Financial Intelligence Centre Bill: hearings

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Finance Standing Committee

29 March 2001
Chairperson: Ms B Hogan (Finance) and Adv J De Lange (Justice)
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Meeting Summary

Submissions handed out:
National Prosecuting Authority
The Banking Council
South African Institute of Chartered Accountants and Public Accountants' and Auditors' Board 
Johannesburg Stock Exchange 
Bond Exchange of South Africa 
South African Insurance Association 
Financial Intelligence Centre Bill [B1-2001]

The National Prosecuting Authority believes that it is appropriate that the Financial Intelligence Centre's core function will be the collection, analysis, and regulation of financial information. The investigative and prosecution functions should be performed by the current law enforcement agencies and not by the FIC. The Centre must act as a ''clearing house'' for law enforcement agencies. There must be a close working relationship with investigators but it should not be one body.

The Banking Council noted that the limited range of accountable institutions which have been listed in Schedule 1 will create a gap which can be exploited by money-launderers. It is unclear if this focus on a limited range of institutions meets with the approval of the Financial Action Task Force on Money-laundering.

After submission by the South African Institute of Chartered Accountants and Public Accountants' and Auditors' Board, the Committees raised the concern that the Bill does not cover auditors sufficiently. There needs to be intensive discussions on the role that the accounting profession will play in the FIC Bill. SAICA agreed that the matter required further discussion.

The Johannesburg Stock Exchange and the Bond Exchange of South Africa presented similar concerns regarding the "know your client" provision and the accountable institutions. The South African Insurance Association concluded the representations.

Meeting report

National Prosecuting Authority (NPA)
Mr Willie Hofmeyr (from the Asset Forfeiture Unit) made the presentation. Mr Bulelani Ngcuka (the Director of Public Prosecutions) and Adv Rudolf Mastenbroek (Senior State Adv in the Asset Forfeiture Unit) were present.

Points arising from the submission include:
- The NPA do not support clause 29 (which deals with suspicious transaction reporting - STRs) in the FIC Bill. The clause has the effect of excluding accountable institutions from section 7 of Prevention of Organised Crime Act (POCA). It creates an obligation for accountable institutions to report suspicious transactions in terms of the FIC Bill. The NPA believes that POCA should be the only statutory provision regulating the circumstances under which STRs must be reported. It is impractical and ill-advised to have two pieces of legislation regulating STRs.
- Clause 29 of the FIC Bill says that failure to report a suspicious transaction results in criminal liability for the accountable institution. The NPA believes that the possibility of criminal action against the individual employed by the institution must also be there.
- The core function of the FIC will be that of collection, analysis, and regulation. The investigative and prosecution functions will be performed by the law enforcement agencies. The NPA feels that this is appropriate.
- There should not be exemptions for any businesses to file STRs. Any exemption to file STRs will be exploited as a loophole by organised crime.
- The NPA does not have an official position regarding the reporting of cash transactions (CTRs) above a certain threshold. However they suggest that the committee possibly excludes the reporting of CTRs and that the committee consider legislative models from countries which exclude CTRs before finalising the FIC legislation.
- Currently the Bill restricts the SAPS's and the NPA's access to the Centre's information. It does this for example by subjecting the provision for access to information (clause 40) to a reasonable belief (of the Centre) that providing the information is necessary. The NPA finds this restriction unacceptable.

Adv Smit (from the South African Law Commission for the FIC Bill) added that:
- Clause 18(2) empowers the Minister to exempt accountable institutions from the Act. By means of the regulations the Minister can delete from the list of accountable institutions. Adv Smit said that there are better ways to handle this. The Minister should not have the power to do it by regulation.

Discussion
Adv De Lange (ANC) asked for clarity on the suggestion regarding clause 29 of the Bill.

Mr Hofmeyr replied that clause 29 should be chopped out of the Bill. It will be messy to have two Acts saying more or less the same thing.

Ms Chohan-Kota (ANC) asked for further clarification. She asked if they were suggesting that accountable institutions report in terms of the FIC Bill and other reports be made in terms of POCA.

Mr Hofmeyr replied that their suggestion was that clause 29 be deleted from the FIC Bill while section 7 be retained in POCA. Section 7 reports from POCA would then go to the FIC. There will be one central place where all the reports go.

