Financial Intelligence Centre Bill: hearings

Meeting report

Life Offices Association
Mr Curnow gave a few examples of risk areas for money laundering within the LOA industry. Money laundering can occur through the single premium policy, the loan facility or living benefits (currently available only in the USA. It allows the policy-holder to access the value of the policy while the policy holder is still alive. The third party can purchase from the life-assured person. It happens for example if someone has AIDS and that person needs the money for immediate needs). The LOA also has products such as unit trusts which can be used for layering money in the money-laundering process.

Ms Hogan pointed out that LOA would still have to transfer the right of ownership. To which Mr Curnow replied that the client can purchase the policy today but can wait years before he informs the LOA of the cession.

Adv De Lange asked if it was possible to move big sums in this way. For example, could one invest one million rand? Mr Curnow replied that one could.

Mr Marnewicke made the following points:
- Financial institutions should not be seen as the perpetrators of money laundering but rather a very strong ally in the fight against that crime. Financial institutions should be seen as partners of law enforcement.

- The LOA believes that the FIC should have investigative capacity. They do not believe that the expertise needed to investigate money laundering and the underlying crimes is held by the various investigative bodies already in existence.

- Cash transaction reporting is unnecessary. It does not address the primary objective of the FIC Bill.

- Reporting suspicious transactions is an essential part of the Bill. However the ambit of the provision is not wide enough. Transactions that are suspicious simply because they do not make economic sense are excluded from the reporting requirements for example. The reporting requirements should be extended to all types of suspicious transactions.

- A reading of the relevant section shows that the suspicion must be directed at the source of the property which must be an unlawful activity. An indemnity for a bona fide report only applies if a report is made in terms of Clause 29 of the Bill. Thus a reporting party may be subjected to a civil claim for breach of secrecy if the report was a mistake and does not comply with Clause 29.

- Clear guidance must be given to role players on the implementation of the Bill. This guidance can only be achieved through a proper and all-inclusive consultative process. The Minister for example should not be the only one to decide on the exemptions.

Discussion
Adv Swart (ACDP) commented on the notion that not only the Minister should decide on the exemptions. He asked what alternative the LOA suggested.

Mr Marnewicke replied that they envisaged a public-private partnership. All interested parties should participate (even the supervisory bodies should participate). The industry was not suggesting that they should make their own exemptions. All accountable institutions which represent a major part of the financial sector should be part of making the exemptions.

Adv Swart referred to the statement that cash transaction reporting is not necessary. He said that SARS might be interested in looking at this information and asked for a comment on this. Mr Marnewicke replied that the Financial Intelligence Centre Bill is about controlling money-laundering. If it is there to assist SARS with collecting information then the Bill must expressly state this.

Adv Swart asked what the LOA’s relationship with the State has been up to now.

Mr Marnewicke replied that in the past they have had a good relationship with the authorities. There has been a good two-way relationship in that they have both given to and also received information from the authorities. They have the right to expose transactions without exposing themselves to risk.

Ms Chohan-Kota (ANC) asked what additional costs would be incurred by the industry as a result of the Bill.

Mr Marnewicke replied that there would be additional costs for the industry. Cash transaction reporting for example will be a new thing. It is difficult to determine exactly what the additional costs would be before the regulations are in place.

Adv De Lange asked how the industry knows its clients. What information do they have on their clients?

Mr Marnewicke replied that the industry has either in-house or contract advisors who obtain the relevant information from the client. The information they will obtain now is whatever is required in terms of the FIC Bill. At the moment they do have a problem with identifying clients. For example there is no central registry of trusts. They rely on the clients to give the information that the advisors ask for. Different information is required from clients for different types of investments. Clients can also approach the life insurer through a broker. LOA feels that brokers should also be accountable institutions. Brokers are considered as agents of the client and they should be required to comply with the legislation in their own right.

Adv De Lange asked what percentage of business comes through brokers.

Mr Marnewicke replied that he could not speak for the industry but for his institution [Sanlam] the percentage is approximately fifty percent.

Adv de Lange commented that this meant that half of their business comes from people that they know nothing about. He then asked under what circumstances would they be suspicious of a client. With money-laundering, one would not put all the money in one place. It would make sense to put different amounts in different places. In light of this it is hard to pick up a suspicious transaction unless there is one place where all the small transactions pass through so that it can be put together to show that it is a suspicious transaction.

Mr Marnewicke replied that the point of departure as to what a suspicious transaction is would be to look at what a normal transaction is. In terms of the current wording of in Clause 29(1) of the Bill, there is not an obligation to report all suspicious transactions. Based on the current wording it is easy for an accountable institution to go around the Bill and to say that there was no obligation to report because the ambit of a suspicious transaction is not broad enough. The problem is that the transaction is only suspicious if the funds are the result of a crime. He said that they would like accountable institutions to report on suspicious and unusual transactions.

Adv De Lange summed up LOA’s point as follows:
It is easy for accountable institutions to get around the Bill because if one cannot prove that a transaction is the result of a crime then it is not a suspicious transaction and there is no duty to report. Thus it is easy for accountable institutions to get out of reporting a suspicious transaction because they could not prove the money was the proceeds of crime. LOA is also saying that they are not indemnified if they report a suspicious transaction and it turns out that the money is not the proceeds of crime.
Thus they are arguing for a wider definition of ''suspicious transaction''.

Ms Hogan asked if LOA thought that the FIC has the power to investigate whether a transaction is suspicious or not or does the FIC simply pass the information on to another institution for that institution to investigate.

Mr Marnewicke replied that in terms of the current Bill the information is handed over for investigation. He added that there is generally a lack of investigative capacity in South Africa.

Advocate De Lange asked why the FIC should have investigative power and in terms of the Constitution how this would be justified as there are other institutions in the country with investigative powers. What did LOA want the FIC to investigate exactly?

Mr Marnewicke replied that he wants them to investigate the money launderer and bring him to book and also to investigate the actual proceeds of the crime. The FIC should have investigative capacity to do something with the information it collates.

Mr Landers (ANC) asked if it did not make sense to give the FIC the power to analyse information and then pass it on to the authorities.

Mr Marnewicke replied that the problem was that it lands on someone's desk who does not answer to the FIC and who may have other cases that are of greater priority to him. LOA wants to ensure that the information collected does not go unused. The FIC needs investigative capacity, how exactly this will be done they do not know.

Mr Phillips (of the drafting task team) commented on the investigating powers. He said that the problem seems to be a lack of faith in the existing bodies to investigate. For this reason he suspects that many of the submissions will suggest that the FIC should have the power to investigate. The task team disagrees with this. The task team did not want to duplicate the investigative powers already in existence in the State. The approach they took is to distinguish between underlying crimes which gave rise to the funds and administrative offences. They did not want to burden the State with administrative offences. They wanted to keep this out of the judicial system while the actual crimes remain within the judicial system.

Advocate de Lange then asked LOA for a comment about e-commerce, noting that Mr Phillips had said in the previous meeting that the definition of ''transaction'' covers e-commerce.

Mr Marnewicke replied that the definitions of ''business relations'' and ''transaction'' are sufficient to bring e-commerce into the Bill. However this brings in new compliance issues. This could be addressed in guidelines in the regulations.

Centre for the Study of Economic Crime (RAU)
Professor de Koker stated that this is not cheap legislation. The State must be prepared to finance the Centre. There is also a cost for large organisations such as banks. The information to be collected must be useful and it must be able to be processed by the FIC.

The amount of dirty money in South Africa is huge. It amounts to approximately 2.2 billion dollars (not rands) per year. SA also exports about 2 billion dollars worth of dirty money to Europe.

One must consider the effect of this legislation on combating crime. The effect will be that criminals will become more sophisticated. Crooks will hide transactions and money - making it more difficult to follow.

In terms of the reporting obligations the question to be asked is whether suspicious transactions should be regulated in terms of Prevention of Organised Crime Act or the FIC Bill. Clause 56 of the Bill provides that accountable institutions must not comply with the reporting requirements in Section 7 of POCA but rather with clause 29 of the Bill. Professor de Koker submits that section 7 of POCA provides for a better regime because it applies to individuals whereas clause 29 applies to accountable institutions.

Professor de Koker suggests that the Bill should provide for reporting ''unusual and suspicious'' transactions. Unusual transactions can be anything that does not conform to the client’s profile. However this is very broad and will be impossible to administer. Alternatively an unusual transaction could be linked to the commission of an offence or the suspected commission of an offence.

It was submitted that attorneys should not be excluded from reporting obligations. Though appropriate exemptions in respect of criminal defence matters should apply. Professor De Koker is in favour of an exemption for attorneys as it was set up in POCA. This method conforms to international standards.

