Financial Intelligence Centre Act schedule amendments: Policy Issues

NCOP Finance

11 October 2022
Chairperson: Mr Y Carrim (ANC, KZN)
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Meeting Summary

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

Financial Intelligence Centre Act

National Clothing Retail Federation letter dated 27 September 2022 (awaited document)

The Select Committee on Finance met on a virtual platform to be briefed by National Treasury (NT), the National Clothing Retail Federation (NCRF), the Financial Intelligence Centre (FIC) and legal advisors. The briefing covered a letter submitted by the NCRF and the responses to questions raised by the Committee on amendments to the Schedules of the Financial Intelligence Centre Act (FICA).

The presentations shared the same sentiments regarding topics such as the grey-listing of Botswana as a projection for South Africa’s status, the migration to a risk-based approach, the mutual evaluation process which informed the amendments to the FICA, the possibility for carve-outs, the cost of compliance and money remitters.

Members expressed concerns mainly over the technical complexity of the Bill, particularly the uncertainty of the effect of the ‘unintended consequences’ which could arise from it. While the Members agreed it was necessary to comply with the requirements of the Financial Action Task Force (FATF), they feared that additional costs or potential fines would be borne by ordinary consumers. They also requested that further information be provided a year after the Bill was enforceable to flesh out the aforementioned uncertainties.

Meeting report

The Chairperson welcomed the Select Committee on Finance to a meeting to consider the draft amendments to Schedules 1, 2 and 3 to the Financial Intelligence Centre Act, 2001 (Act No 38 of 2001), submitted in terms of the Financial Intelligence Centre Act (FICA).

National Clothing Retail Federation letter dated 27 September 2022

The Chairperson said no National Clothing Retail Federation (NCRF) representatives were present in the meeting. He referred to paragraph 4.1 of its letter, and highlighted that the closed-loop credit facilities, such as those offered by themselves, were not covered by the non-bank financial institutions sector. Hence, they would not be caught in the net of credit providers, in terms of Botswana's financial institution legislation. 

He said that the document indicated that when Botswana was faced with a great listing, the FICA was amended by adding the category of accountable institutions. This was a legal entity registered as ‘Incorporated’ under any law.

Concerning paragraph 5.1, the rules-based approach was passed out, and supervisory authorities had not followed a risk-based approach. On risk assessment, the Chairperson noted that the exclusions were not based on risks. He asked for clarity on the requirements of the Financial Action Task Force (FATF) on the potential for exclusions, provided that they were justified.

The Minister of Finance relied on the National Credit Act (NCA). In this regard, National Treasury (NT), the Financial Intelligence Centre (FIC) and the Money Laundering and Terrorist Financing Control regulations were against the exclusion of close-up retail store facilities.

The Chairperson said that the unintended consequences would be minor compared to FATF fines.

Legal responses

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, highlighted the question regarding the NCRF’s contention that the unintended consequences should go to a court for it to be ruled upon. He doubted whether this could happen, unless the unintended consequences materialised.

He advised that when a court became seized with a matter, it looks for an arguable point of law in reference to Section 167 of the Constitution. It could not be merely an academic point. A claimant would have to have felt that they were wronged in the matter in terms of Section 167.

He explained that the amendments could not be refused due to ‘unintended consequences’, as they were unsure of what these consequences would be, or their effect on peoples' rights. The courts would be seized with the matter only if there was a legal issue involved.

On removing the parts which were offensive to the NCRF, he said that the three schedules were made in terms of an Act of Parliament. As subordinate legislation, it was necessary to consider the empowering provision in the Act. Sections 73, 75 and 76 of FICA state that the amendments do not become operative until approved by the Houses.

The amendments may only be approved or rejected. If the Committee agreed that certain areas needed to be excised, the NT would have to bring new amendments or they must all be rejected. He said that they could not be partially approved.