Adv Swart (ACDP) asked for a comment on the investigative capacity of the FIC.
Mr Hofmeyr replied that they must keep the investigative function and the analytical functions separate. If something needs to get investigated then the investigators must be close by. They must work side by side. Law enforcement people should be able to second their own people to the Centre. The police would then convert the information into evidence. Therefore there must be a close working relationship with investigators but it should not be one body.

Mr Andrew (DP) asked how a requirement on accountable institutions to lodge a full list of its clients with the FIC would be helpful as people who were being dishonest would open accounts in different names.

Mr Hofmeyr replied that in terms of the ''know your client'' form the client must disclose the business name and the name of the actual owner who benefits from the account. One cannot simply open accounts in front companies and trusts. The ''know your client'' must get to the actual owner. A problem that will occur is that people will open accounts in the names of family and friends. The accountable institutions will have to determine who the family of clients are. The police will have to investigate and deal with problems which arise. One must accept that the FIC will not solve all the problems.

Ms Hogan (ANC, co-chair) asked about the Centre's link to the investigating unit. She said that the FIC would be gathering financial information on law-abiding citizens (not necessarily for prosecution), only for the purpose of information gathering. This seems quite ominous. If it is linked to an investigation unit then it would seem less ominous. In light of this she asked why the Centre should be independent from an investigating unit.

Mr Ngcuka replied that the FIC would not be the only agency involved. Many agencies will work together. In SA a separate FIC is very important. They need the Centre as a ''clearing house'' for law enforcement agencies. Adv Mastenbroek added that there is an infringement on privacy but the infringement is justified. Today there is already a wealth of private information about people out there that is being captured. For example information is captured on the cellular calls people make and on when a credit card is used and so forth. The only difference with this law is that the information which is captured is passed onto the FIC by the accountable institution.

Adv De Lange asked for a comment on e-commerce in light of the Bill.

Adv Mastenbroek replied that in Europe they were not concerned that e-commerce would be a new chapter for police to get their heads around.

Adv Masutha (ANC) commented that the effect of the FIC Bill could be to drive money-laundering to the black market instead of it taking place through the accountable institutions. This would make it more difficult to track down money-launderers. He asked for a comment.

Mr Hofmeyr replied that if a transaction is made in a large cash amount (example buying a car in cash) then it will amount to a suspicious transaction. Criminals put their money into accountable institutions so that they are able to write cheques for example. The Bill should make it impossible for criminals to use the money which comes from crime.

The Banking Council
Mr Stuart Grobler from the Banking Council made the presentation.

Points arising from the submission include:
- The Banking Council expresses concern for the limited range of accountable institutions set out in Schedule 1. The limited range will create a gap which can be exploited by money-launderers. It is unclear if this focus on a limited range of institutions meets with the approval of the Financial Action Task Force on Money-laundering.
- The Banking Council recommends that the Bill must specifically note that tax evasion is included in the concept of ''proceeds of unlawful activities''.
- They submit that it is unfair that only one representative sits on the Advisory Council to represent the whole private sector. They propose that the government and private sector representatives must be equally balanced.
- Clause 23 of the FIC Bill deals with the records to be kept by an accountable institution in respect of its business relationships and transactions with clients. The Banking Council contends that the clause introduces an inordinate amount of record-keeping requirements. They submit that these record-keeping requirements only apply to a transaction which is a single transaction. This means that the requirements should not apply to transactions concluded in the course of a business relationship with the client.

Discussion
Ms Chohan-Kota asked for clarity on the Banking Council's proposal in terms of identification records.

Mr Grobler replied that if someone made a single transaction then there must be an identification procedure around the once-off transaction. However if the transaction was one in what was a normal, ongoing business relationship then there should not be a ''know your client'' identification procedure for each transaction in that business relationship.

Adv Masutha commented that if there is a threshold amount for reporting transactions then that would create room for money-laundering with the small amounts of money below that threshold. He asked for the Banking Council's comment on this.

Mr Grobler replied that when it came to the threshold it was a matter of pragmatism. It is possible to spool all the smaller transactions into the Centre but this would cost money. The Centre would need to be resourced for this. The result is that the Centre would not be able to analyse all the information that it receives. They are trying to catch the big criminal syndicates - not the petty crooks. They do not want to swamp the system.

Mr Nene (ANC) referred to the Banking Council's suggestion in a previous document submitted to the committees on Finance and Justice on the FIC Bill (FIC 1) in which the Banking Council had made a proposal that SARB should be an accountable institution or a supervisory body. He asked them to clarify this suggestion.