The Bill does not make provision for the appointment of compliance officers. There should be a provision in the Act itself which allows the Minister by regulation to tell accountable institutions to employ compliance officers. The compliance officer manages the function internally. The compliance officer ensures that the necessary training takes place and that employees get the necessary guidance. New personnel do not have to be taken on as an employee can be designated with this function.

Consideration should be given to using the external audit process to channel some information to the FIC. The Bill should require an auditor that is performing an audit on an accountable institution to determine if that institution has formulated internal rules. The auditor must then report to the client [accountable institution] and to the FIC if the institution has not formulated rules. This will enable the FIC to see who is not complying.

There must be proper implementation. In order for accountable institutions to plan they need an indication of when the FIC will be in place. They will need time to get matters in order to implement the regulations. Certainty is necessary. The Government must implement the legislation as soon as possible.

One must look at both international standards and at the South African situation and decide what is feasible.

PriceWaterhouseCoopers (PWC)
Some of the proposed amendments that Mr P Cromhout put forward are:
Suspicious Transactions in Clause 29
PWC recommended that the provisions of the FIC Bill be expanded to increase the effectiveness of money laundering control measures. These include:
· Patterns of transactions and/or networks of transactions
· Unusual transactions
· Unusual customer behavior

Prescribed Background Information on Customer in Clauses 21 and 22
PWC recommended that a provision be inserted in the Bill requiring accountable institutions to gather prescribed background information on their customers. The motivation for this was that in order to report what is suspicious or unusual about a customer’s activities, it is necessary to know what is usual for that customer. It is thus necessary to build a transaction profile of the client, which would enable the 'accountable institution' to monitor the client’s transaction against the client’s profile.

Electronic Transfers of Money to or from the Republic - Clause 30
Mr Cromhout recommended that Clause 30 be removed from the Bill, as the majority of these reported transactions are legitimate. Further, the costs of processing, analysis and storage of such vast quantities of data can be considerable.

Discussion
Mr Landers (ANC) asked how effective and efficient where the systems in Australia and the Netherlands in relation to one another.

Mr Cromhout replied that there was no research that can yield statistics indicating that one system was more effective than the other was. He added that instead of accumulating a large database, accountable institutions should rather gather the information when it was needed. This would enhance the usefulness of the information. In the USA and Australia the institutions have such large databases that they have to create systems to identify criminal activity. These systems however, are still not successful.

Ms Chohan Kota (ANC) noted that there was a problem of detecting large amounts of money that was split up in to smaller amounts and then spread across various institutions. She asked whether the "Geographic Targeting Orders" would be sufficient to detect or monitor this.

Mr Cromhout replied that where the investigating authorities pick up unusual transactions in a particular area, they would gather that information. For this to be monitored effectively the client’s profile is necessary.

Ms Chohan Kota commented that although the idea of background information was a good idea, there would definitely be a problem with the compliance costs for such a process. She asked if there was any study that indicated that the compliance costs for such a process would be minimal.

Mr Cromhout replied that this would not be such a huge task for any institution. There is software available whereby the institution can go back and examine the information that they do have on the client and thereafter expand on that information.

The Chairperson said that a large sum of money that is split in to small amounts would not be picked up as a "threshold transaction" but an unusual transaction. Therefore what is the point of threshold reporting?

Mr Cromhout replied that with threshold reporting the smaller amounts would not be detected. Thus it is not an effective way of dealing with the detection of criminal activity. But it would be detected as "patterns of transactions".

Adv J De Lange asked on what was Mr Cromhout basing his opinion that cash transaction reporting was not necessary. He added that if Mr Cromhout could not analyse the four systems (USA, Netherlands, Australia and UK) then how was it possible for him to state that the systems were not effective. He also asked whether any research had been done that indicated the kinds of transactions that take place in South Africa.

Mr Cromhout merely replied that "it is the opinion of PWC that due to our limited resources there should not be cash transaction reporting". He also replied that there had been no research on the kind of transactions that take place in South cAfrica.

Ms Chohan Kota asked what was the practice with regard to threshold reporting. Particularly, would only future transactions be reported and nothing retrospectively?

Mr Cromhout replied that only future transactions would be reported and not those in the past. However, since information is gathered, such information would be available for the authorities.

Prof B Turok (ANC) asked whether it was possible for "crooks" to open a bank and do their own monitoring.

Mr Cromhout replied that in South Africa there is a very good regulatory system over banks.

In answer to Prof Turok query about figures for money laundering instances in South Africa, Mr Cromhout replied that PWC had done no specific research in this area.

The Chairperson asked Mr Cromhout to motivate his suggestion that tax evasion be included in the criteria for reporting. Mr Cromhout replied that it would assist the revenue authorities if such information were made available to them. The objectives of the Bill would also have to be changed to incorporate this new provision in the Bill.

National Gambling Board
Mr Ngobese gave a brief overview of the regulatory framework of the gambling industry. He pointed out that the current regulatory set-up is that the National Gambling Board is the national body tasked with ensuring that there are uniform standards applied throughout the industry. Nine provincial boards sit individually constituted in terms of specific provincial gambling legislation. They are tasked with licensing gambling establishments and to ensure compliance with legislation and conditions of licensing. Finally, casino operators rank down the scale. Minimum control standards exist in all provincial gambling legislation. Its purpose is to control the integrity of the games played and to prescribe to the operator how the system is to be operated. It sets out procedures for the payment of jackpots and, it provides for the installation of surveillance system in casinos. Electronic monitoring records every gambling transaction that takes place in every casino.

Mr Bongani Biyela said that the gambling industry, particularly management, has been at pains to minimise the impact of money laundering. Moreover, cash that has been stolen by means of a heist is not accepted in the gambling industry. Bill validators are constantly improving their technique in order to ensure that money from money laundering or money obtained through criminal means is totally rejected. He noted that the industry welcomes the Bill with open arms.

Ms Gcwali Makhathini addressed the Committee on the amendments proposed by the National Gambling Board. See submission for detailes on these.

Discussion
Mr A Nel (ANC) asked if there are any regulations designed to prevent criminals from running casinos and getting illegal proceeds.

Imam Solomon (ANC) asked whether national and provincial gambling boards have control over the gambling industry.

Mr Ngobese, in reply to both questions, said that there is what everybody in the gambling industry refers to as profit investigations. This is a long process that is set out in each provincial legislation. It derived its origin from what occurred in Las Vegas where organised crime has been known to be running casinos. Before any gambling licence can be issued, there are investigations conducted, paid for by the applicant. The investigators go through the background of directors, shareholders and employees in the company operating the establishment. These persons are investigated regarding criminal convictions and creditworthiness. If the investigations are successful the Board can then issue a licence.

Mr L Landers (ANC) asked how many times are the checks done before the licence is issued.

Mr Ngobese replied that the procedure varies with each province and said that in other provinces rechecks are carried out every two years after the issue of a licence to ensure consistency.

Compliance Institute of South Africa
The Compliance Institute is a non-profit organisation that represents 300 members who are compliance officers within the financial services industry. The Institute seeks to promote compliance within the regulatory environment of the South African Financial Services Industry and to promote education and training in the field of compliance. It has produced a handbook which assists the Compliance Officer in implementing his entity’s compliance policy as well as outlining each sector of the financial services industry and its requirements (i.e. asset management, banking, exchanges, insurance and operations support).

Mr Symington referred to Clause 4 (1)(e) of the Financial Intelligence Centre Bill and said that compliance is by no means limited to what is stated in this clause and recommended that it be amended to include what compliance tries to achieve. He also noted that Clause 42, which sets out formulation and implementation of internal rules, does not refer to compliance.

Discussion
Mr A Nel (ANC) asked whether in reality e-commerce was not sufficiently addressed in the Bill.

Ms K Meyer (Compliance Institute of South Africa) replied that that is a problem with the Bill and that there is a greater call for regulation in that regard. It is something that cannot be overlooked.

Mr J Symington added that South Africa is no different from the rest of the world. There is a need to clarify the legislative environment relating to e-commerce. A green paper has already been drafted in South Africa and it is hoped that that process will provide clarity.

Mr Nel amplified on this point and added that South Africa does have a green paper on e-commerce per se as that green paper sets out only a broad framework.

The meeting was adjourned.

Appendix 1

LOA SUBMISSION

THE FINANCIAL INTELLIGENCE CENTRE BILL
We to thank the chairpersons and members of the Portfolio Committees on Justice and Finance for the opportunity to address you on the FIC Bill and to make these submissions to add to those already submitted in writing. We will use this opportunity to highlight certain of our written submissions and to address one or two other issues not raised in our submission.

