was implemented, because there were no risks. These processes would ensure that they were transparent, so they could hopefully reach a balance. Entities did pay levies to the FIC, but the NT was getting financial institutions to pay for the cost of regulating them. Down the line, this risk should be incorporated into the regulatory fees.

Mr Smit added to the response on high value goods, stating that the drafting of this item currently proposed in the amendment to the schedule did not include people or institutions that provide services. It specifically referred to items, and an item was typically a physical thing. When a thing was being sold for over R100 000, that would fall within the scope of this item. They were focused on this because if they wanted to expand this to include service providers, the scope became so wide that it would become impossible to regulate and supervise from a supervisory impact perspective. However, if a person could afford to spend that much on items, they would fall into the same category as someone who could spend big amounts on services. The object of what they were trying to do was not to achieve 100% coverage, but to achieve enough coverage so they could pick up an audit trail that could start the investigation off.

Referring to the cost of compliance and registration for small businesses and the number of new entities they expected would come into the scope of the FIC Act, Mr Smit said that the FIC did not charge a registration fee. The FIC Act allowed the FIC and any other supervisor to recover the cost of an inspection to check for compliance from the inspecting institution, but they did not use that power -- that was a part of their business and they covered that from their budget allocation. They did not impose costs on institutions for being subject to their supervision, but the cost of compliance was a factor of the nature of business and what they needed to do to comply with the FIC Act.

The FIC's approach to compliance was to see how an institution runs its business -- what information it generally collects about its customers, how much it needs to verify about its customers' identity, and the business's source of income. Where an institution deals with high risk customers and high risk business, it would have to satisfy the obligations of the FIC Act. Small businesses involved in high risk business would have to do more to comply with the FIC Act. That was how they tried to mitigate the cost impact on institutions, because those would be the exception to the rule. The cost implication was inherently mitigated by the framework of the FICA, which requires institutions to protect themselves from being exploited by money launderers. On the new entities, he said that some estimates had been done on this, and the FIC had been in discussion with the industries that were identified for inclusion for some time, to prepare the proposals for the Minister in the consultation process that was initiated in June 2020. There had been a long period of engagement with the industries so that they could get a good feel of the type of businesses and the numbers we would expect to bring into the scope of the FIC Act.

Mr Christopher Malan, Executive Manager: Compliance and Prevention, FIC, said the FIC had made it an important part of the consultation process to get a sense of the estimated number of players currently in the market for two reasons. First, it was to get a feeling of what the stress factor would be on the FIC systems to register them and keep these accounts up to date. It was important for them to do the link between registration, because they could file reports to them through registration. One could argue that the FIC system was there, firstly, to better arm institutions to prevent themselves from the criminal elements that made these entities a facilitator, and make the institution aware that it was in a vulnerable sector. The institutions then confirm that via registration with the FIC. They were then armed with knowledge to detect the abuse. Once they had detected the abuse, they could then report that activity. That was why it was critical that they spend a lot of time estimating the universe and ensuring that they know who would be in the universe so that when they do outreach, they seek to get the entire universe registered with them.

The figures showed the FIC an estimate of 6 400 credit providers, and 12 500 high value goods dealers. Trust property service providers and company service providers comprised quite a huge market because attorneys, accountants and other financial service providers did play a role in advising persons to set up structures for ordinary business purposes, and also -- unknowingly -- for illegal purposes. There they were looking at approximately 5 000 persons. They had had very extensive engagements on crypto assets, and had registered voluntarily close to 100 of those entities under the cross-border remittance category. They would be moved to a new item schedule once formally itemised. Property practitioners were approximately 9 000, the Law Society and the Legal Practice Council were estimated to be about 1 600, and there were also about 5 000 gaming institutions. These were the non-financial sectors that they were taking responsibility for. The first responsibility was to register all of them and enable them to understand that they were subject to being abused, and also to arm them with the means to report to the FIC. Once registered with the FIC, they would engage them on an extensive education and awareness programme.

Mr Momoniat said it would be hard to prevent grey-listing, but he thought significant progress could be made. If progress was made in one or two or three areas, this would mean that the action plans imposed on them would cover very little and they could get out of the grey-listing quickly. That was why, if one looks at the national risk assessment, the challenge was that for each of these areas, they had to cover the entire ground. They had to show progress against the recommended actions that FATF had come up with, and have their own plans in place to get out of the grey-listing. He had seen the banking chief financial officers (CFOs), and this grey-listing issue had shocked many financial analysts because they were the first FATF members to be in a situation like this.

The FATF process was confusing, and their language was hard to interpret. One had to understand that those assessors had their own methodologies. Many investment analysts did not really understand the process. Grey-listing would be economically negative. They had to demonstrate action and communicate. There was a need to ensure that overseas banks continued confidence in South Africa's banking system, even if the issue may be with the country's prosecuting and investigative agencies. The big concern was about the role of corruption, there not being prosecutions, and investigations taking too long. The country's agencies had to demonstrate that corruption was being dealt with. He thought that this threat was also an opportunity for them to fix up their ability to deal with financial crimes, and believed they could make huge progress and could prevent grey-listing. It would help the Treasury if the Department found a way to get all the other authorities involved, and to come to account about how they were responding to the recommended actions and what progress they were making on them.

Dr George said he recognised that the Committee and National Treasury were in a complicated space, but still preferred to look at the upside and be positive, and also try to mitigate the problem that was coming. He wondered whether National Treasury had applied its mind, or started to apply its mind, to what they were going to do if South Africa was grey-listed, given that they were not far from this decision being taken, and there was in fact a reasonable probability that the country would get grey-listed. He agreed with the acting Director General that the consequences were not completely known. The key was what other jurisdictions would do to potentially impact the movement of money and trade with South Africa. What should South Africa do if it was grey-listed, and how would it be managed?

Mr Momoniat replied that National Treasury had been talking to various economists to understand what the grey-listing would mean for the economy as a whole. They were still in the process of analysing this. It depended on what progress was made on the legislation and the immediate outcomes so that they could understand which sectors would be negatively impacted. A lot of it depended on what FATF would say. They would certainly make their analysis public, and had plans to deal with grey-listing should they get to that point. They needed to look at all the options. He had not found resistance in government, but rather real concern and a commitment to act to prevent this. The challenge was whether they could change the way they worked, and also change their priorities. One had to look at whether there was a national risk assessment that one believed in, and whether it guided one's work.

The Chairperson asked Dr George why he was so worried that there was a likelihood that South Africa would be grey-listed.

Dr George replied that it had to do with him working in the financial industry for a long time, and having followed this grey-listing issue with great interest. He speaks to many people in his job in the international banking fraternity, who often share their views on South Africa. This had been a long time coming, and it was known that South Africa had problems with money laundering and money leaking out of the public sector. If one simply looked at how everything was hanging together, it looked like grey-listing was about to happen. This was a complicated matter; South Africa had a small developing economy, and facing grey-listing would be difficult for it. Time was running out while change and implementation of the law were needed. They did not want grey-listing to happen, but bracing themselves for this possibility was a sensible approach. He remains hopeful that they could prevent grey-listing from happening, but should they not prevent it, they should be as ready as possible for that eventuality.

The meeting was adjourned.