Financial Intelligence Centre Amendment Bill [B18-2008]: briefing

Meeting report

Briefing by National Treasury and Financial Intelligence Centre (FIC)
Mr Nkosana Mashiya (Chief Director: Economic Policy and International Financial Relations - National Treasury) briefed the Committee on the background and objectives of the Financial Intelligence Centre Amendment Bill (see attached document).

The main objective of the Bill was to provide for an administrative framework to enhance supervision of and enforce compliance with the Financial Intelligence Centre Act of 2001 (FICA). The proposed amendments aligned the Bill with the provisions contained in the Securities Services Act and the Pension Funds Act and with international standards for the regulation, supervision and compliance with anti-money laundering and counter-terrorist financing measures.

Mr Murray Michell (Director: Financial Intelligence Centre) explained the role of supervisory bodies within the South African context. The provisions contained in FICA were currently enforced by means of criminal sanctions only. In certain instances, criminal sanctions were not appropriate and the Bill proposed the introduction of administrative enforcement structures. The key features of the administrative enforcement framework were outlined. Details of the consultation process that was followed prior to the drafting of the proposed amendments were provided.

Mr Mashiya summarised the comments received from interested parties on the draft Bill. Concerns included the perceived regulatory overlap between FIC and the supervisory bodies, the positioning of the FIC as a “super regulator”, the availability of funding and other resources to allow supervisory bodies to meet their obligations, the inappropriateness of certain institutions being listed as supervisory bodies and the legality of the imposition of administrative sanctions.

Discussion
Dr Deon George (DA) asked if there was a list of supervisory bodies and which ones were consulted during the consultation process.

Mr Narend Singh (IFP) remarked that there appeared to be widely divergent views from stakeholders reported in the media and asked why there was such difference of opinion on the fundamental issues.

Mr K Moloto (ANC) asked for clarity on the comment that was made in the presentation that there was a need to close gaps between the FIC, supervisory bodies and law enforcement agencies when exercising administrative enforcement measures.

Mr SJF Marais (DA) asked what relationship existed between the FIC, supervisory bodies and law enforcement agencies for the application of administrative enforcement measures.

Ms N Mokoto (ANC) asked what methods were employed during the accreditation of supervisory bodies to ensure that they were fit and proper. She asked what the expected cost of enforcement and compliance was.

Mr B Mnguni (ANC) noted that the intention of administrative enforcement was to prevent additional pressure on the formal justice system. He asked what steps can be taken by the courts.

Dr S Cwele (Chairperson, Joint Standing Committee on Intelligence) requested clarity on the nature of the risks and gaps mentioned in the briefing.

In response to Dr George’s question, Mr Michell referred to the list of supervisory bodies on slide 3 of the presentation and confirmed that all were consulted. The supervisory bodies were the Financial Services Board (FSB), the Registrar of Companies, the Estate Agents Board, the Independent Regulatory Board for Auditors (IRBA), the National Gambling Board and the Law Society of South Africa (LSSA).

In response to Mr Singh’s question, Mr Michell said that the divergent views reported in the media may be a matter of speculation. He said that there were no differences of opinion on the principles among the supervisory bodies but different views were held by entities outside the loop.
List of supervisory bodies on first slide, all consulted

In reply to Mr Moloto and Dr Cwele’s questions, Mr Michell said that a large number of relatively minor transgressions were expected to be identified during inspections. In such cases, remedial action was required and the transgression did not warrant criminal proceedings. The FIC was in the process of benchmarking the different types of transgressions and developing the procedures to be followed.

Mr Mashiya explained the concept of prudential regulation. Certain transactions have to be reported and a risk management framework was necessary to detect such transactions. Regular reports have to be submitted and on-site supervision and inspections took place to ensure that an institution’s risk management framework was in place and was implemented. Current legislation did not make provision for the avoidance of a risk event by preventing it from occurring in the first place. As a result, action can only be taken once the event had actually occurred. Because of the significant consequences, it was recommended that money-laundering was included in the prudential framework.

Mr Mashiya said there was a need to balance regulatory principles. In certain cases it was necessary to protect the value of the assets of an institution while ensuring that the judiciary process was followed. He explained the need for the sharing of information between the FIC and institutions that were exposed to incidents.

Mr Mashiya explained that the concept of the FIC as a “super-regulator” was a misunderstanding. It would be a huge duplication of resources if the FIC were to be represented in every area. The intention was to extend the mandate of the supervisory bodies. There would be no conflict of interest if the FIC supervised the supervisory bodies.