The following aspects will be addressed in the time allowed to us:
· the functioning of a public private partnership and specifically the need for a proper consultative process to ensure the effective functioning of such a partnership;
the effective implementation of money laundering control measures;
· the role of the FIC and specifically its apparent lack of investigative capacity;
· the reporting duties in terms of the proposed FIC Bill;
· e-Commerce; and
· defences against money laundering offences
· the role of the "persons to specialise in measures to detect and counter money-laundering activities" as described in section 4(1)(e).

Public-private sector co-operation
We have dealt with the role of the LOA and the nature of the activities of our members in our written submission to your committees. We would, however, like to once again refer to our position on crime.

The LOA supports international efforts to combat crime in general and specifically efforts to combat money laundering. In doing so we also acknowledge the Forty Recommendations of the Financial Action Task Force (FATF). The FATF is without doubt the authority on efforts to fight money laundering and as such we believe that we should strive to adhere to their recommendations.
We recognise the need to protect the integrity of the financial services industry and to safeguard our members against the influx of dirty money that constitutes the proceeds of unlawful activities. The LOA therefore also supports the effort of the South African Government to introduce legislation to combat laundering that meets the requirements of the international community.

In our approach to the money laundering control measures foreseen by the FIC Bill we view ourselves as partners of law enforcement, the regulatory authorities and government, and not as adversaries. We believe that financial institutions should not be seen as the perpetrators of the crime of money laundering, but rather as a very strong ally in the fight against that crime.

We suggest that one must guard against a repeat of experiences in other jurisdictions where anti-money laundering legislation resulted in what was termed "a new crime war". This so-called war increasingly targeted financial institutions as suspects rather than the real money launderers .

It is our opinion that the effective implementation of measures to control money laundering is only possible if a proper and clear understanding of the role of all concerned is achieved. To obtain this goal the needs of regulatory authorities, law enforcement, supervisory bodies and accountable institutions alike must be addressed. Money launderers are unfortunately mostly only inhibited by their own initiative. Any regime to control money laundering must therefore allow for flexibility to adapt not only to changing industry practices and technological development, but also to the creativity of the launderers.

Accountable institutions will expect that control measures will ensure level playing-fields and uniformity between accountable institutions and groups of accountable institutions. It is further necessary to provide accountable institutions with clarity and to allow them to act with confidence and without fear or prejudice.
Clear guidance in the implementation of the FIC Bill is imperative to achieve this ideal. The Bill provides for such guidance in the form of regulations, guidance notes and internal rules.

It is our opinion that this clarity can only be achieved by formulating this guidance through a proper and all-inclusive consultative process. We think that a last word from the 2000 USA National Money Laundering Strategy is appropriate to finalise this aspect.

"We must take into account the public’s interest in both privacy and a sound financial system, society’s interest in security from the criminal conduct that money laundering supports, and the financial community’s interest that regulations and guidance be reasonable and cost-effective."

The implementation of effective money laundering control measures.
Three important factors influence the implementation of effective money laundering control measures:
· International pressure;
· Limited resources; and
· Cost of compliance

These factors make it even more important for public-private sector co-operation to succeed. There is an urgency to place money laundering control legislation on the statute book in South Africa. We have the sword of the FATF hanging over our heads and the patience of the international community is reaching its end. We believe that the issue of the non-cooperative countries listed by the FATF will be addressed by other parties in their submissions. At this stage it is sufficient to note the existence of this blacklist.

Limited resources demands the optimum results from reports made and investigations conducted. We are well aware of the strain on resources available to fight crime in general and therefore money laundering.

Money launderers are inventive criminals and have enormous resources at their disposal. We cannot afford to waste what we have available when we have such intimidating opposition. Resources from the private- and public sectors should be combined to ensure the maximum benefits.

The cost implications for government and the private sector are of such a nature that optimum results are required. We are sure that government will have an estimate of the costs involved in implementing the measures foreseen in the FIC Bill. The members of the LOA have not been in a position to make an estimate of the cost of compliance with the FIC Bill. This is largely due to the fact that the Bill provides no more than an outline and that we have not been a party to discussions on the proposed regulations. There can, however, be no doubt that there will be a huge cost implication to all financial institutions and also to members of the LOA.

The successful implementation of the FIC Bill is imperative. We have to do it right and do it right the first time. There is not enough time or resources available to waste on ill-conceived measures that are neither practical, nor cost-effective.

The role of the FIC
There is concern about the lack of a dedicated investigative capacity within, or at the disposal of, the FIC.

It is obvious that government has placed a premium on anti-money laundering measures and has gone to great lengths to provide legislation on this matter. This legislation places a burden on accountable institutions and obliges the private sector to join the fight against crime by putting measures in place to identify the proceeds of unlawful activities. We have already indicated that the implementation of the control measures will demand the allocation of vast resources and costs.

Against this background the ability to investigate property is crucial. There is a risk that in the absence of such a capacity, investigations emanating from reports to the FIC could merely end up low down on the priority list of other investigative authorities. We do not believe that the expertise needed to investigate money laundering and the underlying crimes are held in reserve in the various investigative bodies already in existence.

We take note of the reasoning of the Task Team in deciding not to allocate investigative powers to the FIC. Our opinion is, however, that special provision must be made for the investigation of these crimes if money laundering control measures are to succeed.

Reporting duties in terms of the FIC Bill.
Cash Transactions
We are of the opinion that cash transaction reporting is not necessary and recommend that the provision for this be deleted. Possibly the largest benefit of this type of reporting is to create a huge database which could later be mined for information or trends.

Although the gathering of data on cash transactions is useful and may provide interesting results, one must ask if this necessarily addresses the primary objective of the FIC Bill. More and more exemptions in respect of cash transaction reports are formulated in the USA in an effort to reduce volumes and to obtain only information of real use to the authorities and institutions alike. We believe that this is an indication that a shift in thought on cash transaction reporting is taking place.

FATF XII reports that between 66% and 75% of all suspicious transaction reports relate to cash anyway. In our opinion the proper formulation of the duty to report suspicious transactions should provide for the total duty to report.

Suspicious transactions
The need for this section is acknowledged as the essence of any anti money laundering regulatory framework.

It is, however, of some concern that the ambit of this provision is not wide enough to include transactions that facilitate unlawful activities or transactions that are instrumental in the commission of unlawful acts. The current wording also excludes the reporting of transactions that are suspicious merely because they do not make any economic sense. We believe that professor Louis de Koker dealt with the FATF recommendations on this aspect in his submission. We will therefore only deal with the practical implications.

The reporting requirements contained in the FIC Bill are in our opinion not wide enough to extend to all types of suspicious transactions. A careful reading of the relevant section indicates that the suspicion must be directed at the source of the property. Only if it is known, or if reasonable suspicion exists, that the source may be unlawful activities, will the duty to report arise.

The limitation imposed on the suspicion creates problems for persons who enters into a transaction or arrangement. An indemnity is provided in the FIC Bill in case of a bona fida report in terms of this duty. This indemnity, however, only applies if a report is made in terms of section 29. The duty is therefore placed on the person who forms the suspicion to determine whether the suspicion does in fact go to the source of the property or if it is only based on the structure of the transaction.

If the latter is the case, the indemnity will not apply and a reporting party may be subjected to a civil claim for breach of secrecy. It is our opinion that a too onerous duty is placed on the reporting institutions. One would not only have to identify suspicious transactions, but need to conduct further investigation to determine whether the suspicion does in fact go to the source of the property. This should be the duty of the investigating authorities and not of reporting institutions. It should only be our duty to report suspicious transactions in general.

It would be wise to extend the duty to report to transactions where it is suspected that property concerned is instrumental in the commission or facilitation of an unlawful act or forms the proceeds of such activities. This would remove at least part of the onus on members.

E-Commerce
This issue is not sufficiently addressed in our opinion. FATF XII once again recognises the role of e-Commerce and the opportunities for money laundering. Unfortunately no solutions are suggested.

We also have not managed to find the solution. It is nevertheless important for us to recognise the existence of e-Commerce and to provide the infrastructure to deal with it in future. E-Commerce is a reality and cannot be wished away. The benefits to institutions and individuals are too big and many to ignore.

General problems are foreseen with the interpretation of the phrase "reasonable steps" in section 21 of the FIC Bill. This is even more true in the case of electronic transactions and on-line financial services. A further problem is foreseen with the requirements to identify a client at a very transaction conducted in a business relationship.

