General Laws Amendment Bill (Anti-Money Laundering and Combating Terrorism Financing) Bill: NT & FIC briefing

This premium content has been made freely available

Finance Standing Committee

31 August 2022
Chairperson: Mr J Maswanganyi (ANC)
Share this page:

Meeting Summary

Video

In this virtual meeting, National Treasury and the Financial Intelligence Centre briefed the Committee on the General Laws Amendment Bill (Anti-Money Laundering and Combating Terrorism Financing).

The Committee heard South Africa was rated poorly in the Mutual Evaluation Report published in October 2021. South Africa failed in 20 of the 40 Financial Action Task Force (FATF) core standards/recommendations and has also failed in all 11 effectiveness measures scoring moderate and low effectiveness.

The peer review shows that our systems are well behind the curve hence the bad score South Africa received. The FATF rates the country based on what government said it would do against what it actually did.

Therefore, South Africa is facing greylisting by the FATF at its February 2023 plenary. Countries are generally given about three years to deal with technical compliance and make changes in their laws, but because South Africa is facing greylisting, the country has to do a significant amount within a year and a half. The country might be given more time should it show more progress, but the big elephant is what is being done between now and February when National Treasury goes to the FATF plenary.

The Bill addresses the deficiencies and recommendations made by the Task Force. Specifically, it makes amendments to the: Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001); Non-profit Organisations Act, 1997 (Act No. 71 of 1997); Trust Property Control Act, 1988 (Act No. 57 of 1988), Companies Act, 2008 (Act No. 71 of 2008), and Financial Sector Regulation Act, 2017 (Act No. 9 of 2017).

National Treasury indicated that greylisting could be prevented. If South Africa does get greylisted, it would be for one or two measures. If National Treasury can show that substantial progress has been made, it will make it easier for South Africa to get out of greylisting after a few months. The Department felt it is in the country’s interests to improve on the FATF recommendations to tackle financial crimes in the public and private sectors.

Committee Members asked questions about beneficial ownership, the ratings that South Africa received, and whether South African authorities are equipped to deal with greylisting should it happen.

The Chairperson stated that there would be public consultation on the Bill to give citizens of South Africa a chance to comment on the Bill. He expressed unhappiness about the prospect of greylisting, stating that when international bodies come to our country, they should come with the intention to assist government departments and financial institutions in self-correcting and not come with the intention to punish them despite the good work that they do to ensure that regulations are tightened up.

Meeting report

The Chairperson welcomed the Committee and the delegations from National Treasury and the Financial Intelligence Centre.

He noted that no apologies were made and moved to the briefing by National Treasury.

Briefing by National Treasury (NT) and Financial Intelligence Centre (FIC)

Mr Ismail Momoniat, Acting Director-General, NT, provided background that South Africa has been rated poorly in the Mutual Evaluation Report (MER) published in October 2021. South Africa failed in 20 of the 40 Financial Action Task Force (FATF) core standards/recommendations (Technical Compliance) and has also failed in all 11 effectiveness measures (Immediate Outcomes), scoring moderate and low effectiveness. Therefore, South Africa is facing greylisting by the FATF at its February 2023 plenary. Countries are generally given about three years to deal with technical compliance and make changes in their laws, but because South Africa is facing greylisting, the country has to do a significant amount within a year and a half. The country might be given more time should it show more progress, but the big elephant is what is being done between now and February when National Treasury goes to the FATF plenary.

He explained that the effectiveness measures refer to the 11 immediate outcomes and that meeting this is going to be tough. The Department needs to demonstrate the success of implementation. There needs to be a sense that cases are being investigated, successful prosecutions, and a number of freezing orders of funds, policy and operational documentation. Progress also needs to be shown on the targeted financial sanction with the United Nations Security Council, which lists someone that has been designated to be responsible for terror financing. It needs to be shown that South Africa has signed that agreement and has actually gazetted it in the country and it needs to be ensured that legally the banks and others have to act appropriately in terms of what the international agreement requires. We have not been doing that for five years now and we have not even gazetted the list. That should be relatively easy to deal with, but the proof will be in the implementation.