Mr Grobler replied that SARB is a key player in financial institutions. It is therefore strange that SARB had no reporting requirement. It becomes aware of patterns of transactions that individual institutions do not become aware of.

Adv De Lange commented that there would have to be a phased way of putting the Bill into operation. It would not come in with a big bang.

South African Institute of Chartered Accountants (SAICA) & Public Accountants and Auditors Board (PAAB)
Ms Alta Prinsloo (Technical Director for SAICA) made the presentation. Ms Ruth Benjamin-Swales (the PAAB representative) was also present.

SAICA said that they support the money-laundering control legislation and they accept their role. They noted that SAICA is a voluntary association with many members. The Public Accountants and Auditors Board (or PAAB) is a statutory body which regulates registered accountants and auditors. In light of this PAAB is empowered to take disciplinary action against its members for misconduct. In terms of the code of professional conduct misconduct includes holding monies if there is a reason to believe that they were obtained from illegal activities.

SAICA noted that not all accountable institutions are required by law to appoint an auditor. A solution to this should be found. They also noted that there must not be duplication between the FIC Bill and POCA. There must be proper consultation on the regulations.

Discussion
Adv De Lange commented that the presentation seemed ''detached'', as though the Bill did not apply to SAICA.

Ms Prinsloo replied that SAICA did not see themselves as ''outside of the Bill'' they simply chose not to focus their submission on the details of the Bill.

Adv Masutha said that if the auditor picks up a suspicious transaction then it must report this to the FIC. The SAICA submission says that the problem is that not all accountable institutions are required by law to appoint an auditor. What SAICA was proposing?

Ms Prinsloo replied that the number of accountable institutions which must appoint an auditor is limited by statute. Thus the problem is that some institutions are not legally required to appoint an auditor. They need a cost-effective solution for those institutions which will not have auditors.

Professor Ndabandaba (IFP) asked if SAICA considered the Bill to be an effective tool to help the accounting profession to fight money laundering.
Ms Prinsloo replied that it is an effective measure.

Adv De Lange said that the public accountants listed in Schedule 1were only those involved in certain types of work. The Schedule did not refer to all types of accountants. Some have objected to this by saying that all accountants (in terms of all work) must be included. He asked for a comment.

Ms Prinsloo replied that section 7 of POCA requires all auditors to report. Thus all accountants are covered under this section.

Adv de Lange replied that having to report in terms of POCA is different from having to report in terms of the FIC Bill. The two Acts are different Acts and the burdens imposed by them are different. The burden could be either more or less onerous depending on which Act the report is made in terms of.

Adv De Lange asked if SAICA is comfortable with the idea that auditors fall under different Acts for different auditing functions.

Ms Prinsloo replied that it is important to make the split in terms of functions because the auditors excluded from the Schedule 1 definition in the FIC Bill do not have to comply with Chapter 4 of the FIC Bill. Thus, if an audit firm renders financial advice then the firm does not have to comply with the Chapter 4 requirements. Including all auditors in the FIC Bill will overburden the auditor.

Adv De Lange replied that the better one knows their client, the better. He asked what sanctions an auditor (who is excluded from the Schedule 1 definition of an accountable institution) would be subject to for failure to report.

Ms Prinsloo replied that the auditor would be disciplined.

Adv De Lange asked if the discipline is comparable with Chapter 5 which makes it a criminal offence to fail to report. Ms Hogan also asked how active SAICA was in terms of disciplining its members.

Ms Benjamin-Swales replied that PAAB dealt with the disciplinary aspect of members. Recently PAAB has played a more active role than before in terms of holding disciplinary hearings and disciplining members. This is then reinforced by a review of the practitioners file which they have.

Ms Hogan commented that they need to look at the role that the accounting profession will play in the Bill. There has to be some kind of monitoring. They will need an intensive period of engagement to see if the Bill covers auditors sufficiently. They must look at this at a later stage. She asked SAICA if they agreed about this and the response was that they did.

 

Johannesburg Stock Exchange (JSE)
Ms Phillipa Stratten (Legal Counsel JSE) explained that the JSE is a regulatory body. It is also an association that is owned by members of stockbroking firms. It is the only stock exchange currently licensed in the country. The equity turnover value last year amounted to R536 billion, the value of shares traded was R49 billion and the total market capitalisation was R1 550 billion. The JSE has a surveillance department that monitors the market and checks that members are getting mandates from their clients that they are trading correctly. She indicated that the JSE was concerned with section 21 and 22, section 28 and section 35.