Identification procedures to be followed in e-Commerce transactions should in our opinion be considered in the light of the reality of this type of business. It may very well be possible to address this issue within the proposed guidelines.

Defences in terms of section 56
It is in our opinion unjustified to elevate mere reporting of money laundering to an absolute defence against charges of contravention of sections 2(1)(a), (b) or (c), 4, 5 or 6 of the Prevention Act. On the current wording of section 56(2) and (3) this seems to be the case, even if the offence was committed intentionally. This provision creates an enormous loophole that could easily outweigh any possible justification for its existence.

Money Laundering Reporting / Compliance Officers i.t.o. S4(1)(e)
We recognise and support the call to appoint persons within accountable institutions who specialise in measures to detect and counter money-laundering activities, but to be effective we believe that this provision must provide greater clarity regarding the role and responsibilities of such persons.

We believe that, especially in large and complex accountable institutions, these persons could play a valuable filter role in assessing initial reports by employees to evaluate whether the identified transaction is in fact suspicious and ought to be reported. This would in our view greatly assist the FIC since only truly suspicious transactions would be reported and obviously flawed reports would not be allowed into the system to clutter the intelligence being developed. It would of course also assist the accountable institution in ensuring that all reports are properly made in terms of the legislation and enjoy the resulting protection regarding breach of client confidentiality.

The current formulation of the bill however does not facilitate such a role since no provision is made for assessment and filtering or for protections for the accountable institutions undertaking such activities. On the contrary, as the legislation stands at the moment performing such a role would expose an accountable institution to the risk of prosecution if a transaction which it had assessed as non suspicious and therefore not reported were later found to have been an instance of money laundering.

We refer you to our written submission for more detail comment on a number of issues. We would like to take this opportunity to reconfirm our support for the FIC Bill and the fight against crime.

We would also like to take this opportunity to extend an invitation to the Department of Finance and all others parties tasked with the implementation of this FIC Bill, to make use of the expertise and experience of our members in their efforts. We certainly have a very good grasp of our industry and the risk of money laundering in that industry. All of this could be put to excellent use if so required.

Cape Town – 23 March 2001
Mr Jacques Marnewicke
Convenor
LOA Money Laundering Committee

Appendix 2

Centre for the Study of Economic Crime
Summary of suggestions
Paragraphs in [ ] refer to the relevant paragraphs in the submission
The relationship between the FIC Bill and the international standards in respect of money laundering control
It is submitted that the Bill should be more consciously compliant with the Forty Recommendations of the international Financial Action Task Force [FATF] and that it should therefore:
· Provide explicitly for the procedure to be followed in respect of the identification of corporate clients in clause 21; [see par 2.2.1]
· Provide, as required by Recommendation 14 of the FATF, for the reporting of "unusual and suspicious" transactions that will cover a broader spectrum of transactions than suspicious transactions and will, in particular, provide for transactions aimed at evading tax; [see par 2.2.2 and par 4.4]
· Provide clearly for the development of internal money laundering control programmes by accountable institutions, which will include, in particular:
· the designation of a compliance officer [see par 4.6];
· the appropriate screening of employees; and
· an audit function to test the effectiveness of the scheme as required by Recommendation 19 of the FATF [see par 2.2.3].

The relationship between the Prevention of Organised Crime Act 121 of 1998 and the FIC Bill
It is submitted that:
· Accountable institutions should not be removed from the ambit of section 7 of the Prevention of Organised Crime Act and that the current clauses 29 and 56 are defective and should be scrapped [par 3].

Measures to increase the effectiveness of the money laundering control framework
It is submitted that:
· The FIC will be the main regulatory body in respect of money laundering in general. This broader function should be reflected in the wording of clause 4 which should therefore be broadened to include references to the relevant functions under the Prevention of Organised Crime Act [see par 4.1];
· The FIC should not only give guidance to accountable institutions in respect of money laundering control, but should also have a broader function in respect of public awareness and general education regarding money laundering control [see par 4.1];
· The committees of the Money Laundering Advisory Council should be given the right to co-opt members and other persons for such periods as it they may determine in order to provide the committees with access to technological and other expertise [see par 4.2];
· The main object of the Council should be reflected in its name. "Money Laundering Control Council" or the "Advisory Council on Money Laundering Control" will be more appropriate than "Money Laundering Advisory Council" [see par 4.2];
· Attorneys should not be excluded from reporting obligations as such an exclusion will be contrary to current international trends and will also be contrary to the best interests of the profession [see par 4.3]; and
· The Bill should require an auditor who is performing an audit on an accountable institution to ascertain whether that institution has formulated the necessary internal rules and to submit a report to the client and to the FIC if the institution has not formulated the rules [see par 4.4].

General comments
It is submitted that:
· An appropriate amendment should be made to prevent a restriction on the right of access of a representative of the FIC to the records of those supervisory bodies whose records are public [see par 5.1];
· Clause 42(3) should be broadened to compel employers to provide their employees with copies of or ready access to the relevant legislation and regulations and to ensure that the information is only provided after relevant training was provided. [Failure to amend clause 42 will expose employees unnecessarily to liability [par 5.2].]; and
· The penalties envisaged in the Bill are too low when compared with those of the Prevention of Organised Crime Act and that appropriate adjustments should be made [see par 5.3].

Implementation of the legislation.
The Committee is urged to investigate the time-frame for the implementation of the legislation [see par 6].
Attention: A Hermans (Committee Secretary)
27 February 2001
Ms Barbara Hogan MP and Adv Johnny de Lange MP
Chairpersons: Portfolio Committee on Finance and Portfolio Committee on Justice and Constitutional Development
Parliament
PO Box 15
Cape Town
8000

Dear Ms Hogan and Mr de Lange

Comments on the Financial Intelligence Centre Bill 2001

I hereby respond to your kind invitation to comment on the Financial Intelligence Centre Bill [the FIC Bill].

My comments in this letter are limited to some of the more important aspects of the legislation. I refrain from commenting on the smaller printing and language errors in the Bill because I am sure that they will be addressed by the drafters and the state legal advisers. I will also refrain from raising issues which I know have been raised by other commentators in their submissions.

The FIC Bill is an important piece of legislation. If drafted and implemented correctly, it will forge a powerful alliance against crime between the law enforcement agencies of the State, the major financial institutions and the professionals who handle money and investments of others. However, if such legislation is drafted incorrectly or implemented half-heartedly, it will simply provide the framework for an expensive but useless bureaucratic exercise.

The drafters drafted a Bill that will meet many of the South African anti-laundering requirements. I do believe, however, that a number of small amendments to the Bill could increase its general effectiveness. I will restrict my comments to the following issues that I believe should be considered by the committees when they discuss the Bill:

-The relationship between the FIC Bill and the international standards in respect of money laundering control;

-The relationship between the Prevention of Organised Crime Act 121 of 1998 and the FIC Bill;

-Measures to increase the effectiveness of the money laundering control framework; and

-Implementation of the legislation.

Before commenting on these issues, I believe that it is appropriate to introduce the Centre for the Study of Economic Crime of the Rand Afrikaans University and to provide some information about its activities in this field.

The Centre for the Study of Economic Crime
The Centre for the Study of Economic Crime of the Rand Afrikaans University has studied measures against money laundering for some time. Personnel of the Centre participated in the drafting of the current money laundering provisions of the Prevention of Organised Crime Act 121 of 1998. Personnel of the Centre also co-operated with Business Against Crime and the Commercial Branch of the South African Police Service in the development of a training programme on money laundering control for investigators of financial crime.

During the course of 2000 the Centre developed a Certificate Programme on Money Laundering Control to train primarily compliance officers and risk managers in the corporate environment. The first 16 students graduated at the end of 2001. A further 40 students enrolled for the course in the first semester of 2001 and it is envisaged that nearly 100 students would have completed the course by the end of 2001. These students will be able to play a leading role in the drafting and implementation of compliance policies regarding money laundering in their respective companies.

The Centre also cooperates with a number of international role players in money laundering control, including the Centre for International Documentation on Organised and Economic Crime (Cambridge, UK) and the Centre for International Financial Crime Studies (University of Florida, USA). These relationships have resulted in a number of publications and symposia, including the first academic symposium on South African money laundering laws that was held in Cambridge, UK, in 1997.

I will now turn to the submissions on the FIC Bill.

International standards in respect of money laundering control

The Financial Action Task Force
The Financial Action Task Force [FATF] is currently the most important international body which specializes solely in combating money laundering.

The FATF was established by the 1989 G-7 Summit in Paris to combat money laundering. The FATF membership currently comprises 31 countries and regional organizations.