The Bill amends the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001); Non-profit Organisations Act, 1997 (Act No. 71 of 1997); Trust Property Control Act, 1988 (Act No. 57 of 1988), Companies Act, 2008 (Act No. 71 of 2008), and the Financial Sector Regulation Act, 2017 (Act No. 9 of 2017). The Bill addresses 14 technical compliance deficiencies, namely recommendations 7, 8, 12, 15, 17, 18 and 22 to 28.

Mr Pieter Smit, Executive Manager: Legal and Policy, FIC, explained that the technical deficiencies that this Bill will address relate to the findings of the mutual evaluation where legislation was analysed, and it was found that the legislation did not fully meet the FATF’s expectations. Some of these are recommendations that need to be fixed in the short term as part of the observation period process and many of these needs to be addressed over time. Most of the amendments deal with the concept of beneficial ownership which is a serious shortcoming in our legislation at the moment. The capturing of information of beneficial owners and making that information available to owners needs to be investigated. Many of the due diligence findings of the FATF that relate to regulations 12, 15, 17, 18, 22, and 28 are minor things that need to be fine-tuned in our legislation as there is still a discrepancy between our laws and what the FATF expects.

Mr Momoniat explained that the legislative amendments in the two Bills address technical compliance deficiencies. Dealing with 16 of the 20 deficiencies is the first important, and very significant remedial step to prevent greylisting. However, these amendments to the laws are not enough to fend off a FATF greylisting as effectiveness still needs to be demonstrated in implementation. He added that some of the FATF measures could be addressed with our current existing law. For example, if the investigating authorities have more cases in terms of current legislation, those will count as being positive.  

There needs to be a national risk assessment, which does not need a law. The country can have credible risk assessments just by using the current law. The big challenge will be demonstrating effectiveness. On immediate outcome one, which asks about the National Risk Assessment and what the plan is to fight crime, he explained that what FATF is saying is that the lack of effective enforcement and the way implementation has been going says that the Department is too naïve if it thinks that it is going to deal with criminal syndicates given the highly organised level of the syndicates. The country’s national risk assessment needs to demonstrate what South Africa’s priority rate is and that there is a risk-based approach. Alignment needs to be demonstrated amongst the country’s authorities. National Treasury is working on a risk-based approach that everyone buys into.

He stated that immediate outcomes three, four, and five relate to regulatory issues involving various supervisory requirements. It needs to be shown that National Treasury is fulfilling its obligations and reporting on suspicious transactions, that it has a risk-based approach and has a manual on risk-based supervision. The outcomes also speak to beneficial ownership information, and in this regard, it needs to be shown who ultimately owns certain organisations. That is going to be difficult to demonstrate. He added that the schedules that are going to be passed are going to be useful information that National Treasury can submit for the August report and the October report.

Immediate outcomes six to eight and two refer to investigations, prosecutions, and forfeitures relating to money laundering. This requires factual evidence. If you demonstrate weakness, it will not count positively. There must be real cases that lead to real prosecutions and not just authorities prosecuting for improving numbers.

Immediate outcomes nine to eleven relate to terrorist financing investigations and prosecutions and targeted financial sanctions relating to terrorism financing and proliferation financing. This has not been a well-developed area and many of our institutions need to factor this in. It is not that South Africa may be free of many terror attacks but that many individuals may be funding activities in other countries in other parts of the world. Other countries expect us to act, and it is important that we have the mechanisms to act. We need to have our own action plans and demonstrate progress for each immediate outcome.

Mr Momoniat stated that he believes that National Treasury can prevent greylisting and demonstrate that there is real action.

Briefing on General Laws Anti-Money Laundering/Combating Terrorist Financing Bill

Adv Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, NT, spoke on the amendments to the Trust Property Control Act (TPCA) (clauses one to seven of the Bill). She stated that the first few provisions intend to address recommendation 25 in order to ensure that there are appropriate measures to prevent the misuse of trusts for money laundering or terrorist financing. It is critical that National Treasury ensures that there is adequate and timely information on trusts, including information on the trustee and beneficiaries, that can be obtained or accessed in a timely fashion by the authorities.