Mr Michell explained that when FICA was promulgated in 2001, South Africa was in the early days of democratic transition. The Act ensured that economic development took place within the international standards set by the Financial Action Task Force (FATF). FATF formulated 40 recommendations against money-laundering and nine recommendations against terror financing. In addition, FATF monitored the extent to which a country passed legislation and implemented it. The Bill attempted to plug existing gaps and ensure compliance with the FATF standards. A consequence of non-compliance was an unfavourable credit rating for the country and affected the risk factor perceived by investors. It was essential that the country’s risk for money-laundering and terror financing was minimised, resulting in South Africa being rated a better credit risk and a better choice for investors.

The Chairperson referred to recent media reports describing South Africa as being very vulnerable to crime syndicates. The lack of prosecutions was noted despite the high number of syndicates operating in the country.

Clause-by-clause briefing and implementation plans: Financial Intelligence Centre
Mr Pieter Smit (Senior Manager: Legal and Policy, FIC) took the Committee through a synopsis of the clauses of the Bill and gave an overview of the implementation of the proposed amendments (see attached document).

Key implementation issues included the proposed inspectorate within the FIC, application of the new administrative sanctions and the formation of an appeal board. The expected timeframes for implementation were provided.

Discussion
Mr Moloto requested clarity on the protection of information held by attorneys. Attorneys were required to report on their trust accounts. The issue was raised that such reporting may infringe on the client/lawyer relationship.

Mr Moloto referred to clauses 10 and 11 that dealt with disclosure of information. He agreed with the principle but asked how it can be ensured that the information was kept confidential and that it was not used for purposes other than what was intended.

Mr Moloto asked how the penalty for an offence would be determined. For example, the failure to keep a record may be either subject to administrative sanctions or to criminal sanctions, depending on whether the offence was deemed to be a minor or a major one.

Mr Marais requested clarity on the relationships between the FIC and the supervisory bodies and law enforcement agencies. He asked under which circumstances the FIC or the supervisory bodies would appoint inspectors. He wanted to know who was responsible for reporting transgressions to law enforcement agencies.

Mr Marais asked for clarity on the supervision of the supervisors and wanted to know if there was room for fraud, nepotism and the opportunity to take kick-backs.

Dr Cwele remarked that the definition of a terrorist varied between countries, for example some countries considered Muslims as terrorists and may demand information on this basis alone. He cautioned against making any information whatsoever available. He wanted to know if there was a mechanism in place to ensure that information was kept confidential and to ensure that sensitive information didn’t fall into the wrong hands.

The Chairperson clarified that the issue of sharing of information was covered in Section 40 of the principal Act, (FICA). Mr Moloto said that he was referring to Section 37.

Mr Smit explained that Section 37 protected the legal privilege and confidentiality of information. In respect of the onward confidentiality and protection of information, the relationships built up by the FIC with law enforcement agencies played a role. He said that the FIC had in the past passed on very confidential information to law enforcement agencies and were satisfied with the level of confidentiality displayed by them. Law enforcement agencies must follow the due process of the law when acting on the information provided, for example by obtaining a subpoena to access bank records even if the FIC provided details of a bank account. He said that the provisions applied to everybody, not just to the FIC. He explained that there were qualifiers to the information that was provided.

Mr Michell explained that personnel are vetted and certified by the National intelligence Agency (NIA) and that the FIC had an internal classification procedure in place. He said that the FIC was very cautious about providing information to international agencies and only did so if the information met the legal criteria. He said that the FIC’s internal processes and procedures limited access to information to personnel.

Mr Smit agreed that no distinction was drawn between administrative and criminal sanctions. The distinction was however made when deciding which process was followed to address the transgression. The application of either administrative or criminal sanctions cannot be cast in stone and was dependent on circumstances. A case of failure to keep records may either be a minor transgression resulting from failure to apply procedures or to employ the correct person or may by a major instance where the failure to keep records were part of a money-laundering scheme. In order to determine the nature of contraventions and the appropriate response, discussions with law enforcement agencies were to be held and guidelines drawn up.