The FATF issued forty recommendations for action against money laundering in 1990. These recommendations provide a blueprint for a comprehensive strategy against money laundering. They form a benchmark against which national legislation, financial systems and international co-operation against money laundering can be measured. The recommendations are continuously amended to reflect changes in money laundering trends. The recommendations are not binding as an international convention, but every FATF member has made a firm political commitment to combat money laundering and to implement the recommendations. The FATF members monitor the implementation of these recommendations by means of self-assessment and a mutual evaluation procedure.

South Africa is not a member of the FATF and it has not yet implemented the Forty Recommendations in full. Steps in this regard were taken with the enactment of the International Co-operation in Criminal Matters Act 75 of 1996, the Proceeds of Crime Act 75 of 1996 (which has since been repealed by the Prevention of Organised Crime Act 121 of 1996) and the Extradition Amendment Act 77 of 1996.

Non-membership of the FATF as well as the partial implementation of the Recommendations have a negative impact on South Africa:

1.The major financial centre countries of Europe, North America and Asia are members of the FATF and have adopted the Forty Recommendations as a standard for an effective money control strategy. They are required by Recommendation 22 to treat all transactions with parties in countries that do not apply, or insufficiently apply, the Forty Recommendations with circumspection. South African businesses therefore find that their transactions are scrutinized by the major financial centres, because South Africa have not implemented the Forty Recommendations in full.

2 In 1998 the FATF launched a project to identify non-co-operative countries and territories in the international fight against money laundering. A report was published in June 2000. This report listed a number of countries and territories and international pressure was applied to ensure that these countries improved their money laundering control systems. The identification and listing process will continue and, until the FIC Bill has been enacted and the legislation is enforced effectively, South Africa will be in danger of being listed as non-co-operative.

No African country is a member of the FATF. As a consequence the Recommendations do not reflect the realities of African economies. There is an expectation that South Africa should be a member of the FATF to ensure that the standards that are set, reflect the unique features of its economy and infrastructure as well as that of African countries in general. However, South Africa will also find it difficult to take up membership of the FATF if it is not adequately compliant.

2.2 The FIC Bill and the Forty Recommendations
It is clear from the Memorandum on the Objects of the Financial Intelligence Centre Bill, 2000, that the drafters were sensitive to the importance of compliance with the Forty Recommendations. In par 2.11 of the Memorandum the following is stated:

"The Bill, together with the Prevention of Organised Crime Act, 1998, will produce an anti-money-laundering regime substantially in compliance with the recommendations of the Financial Action Task Force on Money Laundering, a multi-lateral body which co-ordinates international anti-money-laundering policy. The Bill aims to achieve this compliance without making unnecessary or inappropriate demands on the country’s resources." [own emphasis]

It is submitted that South Africa endeavored with the Proceeds of Crime Act 76 of 1996 and the Prevention of Organised Crime Act not only to meet the general international standards in respect of criminalisation of money laundering, but to adhere to the best practice in that regard. Recommendation 4 requires, for instance, that countries should criminalise the laundering of proceeds of serious crimes. South Africa, on the other hand, implemented a higher standard by criminalising the laundering of the proceeds of all crimes. Other countries are currently giving consideration to broadening the scope their anti-laundering provisions in a similar way. By adhering to the best practice from the start, South Africa saved time and money because it will not have to change such a fundamental aspect of its criminal legislation in the near future.

It is submitted that the Bill can effect a greater measure of compliance with the Forty Recommendations and even implement the best practice in some instances, without making unnecessary or inappropriate demands on the resources of South Africa. It is furthermore submitted that, in addition, the Bill should address the main money laundering concerns that were identified by the FATF during the past few years. It is simply a matter of time before those concerns will be reflected in amendments to the Recommendations.

It is submitted that the following FATF recommendations should be reflected in the Bill:

2.2.1 Customer identification and record-keeping rules [Recommendation10]
Recommendation 10 reflects a particular concern for the correct identification of legal entities:

"In order to fulfil identification requirements concerning legal entities, financial institutions should, when necessary, take measures:

to verify the legal existence and structure of the customer by obtaining either from a public register or from the customer or both, proof or incorporation, including information concerning the customer’s name, legal form, address, directors and provisions regulating the power to bind the entity.

to verify that any person purporting to act on behalf of the customer is so authorized and identify that person."

The identification procedures set out above are part of current international best practice and the drafters of the Bill probably envisaged that these procedures will be set out in the regulations. However, their prominence in the Recommendations indicate the importance of these procedures to the FATF. It submitted that it would be advisable to set out these procedures in the Bill itself. The procedures could be inserted into clause 21 of the Bill.

2.2.2 Unusual transactions
Recommendation 14 reads as follows:

"Financial institutions should pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing and be available to help supervisors, auditors and law enforcement agencies."

The Bill currently requires the reporting of so-called threshold transactions [certain transactions involving a certain amount of money] as well as suspicious transactions [irrespective of the amount involved]. A suspicious transaction is a transaction that may involve the proceeds of crime. Suspicious transaction reporting is in essence retroactive in nature: The crime must already have been committed to give rise to proceeds that will, in turn, trigger the report. Financial institutions that monitor transactions often identify transactions that may have been entered into in order to commit an offence in future, such as tax evasion. Funds may also be paid into an account to finance an offence to be committed. Unless those funds exceed the threshold or can be identified as proceeds of another offence, such a transaction cannot be reported under the current provisions of the Bill.

It is submitted that the Bill should provide for the reporting of "unusual and suspicious" transactions. The main objective of the broader definition would be to bring transactions that may facilitate the commission of an offence but which do not involve proceeds of crime, within the ambit of the reporting obligation. This will not only give effect to Recommendation 14, but will also increase the effectiveness of the whole control system.

For purposes of a definition of "unusual and suspicious" the following is suggested:

"A transaction is unusual and suspicious if:

it is not reportable under section 7 of the Prevention of Organised Crime Act, 1998; and
the person suspects or ought to have suspected that the transaction is relevant to a possible violation of any law or regulation that has occurred or that may occur whether in South Africa or elsewhere at any time whether before or after the commencement of this Act."

In par 3 below it is suggested that the current provision regarding suspicious transactions in the Bill should be scrapped. That provision could be replaced by a provision relating to unusual and suspicious transactions.

2.2.3 Programmes against money laundering
Recommendation 19 reads as follows:

"Financial institutions should develop programs against money laundering. These programs should include, as a minimum:

the development of internal policies, procedures and controls, including the designation of compliance officers at management level, and adequate screening procedures to ensure high standards when hiring employees;

an ongoing employee training programme;

an audit function to test the system."

If Recommendation 19 is compared to clause 42 of the Bill, it is clear that the Bill does not require the designation of compliance officers at management level. Clause 4(e) of the Bill does, however, require of the FIC to promote the appointment of persons who can detect and counter laundering activities. It is important to appreciate that persons who detect and counter laundering are primarily investigators, not compliance officers. The task of a compliance officer is to ensure compliance with the law and regulations. The brief of a compliance officer clearly differs from that of an investigator. A compliance officer performs a management function and Recommendation 19 therefore requires the appointment of such a person at a management level.

Recommendation 19 also requires adequate screening procedures in respect of new employees. Screening is an important tool to protect businesses against dishonest employees. In the light of the labour law requirements, it is, however, also controversial. If this recommendation is reflected in the Bill, the word "equitable" or "fair" could perhaps be inserted to make it clear that the procedures that are envisaged are those that conform to the constitutional and labour law principles of our law.

Recommendation 19 furthermore requires an audit function to test the effectiveness of the anti-laundering system. This aspect is not addressed by the Bill. Evaluation is an important element of any programme and it is therefore submitted that a specific reference to such an audit it should be included.

Clause 42 addresses steps that must be taken by financial institutions. In the light of the above it is submitted that section 42 should not be confined to the formulation and implementation of internal rules, but should address (in accordance with Recommendation 19) the development of a money laundering control programme. As part of such a programme the clause must require accountable institutions to designate compliance officers at management level to oversee the implementation of the programme. The clause must also reflect the requirement of Recommendation 19 regarding the screening of personnel and the performance of an audit.

3 The relationship between the FIC Bill and the Prevention of Organised Crime Act
I will confine my submission relating to the above to one aspect, namely the removal of accountable institutions from the ambit of section 7 of the Prevention of Organised Crime Act, 1998.

Clause 56 of the Bill provides that accountable institutions will not need to comply with the suspicious transactions reporting obligation created by section 7 of the Prevention of Organised Crime Act, 1998. Instead, accountable institutions will have a similar obligation created by clause 29 of the Bill. Although this amendment is not objectionable in principle, differences between the wording of section 7 and clause 29 are such that the current provision cannot be supported.

1 It is submitted that section 7 provides for a better regime because it applies to individuals whereas clause 29 applies to accountable institutions.

The reporting obligation in clause 29 is triggered when the "accountable institution suspects" certain facts. It is not clear when an institution will suspect a fact. Traditionally in corporate law an entity will know a fact when it is known to the person that can be described as its "alter ego". In practice, the knowledge of the managing director or chief executive officer is often ascribed to the corporate entity. This means that an institution will only be suspicious about a transaction when its managing director or chief executive officer is suspicious about the transaction. Generally, however, that person will be unaware of a ordinary transaction that the institution entered into and will therefore not be suspicious. As a result the reporting duty will not be triggered.

The formulation used in clause 29 appears to be based on a formulation in a similar section in the Drugs and Drug Trafficking Act 140 of 1992. As a result of that formulation, very few suspicion-based reports were made under the Drugs and Drug Trafficking Act. The reporting provision was therefore improved when section 31 of the Proceeds of Crime Act was drafted and again improved when section was amended in 1999. The relevant part of section 7 now reads as follows:

"Any person who carries on business or is in charge of, or manages a business undertaking or who is employed by a business undertaking and who suspects …"

Section 7 therefore indicates clearly which parties must form the relevant suspicion that will trigger the reporting obligation. Clause 29, on the other hand, lacks similar clarity.

Clause 29 furthermore uses the phrase "suspects or reasonably ought to have suspected". This phrase, and similar formulations, are also used in the laundering provisions of the Prevention of Organised Crime Act. These phrases are given specific content in that Act by sections 1(2) and 1(3) of the Prevention of Organised Crime Act. Subsections 1(2) and 1(3) of the Prevention of Organised Crime Act formulate the tests that must be applied to ascertain knowledge and negligent ignorance. The use of similar phrases in the FIC Bill without reference to these definitions will create legal uncertainty when the phrases must be interpreted in their respective contexts in the different legislative instruments.

Clause 56(1) relieves employees of accountable institutions from direct reporting obligations. The obligations that they may have will be regulated in terms of internal rules. Employees and managers of non-accountable institutions will, however, still have to report under section 7 of the Prevention of Organised Crime Act and will face the full force of the law for non-compliance. The lack of equality in the treatment of employees of different institutions appears questionable.

Clauses 56(2) and 56(3) attempt to duplicate section 7A of the Prevention of Organised Crime Act. The duplication is required to ensure equivalence between the two legislative instruments. Unfortunately the duplication is flawed.

Compliance with the internal rules of an institution will be a defence if a person is charged for laundering under the Prevention of Organised Crime Act. However, international experience has shown that the internal rules are often defective. Employees will therefore be allowed to disregard the law as long as they comply with defective internal rules.

Furthermore, the defence under the Prevention of Organised Crime Act only applies in respect of those who are charged with having engaged in laundering negligently. The defence under clause 56 is broad enough to cover intentional laundering as long as the transaction is reported to the authorities. Apparently the reference to negligence was not included in clause 56 to allow for sting operations that may be conducted in conjunction with the Financial Intelligence Centre. However, it is submitted that provision can be made for such operations without allowing intentional laundering in general.

The clause 56 defence does not extend to new section 6A structuring offences.

It is therefore submitted that the current provisions of clause 29 should be scrapped and replaced with a provision regarding suspicious and unusual transactions (as suggested in par 2.2.2 above) and that clause 56 should also be scrapped. Appropriate amendments should however be made to section 7A of the Prevention of Organised Crime Act.

4 Measures to increase the effectiveness of the money laundering control framework

4.1 The brief of the Financial Intelligence Centre
According to clause 4 of the Bill the FIC will have to perform certain functions, for instance, it must collect the information disclosed to it in terms of the Bill and supervise compliance by accountable institutions with the Bill. The clause therefore limits the functions of the FIC to the Bill itself. Information will, however, also be disclosed in terms of the Prevention of Organised Crime Act. Accountable institutions will also have to comply with the criminal provisions of that Act.

The FIC will be the main regulatory body in respect of money laundering in general. It is therefore submitted that this broader function should be reflected in the wording of clause 4. This clause should, therefore, also refer to the Prevention of Organised Crime Act.

It is furthermore submitted that the FIC should not only give guidance to accountable institutions in respect of money laundering control, but should also have a broader function in respect of public awareness and general education regarding money laundering control. Despite the fact that members of the public may unwittingly commit serious laundering offences, no awareness campaigned has yet been launched by a government organ.

4.2 Money Laundering Advisory Council
The Bill establishes a body entitled the Money Laundering Advisory Council. According to clause 15 the Council will advise the Minister and act as a forum where the role players can consult one another. The Council consists of various government representatives and representatives of various other bodies that nominate a representative on request by the Minister.

The Council can play an important role in combating money laundering. It seems, however, as if it may experience some difficulty due to its size, representivity and functions. The Council must both advise and serve as a forum for role players to consult and liaise. An advisory body can normally function more effectively with a smaller membership. On the other hand, the Council needs a larger membership to serve effectively as a forum for consultation and liaison. Although it does not appear ideal to combine these two functions, the Council will still be effective if it is managed correctly and if the Council appoints sub-committees.

Recommendation 15 of the FATF requires countries to pay special attention to money laundering threats that are inherent in new or developing technologies and to take measures to prevent their use in money laundering schemes. Recommendation 29 requires competent authorities to take the necessary legal or regulatory measures to guard against control of acquisition of a significant participation in financial institutions by criminals or their accomplices. It is therefore probable that the Council will have the need to appoint sub-committees dealing with technology and with law. There will probably also be a need to form sub-committees for various industries.

Clause 17(2)(c) gives the Council the right to appoint sub-committees. It is submitted that this right should be broadened to allow the committees the right to co-opt members and other persons for such periods as it they may determine. Such a right will provide the committees with access to technological and other expertise and will increase the representation of different industries on relevant Council committees.

The following provisions regarding the Standing Advisory Committee on Company Law in section 18 of the Companies Act 61 of 1973 may be helpful in this regard:

"4(a) The standing advisory committee shall constitute and maintain at all times such standing sub-committees on accounting, legal and other practices as the Minister may from time to time determine.

The standing advisory committee shall appoint as members of the standing sub-committees such of its members and such other persons and for such periods of office, as it may from time to time determine.

The standing advisory committee may call to its assistance such person or persons are it may deem necessary to assist it or to investigate matters relating to company law."

It is furthermore submitted that the object of the Council should be reflected in its name. "Money Laundering Control Council" or the "Advisory Council on Money Laundering Control" will be more appropriate.

4.3 Exemption for attorneys
Particular care was taken to protect the attorney-client privilege in the Bill. Clause 1(2) states:

"This Act may not be construed as infringing upon the common law right to legal professional privilege as between an attorney and the attorney’s client."

Clause 37 reads as follows:

"(1) No duty of secrecy or confidentiality or any other restriction on the disclosure of information, whether imposed by legislation or arising from the common law or agreement, affects compliance with a provision of this Part [dealing with reporting duties].

(2) Subsection (1) does not apply to the common law right to legal professional privilege as between an attorney and the attorney’s client."

It is important to appreciate that money laundering control legislation attempts to break through the barriers of old secrecy regimes. The Bill itself overrides bank secrecy. Its reporting obligations enjoy preference over the confidentiality that an adviser owes to his client. Should special arrangements then be made for the protection of the attorney-client privilege?

It is submitted that such arrangements are justified. If this privilege is not protected, it will infringe the right of an accused to a fair trial. However, it is submitted that there is no need to protect this privilege where information is disclosed or moneys paid for purposes other than a criminal defence:

1.Legislation in the United States of America requires threshold reporting by attorneys. The general rule is that client identity and fee information are, in the absence of special circumstances, not privileged (Doe v United States (In re Shargel) 742 F2d 61, 62 (2d Cir 1984). Problems regarding the application of the privilege do arise but are then addressed by the legal system. Many of these problems will not arise in South Africa if the criminal defence exclusion of the Prevention of Organised Crime Act is retained.

2.Reporting obligations are required to protect the integrity of the legal profession. Attorneys are unfortunately often implicated in money laundering schemes. The FATF noted the following in their study of money laundering trends and techniques in their 1999-2000 report (par 108):

"The increased presence of certain professions – especially solicitors, notaries, and accountants and often in connection with company formation officers – in money laundering operations was noted."

