Financial Intelligence Centre Act schedule amendments: Treasury / FIC / NCRF meeting response

NCOP Finance

23 September 2022
Chairperson: Mr Y Carrim (ANC, KZN)
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Meeting Summary


Draft Amendments to Schedules 1, 2 and 3 Financial Intelligence Centre Act

Financial Intelligence Centre Act

The Select Committee on Finance convened virtually for a briefing by National Treasury and the Financial Intelligence Centre (FIC) on its meeting with the National Clothing Retail Federation (NCRF) along with the National Credit Regulator (NCR).

NCRF is seeking a carve-out to the draft amendment of Item 11(1) of Schedule 1 of the Financial Intelligence Centre Act (FICA) for registered credit providers that are providers of credit facilities in the form of retail store cards which can be used to purchase merchandise in the retailer’s store.

Treasury and FIC expressed concern that the NCRF proposal could create unintended uncertainty and bring vagueness into the description of item 11. A carve-out would undermine the overall application of a proportionate risk-based approach that the FIC sought to achieve. The Committee resolved to postpone the vote on the Schedule Amendments due to the apparent impasse between the parties. They were encouraged to engage further on the matter. The Committee would do its best to ensure that the amendments get passed by 31 October 2022 deadline.

Meeting report

The Chairperson said he anticipated losing his network connection during the meeting due to load shedding. Mr Njadu would take over when it happens. The Committee would receive feedback from Treasury and FIC on the meeting with NCRF or Federation and its legal representative, Bowman. He said in addition to the public submissions, Members should note the well prepared briefing document that the Committee Support Team had prepared on this topic. The Committee ultimately needed to come to an independent decision.

National Treasury presentation
Mr Vukile Davidson, Chief DirectorFinancial Markets and Stability, Treasury, informed the Committee that National Treasury, the FIC and the National Credit Regulator (NCR) met with the Federation and their legal team, Bowman Gilfillan Attorneys, the previous day to discuss the NCRF points of concern. He found the conversation useful, frank and robust. The NCRF raised three key areas of concern but the main one was about supervisory practices and the expectation of the application of the risk-based approach. The stringent manner of the risk-based approach led the NCRF to seek a wholesale exclusion from the framework. Treasury was concerned about the NCRF’s perception of low money-laundering risks in their sector. Engagements with different role players were continuing to ensure compliance with the law. The solution being sought by the NCRF would have significant implications. Regulators should explain the requirements to entities dissatisfied with the risk-based solution rather than exclude such entities from complying.

NCRF had pointed to similar carve-outs in other jurisdictions. Treasury had engaged regional FIC agencies in Namibia and Botswana and found that in both countries all types of lending regardless of who is offering it, are fully covered consistent with the Financial Action Task Force (FATF) Standards.

Ms Jeannine Bednar-Giyose, Director Fiscal and Inter-governmental Legislation, Treasury, provided feedback on the judgement in the Truworths v Minister of Trade and Industry case. The judgment does not suggest the likelihood of unconstitutionality to be found with the amendments to the FIC Act. She also noted the circumstances for referral of a bill to the Constitutional Court prior to enactment were limited and was provided for in sections 79 and 80 of the Constitution. These provisions were structured in this manner to preserve the position of Parliament.

National Clothing Retail Federation position
Mr Michael Lawrence, NCRF Executive Director, spoke without a document saying the NCRF was grateful for the robust and constructive discussion with Treasury and the regulators. In his opinion, the risk-based approach was not constructive for the NCRF business model and it is consumers. The regulators did not satisfy the spirit of a flexible risk-based approach. The Federation was looking for something more reliable. Valuable research had been done on cost structures. Risk scorecards are managed on the basis of calculating complete risks on costs. The substantive issue was to address the risk-based approach. He would appreciate an acknowledgement of different operating models, not the enforcement of an onerous position. NCRF held the view that the type of credit lending in South Africa was not covered by Botswana FIC requirements.

Engagements seemed to be at an impasse but the sector would comply although it was uneasy about the conditions and requirements being imposed. The NCRF role is to ensure that the regulatory framework is fit for purpose for the business model and nature of client the Federation was representing. The risk-based system would result in discrimination on the basis of race. The Federation would take the matter to court if its position were misrepresented. It has been proven in the past that Treasury’s risk-based modelling was not working effectively. The NCRF was willing to engage further if needed. He thanked the Committee for the opportunity to present the position of the Federation.

Parliamentary Legal Advisor comment
Adv Frank Jenkins replied that he needed more time to respond to the specific cases noted in the Treasury/FIC presentation.

The Chairperson asked for a general comment if the Botswana and Namibia experience was parallel to the South African experience. He also asked if Treasury or the NCRF was correct about referral to the Constitutional Court and on what basis a bill is taken to the Constitutional Court.

Adv Jenkins replied that the interim Constitution allowed referrals to the Constitutional Court to determine the constitutionality of bills. In terms of the 1996 Constitution, a bill could only be challenged after the President signed it.

The Chairperson asked if referral could not be done by Parliament with a third of the House vote.

Adv Jenkins replied that the provision on referrals as per the interim Constitution no longer applied.

The Chairperson said it seemed that Treasury held a different view. He sought a response within ten days to clarify the matter.

Adv Jenkins said he was not ready to deal with the Namibia and Botswana comparisons at this point.

Financial Intelligence Centre (FIC) comment
Mr Christopher Malan, FIC Executive Manager, Compliance and Prevention Unit, remarked that Treasury had dealt with Botswana and Namibia. The category of credit lending was non-negotiable under FATF rules. Notwithstanding concerns raised, South Africa would have to demonstrate full compliance without carve-outs or exemptions. The parallels with Botswana and Namibia were irrelevant because both countries were grey-listed on account of different matters – not lending. FIC used to be rule-based with a number of exemptions which government had decided to change. It would be difficult to reintroduce carve-outs in the current difficult position that the country finds itself. Individual entities merely need to comply if their industry activities fall within FATF classification. There was no provision to second-guess the FATF standards. The application should be made in terms of the risk-based approach. The market tends to apply more stringent and onerous processes than required. The risk-based approach was flexible towards the supervision and oversight role. The issue was about dealing with money laundering and not credit extension and affordability. There was no requirement to apply higher standards. The FIC would engage further with NCRF and would supervise accordingly.

In response to concerns about costs, reference was made to credit extension to which the industry was adding a life product. He argued that there was no need for additional requirements which had already been catered for. He was hopeful that progress could be made and undertook to improve education on the risk-based approach in a sensible manner.

The Chairperson reminded Members to consider also the written submissions from other stakeholders. He requested the Support Staff to compile a summary of all submissions received.

Mr D Ryder (DA, Gauteng) said Mr Malan’s response had triggered him and changed the way he was going to respond. Mr Malan’s comments reinforced the perception of a lack of industry knowledge. The FIC and other agencies tend to act with blunt instruments, that is, penalties in the event of non-compliance. The FIC approach is for the industry to toe the line.

Mr Ryder was angered by the tone of Mr Malan’s response and said it was not at all constructive. He had great sympathy for the industry because the FIC regulations and requirements for accountable institutions were onerous. The 'proof of address' requirement was unclear in the provisions of the Act. Regulation 21(2) of FICA made the law retrospective but Treasury had not done enough to help Members with a proper understanding in this regard.

Not understanding the industry was only assisting people who benefit from the uncertainty, leading to legal challenges and delays in implementation while putting the country at risk. Further discussion was needed on the Namibia and Botswana experiences. He was surprised at the new idea of ‘Guidance Notes’ introduced in this meeting which the Committee did not have sight of and was not privy to. He suggested that matters of importance are hidden in this way and only meant for insiders like Treasury. In his view, cost of compliance includes business foregone due to the prospect of onerous paperwork. He recently walked out of a bank and did not conclude a transaction after he was required to submit details of his pedigree dating back five generations.

He felt that Mr Lawrence made a good point about the tendency of Treasury to default to the maximum level of compliance. The perception remained that regulation is applied in an over-handed manner. He acknowledged that a wholesale carve-out was not achievable but felt the blunt instrument was an overreaction. There was sufficient grey area which Treasury and the Federation needed to further engage on.

Mr E Njadu (ANC, Western Cape) welcomed the presentation but based his questions mostly on the Committee Research Team document on the FICA Schedule Amendments. He sought clarity on the proposal to include crypto asset service providers following the revision of FATF standards. South Africa recently received attention for being the country with the largest fraud and money laundering scams with the cases of Mirror Trading International and Africrypt. He enquired about the proposal to delete the Ithala Development Finance Corporation from Schedule 1 of FICA and add it under item 11 as a credit provider, and include cooperative banks as a category to protect them from exploitation by money launderers.

The Chairperson remarked that the tone of the responses from the FIC, Treasury and Federation should not overshadow the discussion. The Federation came across as angry and Treasury as arrogant. He was not going to allow this attitude to shape the position of the Committee towards the merit of the case. The approach of the Committee was to have a broader view of the issue. South Africa was under siege to avoid being grey-listed by the FATF. Everyone would suffer and poor people would be disproportionately affected should the country be grey-listed. It would be foolhardy not to do what FATF was required unless it was against the National Development Plan and the sovereignty of the country. This was not the case because South Africa was increasingly becoming an unimportant country brought about by the political party to which he belonged. The Treasury presentation was more convincing than the response from the Federation. But he cautioned Treasury not to be so rigid in meeting FATF requirements. He again drew attention to the excellent research paper that the Committee Staff compiled and commended them on a job well done.

The Chairperson did not think that a strong case against money laundering had been made by FATF and asked Treasury to explain if they agree or disagree that Treasury had no choice but to comply. The Federation identified the inevitable exclusion of a large segment of South African consumers from access to credit, because of not being able to provide proof of address, as a problem. He regarded this as an exaggeration and said it was a compliance issue. The Federation believed that its business was a low risk in terms of Money Laundering and Terrorist Financing (MLTF) hence the request for a carve-out.

According to the Chairperson, the FIC and Treasury presented a stronger case against a carve-out. Concerns were raised that they had not conducted a risk assessment to determine the impact of these regulations on the retail clothing sector. He requested a concrete response to this issue. He wanted to know if the FIC had conducted sector studies on carve-outs. He requested they respond to points raised by the Research Team to reach his office within seven days.

Parliamentary Legal Advisor response
Adv Jenkins said a referral based on one-third of the vote was for an Act of Parliament. However, a Bill could only be referred to the Constitutional Court by the President. He confirmed that section 80 of the Constitution was applicable to an Act already signed.

The Chairperson remarked the Committee was not going to vote on the Amendments in this meeting and he did not want Adv Jenkins to spend time on the matter considering his workload. Some of the arguments raised by NCRF did not have immediate relevance to the matter that the Committee was dealing with. It seemed like a matter for the Trade and Industry Portfolio Committee to handle. He did not want the Committee to have endless discussions because the court would ultimately decide. Members were not technical experts but would do their best and it was not going to rush the matter. The Committee would in future, expose Members to technical debates to better understand the portfolio of the Committee.

NCRF response
Mr Lawrence was grateful for the chance to present the NCRF point of view. He would ask the Committee Secretary for the Research Team document which outlined questions for Treasury/FIC response. The Federation had repeatedly asked for the socio economic impact assessment that Treasury was purported to have done but had not been provided with it.

There was no need for haste in terms of the questions about costs, substantive low risks and assertions that the NCRF was making in terms of the consumer base. Bringing the Bowman Gilfillan legal team along was about the substantive concerns of the Federation and out of respect for the Committee considering that he is a shopkeeper and not a lawyer. The expertise of the legal team would allow the Federation an appropriate platform for subsequent actions to address or implement outcomes based on the law or regulations.

Mr Lawrence disagreed that the substantive matter was for the Department of Trade and Industry and stated that it was about the nature of the engagements with Treasury and FIC. A number of their assertions would be taken into consideration during further engagements and the Federation would leverage off those engagements in the spirit of achieving an outcome in the best interest of economic development. He undertook to respond in writing about areas where specific detail was requested. He was immensely grateful for the opportunity to raise the concerns of the Federation and requested the context of the areas raised as concerns to be clearly positioned. He acknowledged that elements of points made about other countries and constitutionality might have been slightly misunderstood. It was not about the pure legality of the current Bill but about the clarity of the carve-out that the Federation was seeking. He expressed concern about the impact of a hasty decision if requirements were implemented incorrectly because it could become problematic.

The Chairperson asked that the Committee Research Team paper be sent to NCRF and Treasury. He expected a response to the questions raised in the document from both parties by 5 October 2022. Mr Lawrence need not overly thank the Committee because Members were doing their job in hearing both sides of the argument. He thanked the NCRF for their participation.

National Treasury response
Mr Errol Makhubela, Treasury Chief Director: Financial Markets and Stability, apologised for the tone and intransigence that he learned was evident in the Treasury presentation. This did not reflect the Treasury presentation style. He noted that the Federation was seeking clarity on the risk-based approach that FIC was applying. He acknowledged that the matter should have been described in greater detail. Treasury would ensure and oversee that FIC sets out the guidance of what was expected. He was hoping that Parliament would be holding FIC to account on the clarity of guidance. He explained that what FATF was considering as guidance, did not have an effect on supervisors defaulting to the most rigid application of rules. Treasury understood and supported the risk-based approach but not in terms of the rigid application which resulted in unintended consequences. Treasury would ensure that the mushrooming of scams is reduced and was working with other regulators to ensure a uniform approach to dealing with fraud. He called on FIC to answer the question about crypto asset service providers.

Financial Intelligence Centre response
Ms Kamla Govender, FIC Senior Legal Advisor, replied that in 2017 the FIC consulted with the cryptocurrency industry on standards for safe keeping of crypto assets. Jurisdictions where these kinds of businesses have been operating must either prohibit or regulate cryptocurrency activities.

The activity is currently unregulated in South Africa. The FIC worked closely with the Intergovernmental Fintech Working Group (IFWG). Officials from the FIC, Treasury, Financial Sector Conduct Authority (FSCA), Reserve Bank, South African Revenue Service (SARS), Competition Commission and the NCR had consulted on a position paper on how to deal with the matter. The position paper sets out 25 recommendations.

On the recommendation relating to FICA, the position taken is that cryptocurrency activities need to be regulated, supervised and licensed. The cases of Mirror Trading International and Africrypt were examples of what happens in an unregulated environment. The FIC was working closely with other regulators to urgently remedy this. When approved, the amendments would include this sector as an accountable institution that would need to comply with FICA. The FSCA was dealing with licensing which was a separate process of amending its Act.

Ms Govender explained that the Ithala Development Finance Corporation (IDFC) is an accountable institution in terms of the amendment of item 11 of FICA Schedule 1 which now includes all credit providers. A recent Mutual Evaluation Assessment revealed that not all financial institutions, designated cooperative banks, and crypto asset traders were under the scope of FICA, hence the amendments. FIC consulted with the sector, resulting in four or five cooperative banks opting to be included as accountable institutions. The type of compliance by the cooperative banks would not be the same as required for the big banks.

The Chairperson interrupted Ms Govender’s response as he expected to lose connection due to scheduled load shedding. He addressed his comment about the arrogance of Treasury. He advised Mr Davidson not to take personally the general feeling expressed about Treasury as it was directed towards Treasury as an entity. He regarded the new entrants to the Treasury team as very competent and cautioned Mr Davidson not to internalise Treasury culture. Although he was representing the Acting Director-General, the style maybe different but it was about the content and not about personalities. Treasury was just doing its job otherwise the money would be spent unwisely by politicians. He directed Ms Govender to proceed and cautioned her not to get over technical in her responses.

Ms Govender reconfirmed that there would be no retrospectivity when the amendments were enacted. Sanctions would not apply for a period of 12 to 18 months when the supervisors would be working with the new sectors to help them understand FIC obligations.

The matter concerning money remitters was currently under Item 19 of the Act which regards money remitters as accountable institutions e.g. authorised dealers such as banks and authorised dealers with limited authority. The Mutual Evaluation Report found that formal money remitters needed authorisation from the Reserve Bank but this was not applicable to informal money remitters.

Mr Christopher Malan, FIC Executive Manager: Compliance and Prevention Unit, replied to the awareness and guidance matter referred to by Mr Ryder. Working with industry is the cornerstone of the FIC approach whenever new regulations are issued. The intention was to ensure that each sector has an accompanying scoping guidance to clarify who would be included or excluded from the regulations. Awareness material would be made available to ensure an understanding of how to apply appropriate risks levels after a self-risk assessment is conducted which the FIC would support through workshops.

The Chairperson drew attention to the NCRF request for documents to which they did not have access. He did not understand the problem because everyone was legally entitled to access most documents, unless classified or confidential.

Mr Errol Makhubela, Chief Director: Financial Markets and Stability, Treasury, was unsure if document request related to sector-specific risk assessments which he indicated had not yet been done.
The NCRF Executive Director replied that he would engage directly with the Committee Secretary about access to the documents.

The Chairperson disagreed with Mr Ryder on retrospectivity but said there was no need for a debate. In his view, it was not possible to decide on the Schedule Amendments in this meeting. He asked the Research Team to forward the document with the questions to Treasury and NCRF. He implored Members to read the Research Team document before the next meeting. The Committee would do its best to facilitate the FICA Amendments. He requested the Committee Secretary have the Amendments placed on the agenda for finalisation by the second week of the fourth term of Parliament. The deadline for passing the Bill was at the end of October 2022.

Fourth Term Committee Programme
The Chairperson asked which areas would be covered in the ‘Taking Parliament to the People’ initiative.

The Committee Secretary replied that the initiative would be taken to KwaZulu-Natal.

Mr Njadu said it was a hectic programme and moved for it to be adopted.

The Committee agreed to adopt the Programme.

Committee Minutes
The minutes of the following meetings were adopted: 2, 23, 30 August and 6 September 2022.

The Chairperson remarked that the work of the Committee was done for the term. He said in jest that all other Members needed to use the time to focus on the Bill but ANC comrades should be out campaigning for the 2024 elections.

The meeting was adjourned.

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