Ms Jo-Anne Ferreira (Chief Director: Public Entities and Governance Unit, National Treasury) said that from a policy perspective, it was desirable that there was the discretion to respond appropriately, depending on the nature of the transgression. She explained that memoranda of understanding were to be drawn up between the FIC and other entities to define the relationship between the various parties. She explained that both the FIC and the supervisory bodies may appoint inspectors on either a permanent or an ad-hoc basis. She said that the FIC would only take action of there was no supervisor in place or there was supervisory failure. The Bill attempted to make it clear when action was required of either the FIC or another entity. She said that there was a tendency to distrust public institutions and a fear of the abuse of power. However, when an institution was legalised, there will be an element of trust that it would act reasonably. Provision was made for legal recourse or appeal if an entity acted unreasonably.

Mr Smit explained that the division of responsibilities between the FIC and other entities was developed within established relationships. The new functions and powers contained in the Bill put pressure on existing relationships and the Bill therefore gave recognition to memoranda of understanding. He remarked that by its nature, legislation was empowering and should not impose limitations and boundaries. He said that the intention of the Bill was not for the FIC to supervise the supervisory bodies. As supervisors were not politically accountable, there was no legal answer if there should be any regulatory failure.

Dr George remarked that the Counter-Money-laundering Advisory Council was concerned with money-laundering only but the FIC was involved with both money-laundering and terror financing. He asked if the Bill was aligned with the General Financial Services Amendment Bill.

Ms J Fubbs (ANC) referred to the proposed clause 14 that dealt with inspections and the powers that may be exercised during inspections. She said that FICA specified that a warrant must be obtained to access records but access to computer systems was not generally provided for in a warrant. The new clause appeared to be fairly broad but warrants were usually narrowly defined.

Ms Fubbs asked if Schedules 1 and 2 would come under review. She asked if the Land Bank would be included as well.

Mr M Bhengu (Member of Joint Standing Committee on Intelligence) (IFP) said that the alignment of the country’s financial management according to global standards was acceptable. He remarked that FICA granted extensive powers to the Minister of Finance and asked if the Bill made any attempt to limit ministerial powers. Section 31 of FICA dealt with internet banking but there were many instances of money-laundering by means of internet banking. He asked how this issue was dealt with.

Mr C Burgess (Member of Joint Standing Committee on Intelligence) (ANC) asked for clarity on the registration of attorneys. Attorneys’ practices varied from individuals, partnerships and corporate entities. It was not clear if all attorneys were required to register or only those who had trust accounts. The LSSA was the supervisory body for attorneys but was only concerned with those who operated trust accounts.

Mr Burgess asked why debt collectors were not included in the Schedule. Many debt collectors had trust accounts but there was no supervisory body for them. Debt collectors were governed by a council, which dealt with registration and disciplinary matters but not with financial issues. He said that the sector may be vulnerable to abuse by criminals.

Mr N Singh (IFP) wondered about the source of tens of millions of dollars apparently made available to Non-Governmental Organisations (NGOs) and religious organisations at extremely low interest rates and asked whether these bodies were subject to supervision as well. He asked how the penalties were determined. He wanted to know if the training period of three months allowed for was sufficient and whether the FIC had the human and financial resources to carry out the training. He asked to what extent the submissions from interested parties were taken into account in the formulation of the Bill.

Mr Smit replied that the Bill included technical corrections but the scope of the environment had changed since FICA was formulated. He said that the framework of the affected institutions had changed and that this was taken into account during the review of the money-laundering framework.

Ms Ferreira explained that a re-evaluation of enforcement within the whole financial services sector was being undertaken. The intention was to strengthen the enforcement powers of the regulators. An enforcement committee was being formed to strengthen the structure of the FSB. She said that as far as possible, the Bill was aligned with other legislation dealing with appeals, administrative justice, information sharing, penalties, considerations, etc.

Mr Smit explained that access to information for inspection and supervisory purposes differed from obtaining information as part of a criminal investigation. A warrant was not required to access information for inspection and supervisory purposes. Most organisations stored information on computers and were required to make this information available for inspection. Criminal procedures allowed for search and seizure of computer records.

Mr Smit said that a review of Schedule 1 would be undertaken. Certain international best practices with regard to counter-money-laundering were being applied to the criteria for inclusion under Schedule 1 and included a review of entities that had access to the financial system and that may be particularly vulnerable to criminal intent. Under the original criteria applied to Schedule 1 organisations, debt collectors and the Land Bank were not considered to have been vulnerable but the situation may have changed. He said that discussions were held with the Land Bank and the FIC was in the process of understanding the nature of the business conducted by the Land Bank and assessing the risk it was exposed to. He said that the Land Bank was not averse to being included in Schedule 1.