The Amendments to the Trust Property Control Act entail:

1. Inserts definitions of “accountable institution” and “beneficial owner” in section one.

2. The amendment of section six to specify matters disqualifying a person from acting or continuing to act as a trustee. The criteria for disqualification are aligned with the criteria in section 69 of the Companies Act concerning directors of companies. The criteria include convictions for terrorism, anti-money laundering and other related offences.

 3. The amendment of section ten to require a trustee to disclose their position as trustee to any accountable institution with which the trustee engages in that capacity, and to make it known to the accountable institution that the relevant transaction or business relationship relates to trust property.

These amendments to the TPCA will be in place for a period until a new regulation of the Trust Property Bill, which is currently being developed by the Department of Justice and Constitutional Development, will be enacted. These are urgent amendments to provide for the immediate period until the new legislation amending the trust property regulation comes into operation.

She also discussed the amendments to the Non-Profit Organisation Act which are clauses 8-14 of the Bill. The objective of FATF recommendation 8 is to ensure that non-profit organisations are not misused by terrorist organisations. It requires countries to review the adequacy of laws and regulations that relate to NPOs which the country has identified as vulnerable to terrorist financing abuse.

She explained that clause nine amends section five to insert a new subsection to provide that the Directorate may collaborate, co-operate, co-ordinate and enter into arrangements with other organs of state to perform its functions. This is a general provision that is supportive of the directorate but also, concerning these other measures in the Bill, it will be helpful in their implementation of requirements relating to maintaining registers of information relating to the interests of non-profit organisations.

Clause 13 inserts a new chapter three and section 25A to provide for grounds for disqualification to be appointed as an office-bearer of a non-profit organisation, and to enable the director to remove an office-bearer of a non-profit organisation when that person fails to comply with the requirements of the Act or becomes a disqualified person. The grounds for disqualification will be aligned to those in section 69 of the Companies Act.

Adv Poovindree Naidoo, Senior Legal and Policy Advisor, FIC, stepped in for Mr Smit, who had connectivity issues. She stated that there were several issues that impacted the Financial Intelligence Centre Act (FIC Act). The amendments to the FIC Act would address some of these deficiencies and improve the ratings regarding the immediate outcomes relating to regulation and supervision. Many of the proposed amendments to the FIC Act relate to minor amendments that do not change any policy approach in the FIC Act.  The findings related to where South Africa received a “partially compliant” rating in terms of the recommendations outlined earlier in the presentation also related to the scope of the FIC Act. That means certain sectors did not fall within the scope of the FIC Act, and this is dealt with through the amendments to the schedules of the FIC Act. Once these sectors come within the scope of the FIC Act, that will substantially increase the ratings that the country will receive from partially compliant to largely compliant.

In terms of the proposed amendments to the general powers of the FIC (clause 18 of the Bill), she stated that the FIC had been involved in a number of projects. In terms of the FIC being allowed to enter into public-private partnerships, this is now clearly set out in the powers. The next function that will allow the FIC to function more effectively and to address some of the deficiencies in terms of the FIC having access to and sharing information so that it can properly analyse information is for the FIC to request information or for access to any database held by any organ of state as well as to have access to the information contained in a register that is kept by an organ of the state.

On the proposed amendments relating to politically exposed persons (PEP) (clauses 44, 45, 46, 48, 49, and 50 of the Bill), she explained that in terms of recommendation 12 in the MER, South Africa was found to be non-compliant, as we have a time limit on when a person is considered a politically exposed person. This was not in line with the FATF standards because we currently have a provision that the person currently holds that position or has held it for a period of 12 months. That restriction is being removed.

On the proposed amendments relating to the Risk Management and Compliance Programme (RMCP) (clause 36 of the Bill), she explained that this is a programme that an accountable institution needs to have in place where they set out the processes and the manner in which they will comply with the requirements of the FIC Act. Section 42 is amended to include the requirement that accountable institutions must take into account the proliferation financing risks when developing their RMCP. This is a requirement that has recently been included in the FATF standards where the requirement was previously that countries and institutions must only take into account money laundering and terrorist-financing risks but it has now been extended to proliferation financing risk.