In its June 2000 report entitled "Recovering the Proceeds of Crime" the Performance and Innovation Unit of the UK Cabinet mentioned the following example. It illustrates how solicitors can turn a blind eye to the affairs of their clients [p 89]:

"Law enforcement officers contacted a local law firm and passed on information that they were aware that the UK and offshore companies set up by the solicitors were being used by organised criminal groups and drug traffickers. The firm responded that it did not need to make any disclosures so long as it did not enquire into its clients’ affairs. It would then neither know nor suspect that they might be involved in money laundering."

Law enforcers in South Africa are aware of many instances where attorneys allowed their trust accounts to be abused for laundering purposes. The Krugel Commission of Inquiry which was appointed by the Transvaal Law Society to investigate alleged unprofessional and/or illegal conduct by practising attorneys also found in its 1996 report that there was evidence that a number of attorneys were probably involved in money laundering. The report highlighted an increase in the use of attorney’s trust accounts for money laundering purposes.

In the recent SBV cash heist case where judgment was handed down in Durban on 31 January 2001 an attorney was convicted as an accessory after the fact because he assisted some of the criminals to launder their money.

If attorneys are exempted from reporting obligations, the abuse of the profession by launderers will simply increase. Such an exemption will, in fact, invite abuse of the profession by launderers.

3.Similar measures are under discussion in Europe. A concise summary of the current proposals is provided by Stessens Money Laundering (2000) 139-140:

"The 1999 proposals of the European Commission to amend the 1991 Money Laundering Directive likewise exempt lawyers from any identification or reporting requirement in any situation connected with the representation or defence of a client in legal proceedings, for it confines the obligations of notaries and other independent legal professions under the Directive to assistance or representation of clients in respect of the ‘(a) buying or selling of real property or business entities, (b) handling of client money, securities or other assets, (c) opening or managing bank, savings or securities accounts, (d) creation, opening or management of companies, trust or similar structures, (e) execution of any other financial transactions’. Moreover, the proposal makes full allowance for the professional secrecy duty permitting Member States to allow lawyers to make suspicious transaction reports to their professional associations rather than to the financial intelligence units to which financial institutions make their reports."

On the strength of the above it is submitted that attorneys should not be excluded from reporting obligations. Such an exclusion will be contrary to current international trends and will also be contrary to the best interests of the profession. However, appropriate exemptions in respect of criminal defence matters should apply. In that respect the exemption under the Prevention of Organised Crime Act appears to conform to international standards. Consideration may also be given to the creation of an indirect reporting channel, for instance by allowing attorneys to report suspicions to the Law Society.

4.4 Transactions that may be linked to future offences
Many financial institutions identify transactions that are suspicious because they may facilitate an offence that will be committed in future.

Transactions that have no obvious commercial purpose are sometimes concluded. Such transactions are often suspect because their main purpose may simply be to evade tax. The dilemma of the financial institution is that it cannot be sure that the purpose of the transaction is indeed to evade tax. The transaction is simply a suspicious transaction.

Although the transaction is suspicious it is not reportable under section 7 of the Prevention of Organised Crime Act. Nor will it be reportable under clause 29 of the Bill. Both provisions require that the offence must already have been committed before a reporting obligation can arise. The tax offence, on the other hand, will only be committed at some stage in the future when the client submit a tax return in which the transaction or the money involved in that transaction is not disclosed.

It is submitted that the effectiveness of the reporting structure of the Bill can be increased if the reporting duties under clause 29 are broadened to "unusual and suspicious" transactions. This recommendation will also meet with the FATF requirements. See par 2.2.2 above for additional motivation for this recommendation.

4.5 Duties for auditors
Clause 4(c) of the Bill stipulates that the FIC must supervise compliance with the Bill by accountable institutions. The FIC, like any other similar regulator, will probably not have enough staff to supervise compliance by all accountable institutions effectively. The FATF is giving consideration to the involvement of the accounting profession in this respect [FATF Annual Report 1999-2000 Annex C]. It is submitted that serious consideration should be given to utilizing the external audit process to channel some information to the FIC.

It is submitted that the Bill should, as a starting point, require an auditor who is performing an audit on an accountable institution to ascertain whether that institution has formulated the internal rules and to submit a report to the client and to the FIC if the institution has not formulated the rules.

It is submitted that such a duty can be reconciled with the normal duties of an external auditor.

The duty will not increase the cost of the audit to the institution unduly, because it simply requires a formal investigation to ascertain the existence of such rules.

The duty will increase the effectiveness of the supervision by the FIC considerably, because it will furnish it with information that the FIC will probably be unable to ascertain itself.

If this mechanism works well, consideration could be given in future to expanding the role of auditors and to require them to evaluate the rules, to evaluate their implementation and perhaps even to measure the vulnerability of the institution to laundering. At this stage, however, I submit that a basic duty to ascertain the existence of the rules will suffice.

4.6 The appointment of money laundering compliance officers
It was argued above that the FIC will probably not have enough resources to supervise compliance by all accountable institutions with their money laundering obligations. In fact, international experience proves that the legislation is only implemented effectively if the institutions themselves accept their responsibility in this regard. Acceptance of this responsibility means that an institution must allocate the necessary personnel and resources to this function. This does not necessarily mean that an institution will have to appoint new personnel. It is, however, important that a person will be designated who will lead and guide the institution in this regard.

It was pointed out in par 2.2.2 that the FATF Recommendation 19 requires the designation of money laundering compliance officers at management level. It is submitted that the Bill should make express provision for such a designation. Such an obligation will not only ensure that the Bill meets with the relevant international requirements in this regard, but will also assist to ensure effective compliance by accountable institutions with money laundering legislation.


5 General comments
5.1 Clause 27 – access to information

Clause 27(2) stipulates that a representative of the FIC will have access to the record of a supervisory body only by virtue of a warrant issued in chambers by a judge. This measure affords important protection to private information. However, this measure does not make sense in relation to supervisory bodies, such as the Registrar of Companies, whose records are public. It is submitted that a suitable amendment should be made to clause 27(2).

5.2 Clause 42(3) – copies of documentation

Clause 42(3) reads as follows:

"An accountable institution must provide a copy of the internal rules to each of its employees involved in transactions to which this Act applies."

Although the general thrust of this subsection is supported, it is submitted that amendments are required to reflect the current practice of financial institutions and also to protect the employees.

The larger financial institutions provide their employees with electronic access to manuals and internal rules, while smaller accountable institutions will probably provide their employees with hard copies. It is onerous to require all institutions to provide every relevant employee with a [hard] copy of the rules. It should be sufficient if every such employee has ready access to the rules.

Employees should not be given access to material without having received appropriate training. The mere fact that they have had access to the relevant documentation will increase the legal standard that applies to them in a laundering investigation and prosecution. If the documentation is simply dumped on an employee without having received appropriate training, that person will be at a severe disadvantage. The duty to provide employees with copies of documentation or ready access thereto, should therefore be linked to the training programme.

We have analyzed a number of money laundering control practice manuals that institutions prepared for their employees. In some cases these manuals were misleading and the guidelines were based on a misinterpretation of the legislation.

It is therefore submitted that employers should be compelled to provide their employees with copies of or ready access to the relevant legislation and regulations. This will empower those employees who are able to read and interpret the legislation and regulations, but, more importantly, it will empower representatives of employees to ensure that the internal rules that were formulated by a business, are in accordance with the statutory duties and that the employees receive the correct training. Access to the legislation will also facilitate general awareness of laundering legislation.

In the vast majority of cases the institutions will be able to provide employees with online electronic access to the legislation and regulations. The cost implications of such a duty will therefore be minimal in comparison to its contribution to training and awareness.

5.3 Clauses 51 and 55 - penalties

Clause 51 stipulates that a person convicted of an offence committed under the Bill will be liable to a fine and/or to imprisonment not exceeding ten years. The penalties appear to be too low when compared to the penalties provided for by the Prevention of Organised Crime Act. The difference in the penalty regimes will give rise to unfairness: If a trader who is not an accountable institution fails to report a suspicious transaction in terms of section 7 of the Prevention of Organised Crime Act, the person faces a fine and/or imprisonment not exceeding 15 years. If an accountable institution commits a similar offence, the maximum term of imprisonment is only 10 years.

Clause 55 inserts a new section 6A into the Prevention of Organised Crime Act. The new section will regulate the structuring of transactions to avoid a reporting duty. The penalty for a contravention is a fine not exceeding R500 000 or three times the value of the property involved in the transaction, whichever is the greater, and/or imprisonment for a period not exceeding five years. This penalty is also too low when measured against similar provisions in the Prevention of Organised Crime Act.