Mr Smit said that the Minister of Finance was accountable for the implementation of legislation and the country’s ant-money-laundering effort. He therefore must have the authority to establish the necessary institutions and structures and make the appointments necessary to carry out his mandate. The issue of trust also applied to the Minister and there were sufficient checks and balances in the system to counteract abuse of power and non-delivery of results in addition to international scrutiny.

Mr Smit said that internet banking posed certain risks and required further research. Banks were held accountable for ensuring that persons carrying out internet banking transactions were adequately identified and the FIC will take the issues of identification compliance into account during inspections.

Mr Smit explained that firms of attorneys that operated trust accounts must register and advise who the compliance officer will be. Certain exemptions were applicable and it was not expected that every attorney will have to be registered.

Mr Smit said that NGO’s and charities were not considered to be at risk for money-laundering and terror financing purposes. These organisations did not fit the criteria applied to financial institutions and intermediaries and it was not intended to include them in Schedule 1. The issue of oversight over non-profit organisations fell outside the scope of FICA. Currently, oversight was done by SARS and the policy was enabling rather than restricting them from carrying out their functions.

Mr Smit said that the decision on the amount of the penalty depended on the serious nature of the offence. Organisations tended to take into account the size of the penalty involved when assessing the cost of the risk that was being taken. Guidelines will be drawn up for supervisory bodies to determine the appropriate penalty for transgressions.

Mr Smit gave the assurance that the current version of the Bill included the submissions as well as the results of discussions with that were held with the supervisory bodies and other interested parties. The FIC incorporated the comments where possible in the wording of the draft Bill. The response to the submissions will include the matters where the FIC disagreed with the submission.

Mr Marais remarked that it was clear that specialist skills were required to carry out the tasks. He asked whether the FIC had enough skilled personnel and how it intended to ensure that they were adequately trained.

Mr Marais asked whether international standards applied to training and who would be carrying out the training. He wanted to know how many inspectors were employed by the supervisory bodies.

Ms Fubbs noted the acknowledgement that there was a shortage of persons with the necessary legal, audit and financial skills to carry out inspections. She asked what the FIC envisaged with regard to the acquisition of skills by inspectors in the short and in the long term.

Mr Singh asked if enough time was being allowed for the Committee to consider the wide variety of submissions before considering the final version of the Bill. He noted that implementation was only expected in August 2009.

Ms Mokoto asked for clarity on the oversight role the Committee was expected to play.

Mr Moloto felt that it was necessary to implement the legislation sooner than the timeframes of up to a year that was indicated in the presentation.

Mr Smit replied that the supervisory bodies were a source of training skills for newly recruited inspectors. There were also international counterparts with expertise in the area of money-laundering. The FIC and the supervisory bodies needed to ensure that training that took place adhered to the standards that were set. Observation and learning by doing were important training mechanisms. The FIC was reluctant to poach personnel from the supervisory bodies. The exact number of inspectors currently employed by the supervisory bodies was not known. He pointed out that the FSB already had a well-established inspectorate division, banks had their own internal inspectors which the Registrar had made use of, the National Gambling Board and the Estate Agent’s Advisory Board had its own inspectors. He said that the FIC was looking for a combination of legal and audit skills plus the ability to question and assess information. Potential candidates were identified for development as inspectors.

Mr Smit explained that the timeframe for implementation was determined by considering the end objective. The FIC needed legal certainty and have the legislation in place to allow it to justify the budget and to formulate the plans for implementation. He suggested that the process of passing the Bill was not delayed.

Mr Smit said that the FIC was accountable to the Committee and submitted annual reports. He expected that the supervisory bodies were also subjected to reporting mechanisms and were held accountable.

Mr Michell said that although there was understanding of the process of inspections within the supervisory bodies, there were not enough inspectors. He said that the compliance function was growing rapidly across the market and the FIC itself faced a challenge to retain trained personnel. He reported that tertiary institutions were approached with the request to include compliance in their curricula.

The Chairperson cautioned Members against serving on forums and lobby groups in their capacity as members of the Committee. Members were in danger of compromising their independence and ran the risk of a conflict of interest in their oversight responsibilities unless they served on the forums in their private capacities.

The Chairperson thanked the presenters and noted that the Committee will hear oral submissions on 7 May 2008.

The meeting was adjourned.