On the proposed amendments relating to targeted financial sanctions (clauses 15, 25, 26, and 27 of the Bill), she stated that the FIC Act did not include a definition of proliferation financing before; the definition is now added. Section 26A is amended to provide for the resolutions of the United Nations Security Council to become enforceable immediately on adopting a resolution. This requirement is necessitated by the deficiency identified when the previous process in the FIC Act was for the Minister to publish a notice in the government gazette as soon as it is issued by the Security Council. This was found to not be in line with the requirements of “without delay”. This proposal of having the resolution come into effect immediately would hopefully address that deficiency.

Adv Bednar-Giyose added that a few amendments to the Companies Act seek to address recommendation 24.

Mr Momoniat discussed the timeliness of the FATF process and the process for the Protection of Constitutional Democracy against Terrorist and Related Activities (POCDATARA) and General Laws Bill. The October reports will be important because the FATF secretariat will already respond to things. Whilst National Treasury can update, it would be good to have concluded all the issues it can conclude from its side.  National Treasury was not expecting the Bill to be concluded by then. The Committee will determine the deadline for public comments and provide guidance on the further process of the Bill and how the relevant portfolio committees: Finance, Social Development, Trade and Industry and, Justice and Correctional Services, need to be consulted.

He reiterated that greylisting can be prevented. If South Africa does get greylisted, it would be for one or two measures. If National Treasury can show that substantial progress has been made, it will make it easier for South Africa to get out of greylisting after a few months. In his view, the FATF is a messenger sent to make the Department aware that there are weaknesses. It is in the Department’s interests to improve on the FATF recommendations so that it can tackle financial crimes in the public and private sectors.

Discussion

Ms P Abraham (ANC) appreciated the Department’s input. She stated that it appears that the country is at about 50% compliance. Is this good enough? She did not want to assume that it was not good enough and wanted to get a sense of the international performance so that the Committee could gauge that it was not performing dismally compared to other countries. She sought clarity regarding section 21. Are we saying that foreign nationals are not able to have ownership when they are not naturalised?

Dr D George (DA) stated that his understanding is that the Department of Justice has insisted on its own legislation on terrorist financing and that that legislation is not part of this Bill. Is this so? If so, why is it the case because this needs to be coordinated?

Mr A Sarupen (DA) asked questions in regard to slide six, where the effectiveness of the measures was one of the things that were pointed out and it needed to be aligned to the 11 immediate outcomes. National Treasury stated that aligning these measures to the 11 immediate outcomes was going to be tough. What is National Treasury going to do to ensure that the FIC, Law enforcement agencies, etc, understand the scope of what they have to do and then understand how to effectively do it to prevent greylisting?

The Chairperson stated that sometimes as citizens we blame people outside of the country for the perception that they have of the country. However, public officials often speak about a corrupt and crime-ridden South Africa when they make public appearances. He seldom heard public officials of other countries making similar statements every time they made public appearances. He did not think we were projecting the right narrative about our country. South African public officials hardly make statements about what government is doing first; they simply jump to speaking about corruption. The law should deal with the corrupt officials. He heard Mr Momoniat stating that more politically connected people must be arrested. This is going to lead to politically connected people being arrested even though they did not commit any crimes just so that National Treasury can look like they are doing something in the eyes of FATF. Is this Bill not about dealing with people who are in money laundering and terrorism? However, if the other narrative is to arrest politically connected people just to look like something is being done in the FATF’s eyes, then those people will be on trial for over ten years without the trials finishing. The term politically connected denied a lot of people. He used the example of his own kids being considered politically connected and suffering the consequences thereof even though they do not have any political interest.  He did not think that the way we treat South African citizens was right and did not think other countries operated like this. What kind of government are we running? He heard one of the presenters speak about a possible clause about companies receiving tenders from the government. What is that all about? Why should there be a special clause when citizens who have companies apply to the government for tenders when there is the PFMA and the regulatory regime for procurement? He did not understand the need to include something like that in this Bill. The country has a problem with foreign nationals who own spaza shops and other businesses in the country but he did not see them mentioned here. How is SARS dealing with these people? They trade in cash, and they do not pay taxes. Where in the Bill are we going to address the many foreign nationals who are running businesses in the country but are not paying taxes? Those might be the proceeds of crime and terrorism. He did not know if National Treasury was trying to prove to the FATF that the country was not guilty. Are the FATF regulations punitive and not corrective? Are we getting the impression that the country is approaching FATF on the back foot and that South Africa is going to be greylisted? Why must the country be greylisted and why is it not the case that it is a regular progress check?