Section 21 and 22
Identification of persons acting on behalf of their own clients should go back only to the previous Accountable Institution. For example a stockbroker dealing with an institution such as Old Mutual as a client. One transaction done by Old Mutual on the JSE could be reallocated in its books to any number of its clients. Establishing the authority and identity of each Old Mutual client for every deal done is practically unworkable. Foreign institutions and asset managers do not divulge the identity of their underlying clients. Furthermore, with reference to section 22 (1) no foreign legislation applies the "know your client" requirement retrospectively. This is also not a FATF recommendation. This appears then to be too onerous a requirement.

Secondly, in order to prevent the duplication of reporting in section 28 it would be more sensible if it is the first accountable institution that receives the cash that should make the report.

Thirdly, section 35 carries the potential for enormous systematic risk for the JSE. The entire concept of STRATE settlement system is founded on a simultaneous and irrevocable delivery versus payment. Settlement is also contractual. It is not possible to halt a trade for even a day, as this would result in a failure of settlement of that trade as well as punitive fines to the broker and client involved. On this point, the JSE is extremely concerned. No trades settling through STRATE can or should be halted. The JSE should be excluded from this provision.

Discussion
Ms B Hogan (Chairperson) asked if the "know your client" provisions would be exercised if the person was not coming through any other accountable institution.

Ms Stratten replied that this was essentially correct.

Ms E Ghandi (ANC) asked how regularly clients deposited money into broker's accounts in order that they may do trading on their behalf on the Stock Exchange.

Ms Vivienne O'Hare (JSE) replied that this definitely does happen every now and then however she could not tell how often it happened. There was no onus on the brokers to report to them as a supervisory body as to how much cash the brokers receive in a year. This has been a motivation behind the formulation of the rule to be inserted into the JSE's rules and directives that brokers cannot accept cash at all.

Ms Stratten added that if the bank receives physical cash as a first accountable institution it would make more sense if it was the bank that reported it. The Bill required duplication of reporting and this was likely to lead to volumes of reporting.

Ms Hogan asked for clarification on the suspicious transaction requirement and what would be regarded as a suspicious transaction on the stock exchange and if everything comes through accountable institutions.

Ms O'Hare replied that a lot of the transactions that come from members of the public as well as accountable institutions. A suspicious transaction would be for example when a person deposited a cheque with a broker and instructed the broker to hold on to the cheque over the week and then decided not to invest on the stock exchange and wanted the cheque returned to bank it.This would be a suspicious transaction to the broker because one would not normally give money to a broker for investment on the stock exchange and subsequently ask for its return. Another example would be where a person asked the broker to buy shares despite being advised by the broker against it. However, the person insisted on buying those shares so that he may resell them with the purpose of buying others at a later stage (and kept churning the account). If he did this against the broker's advice the broker is entitled to consider that as a suspicious transaction.

Ms Hogan (Chairperson) asked if the "know your client" rule would apply in those circumstances.

Ms O'Hare replied that this was correct.

Ms Hogan asked if Ms O'Hare was suggesting that the broker becomes suspicious after the transaction and not before the transaction.

Mr O'Hare replied that this generally was correct. However, most of the brokers are also linked to things like "credit and form" and running regular checks on transactions. If they are uncomfortable they contact surveillance which in turn will help them institute further inquiries if they are uncomfortable with a client.

Ms Hogan asked if Ms O'Hara could explain what a STRATE environment is.

Ms O'Hara replied that STRATE was taking share certificates that are currently in paper form and transferring them onto an electronic record. This electronic record would show the number of shares that an individual owns. STRATE was developed that settlement could be achieved within a shorter period of time. It takes two days to achieve complete settlement through STRATE, there eliminating paper transfer delays of up to a week.

The concern here is that under the STRATE environment a trade cannot be cancelled. This is because settlement is contractual between a broker and a client. If a trade is cancelled a broker may be fined up to a R100 000 for a failed trade. The only authority that can cancel a settlement is a settlement authority itself, which is the JSE. The FIC Bill cannot halt the trade, because the broker has got to account to the client and to the settlement authority. This holds risk for the JSE to halt settlement. South Africa is currently rated second last in settlement risk. STRATE would hopefully put South Africa higher up to one of the least risky settlement countries.

Ms Stratten added that if trade was reversed one party, often an innocent party, would be prejudiced. The question arose as to who would fund their loss. That could potentially be huge if the share price was moved dramatically.

Mr L Landers (ANC) asked if the JSE was required to keep records of trades and transaction would the relevant law enforcement authorities have access to those records.

Ms Stratten replied that the JSE had always battled with a right to privacy and confidentiality versus public need for transparency. This was dealt with on a case by case basis. The JSE would be in a position to provide the records if it was able to, but what must be realised was that they are members' records and members are normally requested to furnish the records as requested.

Ms Hogan added that according to her understanding, this Act would impose an obligation to provide the necessary records.

Ms Stratten conceded that that was true.

Ms Chohan - Kota (ANC) based her question on the STRATE settlement system explanation that had been provided by Ms O'Hara and said that the whole system was geared toward protecting the integrity of the stock exchange. The ordinary civil laws would still apply if a sale was not perfect, for example, if somebody was unduly enriched with money that was bad. She commented that JSE's problem was a practical rather than a legal one. In terms of these practical problems other stock exchanges around the world with money-laundering legislation should be examined.

Ms O'Hare replied that from conversations she had with colleagues in the US and the UK transactions are not stopped on the electronic exchanges. Records of what was happening could be provided. Once the shares have been purchased or sold for the money, the money was frozen so that the actual transaction may go through, but the proceeds of the transaction were frozen.

Ms Hogan asked if the transaction could be reversed as well.

Ms O'Hare said that the transaction was still allowed to go through.

Ms Hogan asked if the Stock Exchange had any regulations, which spell out the transactions that are likely to be suspicious, and what actions a broker needs to undertake if such circumstances should arise.

Ms O'Hare replied that they could not list what should be considered as a suspicious transaction. Workshops are regularly held to keep stockbrokers updated on possible scams that amount to suspicious transactions. All brokers are advised on all the scams that are used in order that they may be informed of the ins and outs of the market. Surveillance does keep a good eye on this.

Mr K Andrew (DP) said that he had heard of cases in the US where individuals bypassed brokers doing their own online dealing - he asked if this happened in South Africa, or if that would not short-circuit the "know your client" rule.

Ms Stratten said that the system where people are trading on their own account is not yet happening in South Africa, a person would need to go through a broker.

The Bond Exchange of South Africa
Mr Graeme Brooks remarked that his comments are complementary to the presentation that had been made by the JSE. The reason for separate presentations by the JSE and the Bond Exchange was to highlight the differences between the two markets.

The Bond Exchange is a financial exchange licenced under the Financial Markets Control Act. It was formed in 1996. The predecessor association was formed in 1989. The Bond Exchange is an Association, not a company. Currently it has a total of 70 members. Members include banks, primary issuers such as Eskom and Transnet, Old Mutual, Sanlam and a whole range of broking firms being its members. The Bond exchange lists debt securities.

He said that the Bond Exchange supported the Bill wholeheartedly. The Bond Exchange's concerns with the Bill were similar to that which have been raised by the Stock Exchange in the question about accountable institutions and the "know your client" principle.

Secondly, there are about 9 500 members registered in the Bond Market and for the Bond Exchange to actively pursue and examine the bona fides of those members would not be possible. The Bond Exchange relies on its members being accountable institutions to do the first phase of this function and examining the transactions that they put into the Bond Exchanges' market.

Its third concern related to section 35 of the Bill. The Bond Exchange would also be unable to halt a transaction for the same reasons that the JSE have submitted regarding STRATE.

Discussion
Adv. J De Lange asked what would constitute a suspicious transaction if trading or settlement was done electronically and not manually.

Mr Brooks replied that that was a very difficult question because of the nature of the market, the speed at which it works and the size of the transactions. It would be very difficult to form an impression of a suspicious type of an activity. However, the Bond Exchange does daily surveillance through its division. It looks at transactions that are outside the market rate, that are of an unusual size, that are done on a stock or bond that is illiquid or not traded but beyond this it would be very difficult to determine what a suspicious transaction is.

Prof. B Turok (ANC) asked if the Bond Exchange reported all local and international transactions to the Reserve Bank.

Mr Brooks replied that the Bond Exchange had a close working relationship with the South African Reserve Bank in Pretoria. It has the privilege of examining money flowing throughout its accounts.

The South African Insurance Association
Ms Caroline Da Silva (Executive South African Insurance Association) supported the intention of the Bill since it brings South Africa in line with international standards and is important in fighting organised crime in South Africa. She read her discussion document which outlined the SAIA's concerns about the Bill.

The meeting was adjourned.

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