Adv Jenkins addressed the NCRF concerns that the FATF had not conducted a risk assessment impact study. He said that if there was an instinctive reaction, they were unaware of how burdensome it would be for various people affected by the legislation. He said that a person would have to prove there was an arguable point of law with the requisite standing before the court.

The court would consider the impact and affected rights. If the impact was disproportionate to the rights affected, and if the rights were of great importance, the court would find in favour of the rights and strike the legislation down. He said that currently, this was just speculation, as the unintended consequences were yet to be defined.

Concerning Botswana, he said the country had been removed from the grey-list by the FATF after joining the South African anti-money laundering group. This included aspects of oversight, strengthening their Anti-Money Laundering and Countering Financial Terrorism (AML/CFT) regimes through FATF. He felt this was vague, and failed to go into why Botswana had been red-listed.

The NT strongly agreed with the sentiments of Adv. Jenkins.

The Chairperson asked for input considering the grey-listing of Botswana.

Mr Pieter Smith, Executive Manager: Legal and Policy, FIC, said that Botswana was a member of the Eastern and Southern Africa anti-money laundering group. This was an assistive body to the FATF in the area. Botswana had been a longstanding member of the organisation and South Africa. It was responsible for carrying out mutual valuations, similar to the FATF. The same methodology and assessment of members was used as the FATF.

On the basis of the results from the mutual evaluation conducted by the organisation had done concerning Botswana in 2018/19, Botswana had been grey-listed. This occurred in the same process as was done to South Africa by the FATF.

After being grey-listed, Botswana addressed the deficiencies to a significant extent. Around November 2020, the FATF agreed that Botswana had done enough to end the FATF monitoring of the country and removal from the grey-list.

The Eastern and Southern Africa anti-money laundering group continued to monitor the further processes that Botswana needed to undertake to address the remaining deficiencies. Botswana had not yet fixed all of the issues identified when they were grey-listed, but had done enough in terms of the material aspects of the shortcomings for FATF to no longer need to monitor the country.

Mr Smith said that he had not yet had time to find the mutual valuation reports, specifically looking to see if credit providers were mentioned in the evaluations. It did not feature in the follow-up processes in the follow-up reports on Botswana. This was because it was not an issue in deciding whether Botswana should be grey-listed or removed from the grey-list.

He noted that Botswana had done a significant amount of work in a short span of time across almost all of the categories on the recommendations that had to be addressed. An issue this discrete would not have been significant in determining the grey-listing status of Botswana.

Mr Smith said that if Botswana's legislation currently covered credit providers, then it would be in line with FATF. If it did not, then Botswana would have to do further work in its remaining follow-up process. That work would be monitored by the Eastern and Southern Africa anti-money laundering group.

The Chairperson said that the Committee had been given a mutual valuation report from October 2021.

Amendments of FICA schedules: Responses to SCoF document

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, NT, took Members through the comments and responses to the Standing Committee on Finance (SCoF) questions raised on 23 September 2022.

She spoke about the mutual evaluation process and recommendations which informed amendments to the FICA which were intended to deal with the identified deficiencies relating to the scope of the regulatory framework.

The widening of the scope and reorganising the structure of supervisory bodies, through the proposed amendments, would appropriately address the issues. These issues stemmed from customer due diligence recommendations and some weaknesses relating to supervision and enforcement. This was noted as outcomes three and four in the report.

On trust service providers, the post amendment was intended to deal with a specific recommendation in the mutual evaluation report. It required the inclusion of certain activities relating to trusts and company service providers, including accountants. It was aimed to ensure that they would fall under the scope of item two as accountable institutions.

Regarding paragraph 4.1, it was recommended that the FIC should consider applying a differentiated approach. This approach was intended to consider the size of credit turnover, and did not exclude marginalised people, rather than the current one-size-fits-all approach.

She said the NT noted that the 2017 FICA amendments, the repeal of a significant portion of the money-laundering and terrorist financing control regulations, and the withdrawal of certain exemptions led to the risk-based approach.

The flexible approach allowed for a degree of differentiation among the different types of institutions, based on the inherent money-laundering and terrorist financing risks, types of clients of institutions and products offered. The appropriate approach would be decided upon, based on the institution.

The NT noted the submission of the NCRF that market practices differed from the flexible approach required, though this may just be in terms of credit legislation.

Mr M Moletsane (EFF, Limpopo), considering paragraph 1.4, asked whether the recommendation in paragraph 1.3 was possible to implement.

Ms Bednar-Giyose said that the regulatory framework already necessitated that a one-size-fits-all approach could not be applied. She said it must be based on each particular institution and the guidance issued to inform the implementation of the risk-based approach.

Mr Smith reiterated that FICA required institutions not to apply a one-size-fits-all approach or a rules-based approach, but rather a differentiated approach based on an understanding of risk. FICA expected that when supervisors best comply with institutions, they would follow the same approach of understanding the institution's risk and how it would meet the risk mitigation requirements.

In the guidance issued by the FIC in 2017, it was clear that institutions were not restricted to using specific documents, information or means to verify their customers' identities. The FIC noted that the message to institutions that had to comply with the FICA has been very consistent since 2017.  

Some institutions may require proof of address through market practice and their own choice. The FIC and the supervisory community had not expressed that that was an expectation that they hoped to see institutions apply. 

Ms Bednar-Giyose said the NT would note the submissions by the NCRF about the practices they had observed. It would be very important that an effort be made through a clarification of the supervisory expectations, engagements and provisional guidance. They recognised that this was important and should be worked on going forward. 

The NT also noted the importance of these measures in ensuring an appropriate application of the risk-based approach going forward. Guidance notes had been issued relating to the application of the risk-based approach, but it was still seen as necessary to have monitoring and further guidance going forward.

She said the amendments resulted from lengthy consultation processes from March 2017 to 2019 with relevant sectors and supervisory bodies. When developing the final proposed amendments, these consultations and the 2020 amendments submitted to Parliament were considered.  

In the amendment paragraph 4.6, the NT noted that there were no carve-outs for Schedule 1 items, similar to the NCRF on credit providers. The amendment to Item 8 excluded the reinsurance business, as this business transaction did not occur between businesses and the public, as would be the case in the carve-out requested by the NCRF.

On the amendment paragraph 4.8, the NT referred Members to material on the European Union's (EU's) blacklist.

Concerning the amendment paragraph 5.1, the NCRF had made submissions regarding the costs. It had been said that it would be between R25 and R30 per credit applicant. The NT responded that this was an initial estimate and may not be an accurate assessment of costs, as a majority of relationships within the sector could be classified as low-risk.

An accountable institution may determine that it would conduct simplified due diligence by obtaining certain customer identity particulars and verifying them against an identity document (ID). Credit providers who have already obtained this information from their credit providers may use their existing information.

Some obligations applicable would include better risk management, compliance programmes and providing some training to staff members. While the FIC was unable to quantify these amounts, the NT said that the ongoing costs of maintaining the measures would be minimal once implemented.

On the retrospective application of the FICA, the NT noted that Section 21(2) was a transitional provision that would not be applicable in relation to the implementation of these Schedules. It said that the information already collected by credit providers before credit was provided to a customer was much more than what was required for simplified due diligence in respect of a low-risk customer.

Ms Bednar-Giyose spoke about the impact of the FIC considering some of the recommendations made. She said the FATF standards included non-financial businesses covered by a country's legislation against money and terrorist financing. This included casinos, estate agents, trust and company service providers, and dealers in precious metals and stones.  

On carve-outs, she said that the risk-based approach was intended to provide a nuanced and proportional approach to the application of requirements. The FIC included payment in any form to get a more accurate assessment of the purchasing powers of individuals.

Once the amendments were enforced, inspections would commence for a period of only 12 to 18 months. This was meant to allow newly accountable institutions to implement the appropriate measures, oblige with compliance and receive guidance on approaches.

On which credit providers were included or excluded, FATF standards require that all types of financial institutions be covered under anti-money laundering and countering terrorism financing (AML/CTF), including entities responsible for lending. Due to the wide scope of defining credit facilities under the NCA, it had been difficult to maintain legal certainty when referring to sub-categories of credit providers.  

Regarding the amendment in paragraph 5.4, Mr Smith said that the FATF standards set requirements to cover particular industries or sectors in South Africa’s AML/CTF. He said the country must cover that in its full scope, as defined by the FATF standard.

Countries had the discretion to deviate from that if they could prove low-risk in that sector. The FIC said that proven low-risk meant that the risk of the country must be negligible and of such a nature that it had no material impact on the efficacy of the country's AML measures. Low-risk must be managed under the AML framework and FICA when applying the risk-based approach.

He said FATF standards did not require countries to do a risk assessment to decide whether something should be included in its AML framework. Banks, insurance companies for stock market traders and financial service providers were identified by FATF standards. They had to be applied and included in the country’s AML. A country was not required to do a case-by-case risk assessment for each of those sectors to decide whether to include them or not.

Mr Smith said that a country was also required to include categories of business not covered by FATF standards if the business provided a particular risk profile in the country. If the country’s own risk assessment indicates that a material risk must be managed, it must be included under the AML framework.

He used the example that South Africa assessed whether to include short-term insurance, such as risk insurance of property against theft and damage. During the risk assessment process, it had shown that there was not a justified reason to include this type of insurance in the FICA. There was a need to have constructive information-sharing arrangements with providers of short-term insurance and the FIC to access insurance policy information.

In the context of lending businesses, South Africa would be able to exclude a category of these businesses only if the FIC was convinced there was no risk in that area affecting AML. The FIC felt that even with low-risk lending businesses, there was still scope to manage risk in terms of FICA requirements.

In low-risk categories, the FIC believed that they could still be managed under simplified measures that were already aligned with how credit providers conducted business and received information from their credit providers.

Mr Moletsane said that if credit providers were asked for proof of address, there would be no exclusion of a large segment of South African consumers through unintended consequences.

Mr Smith agreed with Mr Moletsane. He said that if credit providers insisted on a proof of address, that would exclude a significant portion of the population which relied on credit to support basic lifestyle requirements. If credit providers were asking for proof of address, this was not to comply with the FICA.

The FIC did not encourage credit providers to require proof of address, as it was contrary to the messaging that had been communicated. It was exclusionary and did not serve the purpose of creating a transparent regulatory environment.

Ms Bednar-Giyose referred to money remitters, and said that the proposed amendments sought to resolve the deficiency of the current phrasing of the item, which had failed to fully cover the concept of money or value transfer providers, as was described in the FATF standard.

The amendment intended to cover informal money remittance businesses, as required under the standards.

Discussion

Mr Ryder appreciated NT’s response, and said that based on the Vodacom and NCRF submissions, there was insufficient understanding of the amendments. People feared that doing minor purchases, they would have to go through the same processes as banks with their FICA processes. The law required the “processes of knowing your client.” He said that the risk-based approach differentiation was not made clear to people trying to understand the processes.

Although unintended consequences could not be pre-empted, business owners fear how it would affect them. Bigger institutions such as Vodacom and NCRF, with greater resources, including high profile attorneys, also struggled to understand the impact of what was being asked.

Mr Ryder said that considerable work must be done to make the details understandable. This was to ensure that the implementation of the regulations was not applied in an extremist manner. He had concerns that if onerous regulations were passed placing burdensome requirements on businesses, it would create the perception that it was difficult to do business in South Africa.

This perception could act as a barrier to many people. He was concerned that the most conservative interpretation of the regulations would be adopted, fearing extreme penalties. The example was set with the FIC and various banks, which faced massive financial implications. Banks were large institutions that had invested money, time and effort to ensure compliance, though the FIC regulations still caught many out. He referred to Standard Bank and Nedbank's recent fines, despite their access to compliance offices and legal aid. 

Mr Ryder said that going forward, there needed to be better clarity on regulations. He suggested using supporting documents and road shows with different entities to inform people who were expected to comply with the regulations.

He said that it was almost certain that South Africa would be grey-listed. It would be important to get out of this predicament swiftly. He cautioned against using broad regulations which necessitated expensive and, at times, unattainable compliance. He asked whether this would impact South Africa’s ability to extract itself from the grey-list in the medium term.

He questioned whether a more finely tuned set of regulations would be more appropriate in ensuring that an unrealistic benchmark was not set.

The Chairperson said that the response document should be considered in light of the communication sent from the NCRF.

He said that the case presented by the NT and the FIC seemed to be stronger than that of the NCRF. The confusion from the lack of clarity and unprecise terms had been commented on by the media. This led to the creation of the Bill currently before the National Assembly (NA), which differed from the Bill before the SCoF in the meeting.

He acknowledged that the Bill before the SCoF also had complications, and agreed that there was a need for some sort of public dissemination. He encouraged Members to separate their policy issues from issues of lack of clarity surrounding the Bill.

Questions raised on SCoF document

The Chairperson referred to section three, and commented that it was interesting that very few key issues remained compared to what had been raised by the NT. Referring to section 3.1, the key issue concerned blanket inclusion of credit providers. The NT and the FIC had responded that the terms of the newly proposed wording was not defined in the NCA, but the category of lending was non-negotiable under the FATF.

The Chairperson agreed that this was the key issue which was accepted, unless Members could prove otherwise.

He said carve-outs created an unattainable precedent due to many other requested carve-outs. Internationally, it was recognised that there had not been carve-outs in primary legislation. The EU’s fifth AML directive included credit institutions without setting thresholds or having exclusions.

He said that the NCRF had not given any projections on the costs of compliance.

On the proposed transitional period, the NT explained that once the amendments were enforceable, inspections and enforcement would commence only after 12 to 18 months window. Members were of the view that the Bill was extremely technically complex.

While understanding the policy issues, the Chairperson said the NT must provide greater clarity to relevant stakeholders and the public on precisely what the Bill entailed in practice. Members encouraged the NT and FIC to engage with stakeholders within the available time and resources to gain clarity in this regard.

Discussion

Mr Ryder said it was difficult to evaluate the report regarding the current allegations released. Regarding the cost of compliance, he asked how accessible the Department of Home Affairs (DHA) system was. He used the example of the NCRF using a third party to verify ID numbers.

He wanted to know whether this extra expense was a choice or a requirement influenced by the Protection of Personal Information (POPI) Act. He felt that these additional expenses would be placed on consumers.

On money remitters, he said that many people from neighbouring countries worked in South Africa and sent money back home through various methods. He asked what the impact of this would be.

The Chairperson felt the Bill should be accepted, with reservations concerning the technical clarities. The report should reflect that Members were concerned with some aspects of the amendments and acknowledged the technical complexities. He said that, like many bills, this was a trade-off, though it must be balanced with the requirements of FATF.

The majority of the Members believed that, as far as possible, compliance with international regulations had to take into account the specific needs of South Africa. This intended to respect its national sovereignty while recognising that it formed part of a global system.

As often happened, the costs of compliance were borne disproportionately by consumers. Members believed that the NT should monitor this and report to Parliament a year after it came into effect concerning research and developments in this area.  

While recognising the likelihood of consumers having to pay a disproportionate share, or a majority of the costs, Members felt that the costs of not meeting FATF regulations would be far more expensive. This cost would also be borne by consumers.    

Members had not received sufficient evidence of what precisely the costs would be. They understood that it might be difficult to establish projections, but felt that the costs may be far less than what they had been made out to be.

Members believed that the FIC and NT were correct in saying that receiving addresses was not required.

The meeting was adjourned.

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