The Chairperson indicated a problem with such a regulatory body when it is the public narrative that South Africa will be greylisted because he did not know whether its intention is to be punitive or corrective.

Mr Momoniat stated that the Chairperson had raised important issues.

On the concept of politically exposed persons, he replied that this concept started off with the United Nations and the World Bank as a recognition that corruption takes place in government. Preventative measures need to be taken when corruption is dealt with. By definition, corruption involves one party in the public sector controlling some assets under the government and one in the private sector. The notion of politically exposed persons had huge criticism, but governments agreed with the United Nations and it started being implemented and FATF members were expected to incorporate the concept into their laws. National Treasury also decided to expand it to those dealing with tenders. That is how that provision came in. What National Treasury does in the Bill is not to change what was passed by Parliament. The concept has been contested a lot, even in Parliament. We are not adding to the concept, we are just separating the politically exposed from the others that the government had decided to whom it should apply. This is not to discriminate against the PEP. It is up to each institution to decide how wide they want to go with their understanding of politically exposed persons. Our law says that this is a minimum list. Because institutions have a risk-based approach, they tend to be more risk averse and expand their list of whom they consider politically exposed persons, even to the extent that they consider the relatives of public officials. Very sophisticated data, such as open-source information, is used to risk-based customers. This speaks to customer due diligence issues and what institutions have to do when they onboard customers, as provided by one of the FATF core recommendations. A higher due diligence is required by this FAFTF recommendation when a person is seen as politically exposed. This does not mean banks and other similar institutions have to say no to a politically exposed person’s application. They have to perform higher due diligence but they do not have to discriminate.

On South Africa facing greylisting, he replied that South Africa is the only major FATF member facing greylisting. Other major countries are afraid of how the system is working. He was of the opinion that there are issues about how the system works but it is something we have to take up through the FATF process and hope those other countries take it up as well because we have always argued with the FATF that these recommendations tend to lead to perverse outcomes. The FATF standards set a minimum and people are so risk averse that it is done in a very wide sense. This can have huge consequences for development.

On statements about corruption in South Africa, he replied that when the mutual evaluation team came, they published a public report and would have read from our media and all the country’s authorities such as the FIC and SARS and would then be aware of state capture and corruption from reports. This comes down to the fact that nobody should be charged just because National Treasury wants to meet some standard. However, when there are allegations of corruption, the FATF standards ask whether those allegations are investigated and whether there are prosecutions. When it comes to corruption, the FATF looks at the issue of PEPs to see whether the laws apply to people in powerful positions. Mutual evaluations refer to these things a lot of the time. It should appear that our authorities are acting on this. Whether we like it or not, we are judged as a country, and I think the FATF report is concerned with how sophisticated organised crime is today. Most countries battle to act quick enough to this. The peer review shows that our systems are well behind the curve hence the bad score South Africa received. It is their view, and their view does impact investment for SA. National Treasury bringing this Bill shows that the government is committed to fighting corruption and that the country’s agencies should perform their duties fairly and without prejudice.

On the risks from the cash economy, he replied that the Chairperson is correct in stating that the cash economy is a big problem. It is for us to identify that it is a big problem and to put measures in place to deal with the transgressions in the cash economy. Differentiations are made between a domestic PEP and an international PEP so that the sophisticated data can pick it up and categorise this person accordingly as high risk or not. It looks pretty bad when we say that our legislation is not tough enough to deal with criminal syndicates, but if you follow the media, they talk about it. It is important for the government to understand where there are problems in certain sectors, recognise them and show that we have plans to deal with them.

To answer Ms Abrahams, he replied that the peer review was a rating and one might say it is 50% but we expected to score better. There is no actual numerical score, so we are currently rated poorly compared to other FATF members who have had a mutual evaluation.