Implementation

The Centre is extremely concerned about the implementation of the legislation. There is international pressure on South Africa to urgently implement the legislation. In fact, expectations were raised already in 1996 that South Africa will implement it as a matter of urgency.

The following steps will be required inter alia to implement the legislation:

The establishment of the Financial Intelligence Centre [at least the appointment of the Director];

The establishment of the Money Laundering Advisory Council;

The drafting of the regulations.
We are concerned that the above steps, and certainly the consultative drafting process that will be required for the regulations will take at least a year. If that is the case it means that South African crime fighters will not enjoy the benefit of this legislation before 2002. It is difficult to justify such a delay. However, the time period can be shorter if the Department of Finance and the role players will commit themselves to a shorter time-frame.

We therefore urge the Committees to investigate the implementation of the legislation and to provide guidance on the time-frame.

7 Conclusion
The money laundering control legislation will provide the South African business community with an important new set of regulations and it is therefore of the utmost importance to ensure that the legislation is adequate, fair and practicable. We thank you for the opportunity to make submissions on the FIC Bill.

Yours sincerely

Prof Louis de Koker
Director: Centre for the Study of Economic Crime

Appendix 3

National Gambling Board of South Africa
21 March 2001
PRESENTATION ON THE FINANCIAL INTELLIGENCE CENTRE BILL, 2001

1. Introduction
Thank you for inviting the National Gambling Board to comment on behalf of the gambling industry on this important legislation. The gambling industry operators and regulators welcome the introduction of the FIC Bill as a very significant piece of legislation that will bring South Africa in line with the recommendations of the Financial Action Task Force (FATF).

Although gambling institutions1 particularly the casinos, are perceived as a fertile ground for money laundering activities, it is important to note the words of our National Director of Public Prosecutions, Mr Bulelani Ngcuka who said that "The fight against money laundering is something that concerns every bank teller and every bank manager in our society. It concerns every attorney and his or her trust account, every life insurance sales person, every estate agent every car sales person - in fact every person who deals with the flow of money, and in particular cash." (Foreword, KPMG Money Laundering Control Service by Professor L de Koker).
In an endeavour to ensure the smooth implementation of this legislation, the National Gambling Board sought input from the provincial gambling regulators as well as from industry operators. A stakeholders' forum in which the below-mentioned parties participated was held in Midrand on 27 September 2000 to discuss the implications of the FIC Bill on the gambling industry:

North West Gambling Board, Northern Province Casino and Gaming Board, Akani Egoli (Pty) Ltd, Natal Bookmakers Society, Sun International (Pty) Ltd, Global Resorts SA (Pty) Ltd, Free State Gambling Board, Balele Leisure, Phumelela Gaming & Leisure Ltd, Tusk Resorts (Pty) Ltd, London Clubs International Plc, Eastern Cape Gambling Board, Gauteng Gambling Board and Tsogo Sun Holdings (Pty) Ltd.

Discussions at this forum culminated in the appointment of a committee, which was to formulate comments and submissions on the FIC Bill. The submissions, which you have before you ladies and gentlemen, are therefore not only the views of the National Gambling Board but it is a product of wide consultation with the relevant stakeholders. Present with me here today is some of the members of the said committee viz.:

Mr Themba Ngobese, (NGB)
Mr Bongani Biyela (Akani Egoli)
Mr Dhayalan Naidoo (Tsogo Sun)

Please allow this committee ladies and gentlemen, before giving its comments on specific sections of the Bill, to give a very brief synopsis of the gambling regulatory framework in the Republic. Themba Ngobese will give that brief synopsis.

2. Regulatory framework
In terms of schedule 4 of the Constitution of the Republic of South Africa, Gambling is a functional area of concurrent national and provincial legislative competence. It is for this reason that the regulatory functions for gambling are therefore shared between the provincial gambling boards and the national gambling board.

2.1 National Gambling Board
The National Gambling Board, established in terms of the National Gambling Act, 33 of 1996 has as its primary function the duty to promote uniform norms and standards throughout the Republic in relation to matters pertaining to casinos, gambling and wagering.

2.2 Provincial Gambling Boards
The primary function of each of the 9 provincial gambling boards, which were constituted in terms of their respective provincial legislation, is to issue gambling related licences and to ensure that the licensees comply with all the provisions of the relevant gambling legislation as well as the conditions of such licences.

3. Comments on the Bill
3.1 Schedule
3.1.1 It is suggested that the following wording for the accountable institution listed under no.11 be adopted:


"A person who carries on the business of gambling in terms of a gambling licence issued in terms of the relevant gambling legislation".


3.1.2 If the change proposed in 3.1.1 above is adopted there will be no need for No.19 of Schedule 1, as the proposed wording for No 11 would encompass all types of legal gambling institutions. We therefore suggest that no.19 be deleted.

3.2 Schedule 2
The relevant regulatory authorities of all the accountable institutions have been listed in schedule 2 as supervisory bodies. It is however not clear who will be the supervisory body for gambling institutions.


As we have outlined the role of the National Gambling Board it is suggested that the National Gambling Board be listed as a supervisory body for gambling institutions.

3.3 Definitions
"Cash"
The definition of cash should include Electronic Fund Transfers so as to accommodate the move towards e-commerce. Electronic Fund Transfer will also cover smart cards as these are already in use in some of the casinos.

The qualification that follows after "cheques" in paragraph (d) of the definition of "cash" should be removed. Cheques should be included as cash in respect of all the accountable institutions, otherwise it may mean that other accountable institutions with the exception of casinos and totalizator betting services, will not have to report transactions in excess of the prescribed amounts if the instrument of payment is by way of a cheque.

3.4 Sections 21, 22 and 23
3.4.1 It is envisaged that the above-mentioned sections will be the most onerous to implement in respect of casinos and totalizator betting services. We therefore suggest that specific provisions catering for the gambling industry should be incorporated under this section.

It is suggested that the requirements for these sections should only apply to clients who conduct transactions in excess of R25 000.

Looking at the volumes of patrons who conduct single transactions at a casino and totalizator betting service at any point in time, these institutions would not have the resources to obtain identification of each and every patron.

3.4.2 It is our submission that the main objective of the Bill is to prevent the laundering of ill-gotten gains. The identification burden placed on operators of casinos and totalizator betting services will not be of benefit to the object of the Bill. This will also place an unnecessary burden on the resources of the Financial Intelligence Centre.

3.5 Section 31
Although this section deals with reporting by supervisory bodies we are of the view that the regulations, once they are passed should elaborate on the functions of supervisory bodies and also consider giving investigating powers to the supervisory bodies through the regulations to enable them to discharge their obligations.

3.6 Section 53
We would like to know whether the Committee tasked with the drafting of the regulations has already been appointed. In this regard we would like to make our input when the regulations are being drafted in order to sensitise them to the peculiar requirements of the gambling industry.

Most of the provincial gambling legislation currently requires the reporting of transactions in which the amount of exchange involved exceeds R25 000.

There is also provision setting out the compilation of these transaction reports and what information needs to be contained therein. There are also measures in place aimed at preventing the circumvention of the threshold amount. These measures require the casino operator to aggregate all cash transactions within a 24-hour period between the operator and the patron or the patron's agent.

The above-mentioned provisions are contained in the regulations of the following provincial Acts:

-Northern Cape Casino and Gaming Act, 1996 - Regulations 59, 60,61 and
-Western Cape Gambling and Racing Law, 1996 -Regulations 47, 48 and
-Free State Gambling Act, 1996 - Regulations 21,22,2324 and 25.
-Eastern Cape Gambling and Betting Act, 1997 - Regulations 122, and 123.
-Gauteng Gambling Act, 1995 - Regulations 68, 69, 70, 71 and 72.
-Mpumalanga Gaming Act, 1995 - Regulations 60, 61 and 62.
-KwaZulu-Natal Gambling Act, 1996 - Regulations 98, 99,100,101 and 102

From the above it is clear that the gambling industry already has stringent mechanisms in place for threshold reporting and we therefore recommend that the existing R25 000 threshold be adhered to.

3.6 General
We suggest the following:
3.6.1 Suspicious reporting as envisaged in section 29 should be done in terms of the Prevention of Organised Crime Act,1998 (POCA) and not the FIC Bill because POCA covers everyone (natural and juristic persons) whilst the FIC Bill covers only accountable institutions.

3.6.2 The auditors of an accountable institution should submit a report to the FIC and in the case of the gambling institutions, to the supervisory body too, in respect of the institution's compliance with its duties to keep the necessary records, identify its clients and train its employees in respect of compliance with 5 42.

Thank you once again for allowing us the opportunity to make this presentation to you.