On the Department of Justice having another legislation to deal with terrorist financing, Mr Momoniat replied that he is unaware of another bill dealing with terrorist financing. The Department of Justice was dealing with the POCDATARA Bill. No other Bill is dealing with these issues around the country’s greylisting. Any other issues will be brought through next year.

On Mr Sarupen’s question, he replied that National Treasury now chairs an inter-departmental task team and there is a sub-team that deals with enforcement agencies. They are all keenly aware of their responsibilities regarding the laws at hand. People outside are noticing that we are not using these measures as often enough as other countries use them, hence the rating that the country receives. The FATF rates the country based on what the government said it would do against what it actually did. That gap needs to be closed.

On the foreign nationals and foreign politically exposed persons, National Treasury replied that the FIC Act does not prevent foreign nationals from opening bank accounts. It would just depend on the documentation that is used when they are opening a bank account and what the bank’s processes require. There are a number of ways foreign nationals can open a bank account.

On the terrorism legislation and why it was not included in this provision, National Treasury replied that the process to amend the POCDATARA Act started a few years back and they amended more than just the deficiencies identified in mutual evaluation reports. There are quite a number of additional amendments that are included in the POCDATARA Amendment Bill, which has gone through public consultations. There were discussions between National Treasury and the Civilian Secretariat in terms of how they would proceed. The Bill had gone through the cabinet process and was ready for tabling when the General Laws Amendment Bill was before Cabinet.

The Chairperson stated that the foreign national issue is not about the bank accounts; it is about the businesses they are conducting and not paying taxes. We are not saying that foreign nationals should not have bank accounts as that would be against the International Human Rights Declaration. The issue concerns them running cash businesses in South Africa and not paying taxes. There are several businesses run by foreign nationals and several counterfeit goods are sold by them. South African businesses raise these issues often. He was not sure that this Bill addressed that.

Mr Momoniat stated that the cash economy does pose a lot of problems and gave the platform to Mr Tomasek to address this issue.

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, stated that the Bill does not directly deal with the foreign national issues raised by the Chairperson but what it does do is provide valuable information concerning who actually holds bank accounts in the country. SARS receives a lot of third-party data from financial institutions but that data is only as good as what SARS is given by that financial institution. To be able to trace the incoming assets that we would be able to pick up through the reporting, it is essential that we have records about who owns the various companies, who owns those bank accounts, and who owns that trust. All of those things feature in this legislation and would assist SARS in more accurately determining who has what economic and taxable activity in this country. This would assist SARS in its own international peer review system where South Africa is also reviewed concerning its ability to exchange its information with other jurisdictions and that review process piggybacks on the FATF process to some extent. Where we are able to correct deficiencies that are being identified by FATF and improve our rating in that context, that rating improvement will ripple through SA’s ability to exchange and receive information with other jurisdictions.

The Chairperson stated that the process of the Bill would be taken to the next level of parliamentary procedures and public hearings will be had to give citizens of South Africa a chance to comment on the Bill. In the end, we legislate in the interest of South Africans so we have to make sure that we conduct a fair process to ensure that the Bill is in the interest of South Africans. The South African financial institutions were insulated and did not face risk like other countries when there was an international financial meltdown in 2008, yet the institutions are not credited for that. Rather, they are threatened with greylisting. All the good work they do and all the regulatory systems they have are being ignored and focus is placed on other things. We have to raise this thing that when international bodies come to our country, they should come with the intention to assist government departments and financial institutions in self-correcting and not come with the intention to punish them despite the good work they do to ensure that regulations are tightened up.

He informed Members that the South African Reserve Bank finally has answers to the questions asked by Mr Shivambu and Dr George, but it looks like they still have outstanding information. He suggested that what the Committee should probably do, seeing that the Speaker of the National Assembly has appointed a Panel to deal with the Phala Phala Farm matter, is to let the matter be dealt with on that level rather than parliamentary committees conducting parallel processes. Parties will be invited to be part of the other process.

Ms Abraham agreed with the Chairperson that the Committee should not embark on a parallel process.

The Chairperson thanked all the stakeholders that were part of the meeting.

The meeting was adjourned.

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: