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

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Finance Standing Committee

06 May 2008
Chairperson: Mr N Nene (ANC)
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Meeting Summary

The Committee heard oral submissions on the Financial Intelligence Centre Amendment Bill from the South African Insurance Association, the Banking Association South Africa, the Independent Regulatory Board for Auditors, the Johannesburg Stock Exchange and the Law Society of South Africa. All parties supported Government’s initiatives to combat money-laundering and terror financing. Common concerns included the confidentiality of shared information, the role of the Financial Intelligence Centre and the possible loss of independence and authority by supervisory bodies, the cost of implementation of the Bill and the application of administrative sanctions. The detailed submissions included comments and suggestions on the wording of definitions, technical corrections and references to other affected legislation.

Members asked questions about the cost of compliance, the effectiveness of penalties, the independence of the supervisory bodies, the skills required of members of the Appeal Board, the non-implementation of provisions of the existing Act, the supervision of attorneys and the perceived unfairness and unconstitutionality of the Amendment Bill.

Meeting report

South African Insurance Association (SAIA) submission
Ms Refilwe Moletsane (Deputy Executive Officer) presented the SAIA’s comments on the proposed amendments to Sections 1, 40, 45 and 68 (see attached document). The major issues concerned the sharing of information, the cost of inspections to be borne by the inspected entity, the payment of fines regardless of any appeal and the punitive nature of fines without any provision for compensation to an aggrieved party.

Banking Association South Africa (BASA) submission
Mr Cas Coovadia (Managing Director) presented the Association’s general comments on the Bill and Mr Stuart Grobler (General Manager) outlined the specific comments pertaining to Sections 1, 3, 4, 8, 11, 12, 13, 14, 16, 19, 22 and 23 (see attached document). Issues raised included the creation of a “super-regulator”, the over-regulation of the banking sector, the effective implementation of the Financial Intelligence Centre Act (FICA), the exclusion of debt collectors from Schedule 1, the confidentiality of information and the cost of inspections.

Independent Regulatory Board for Auditors (IRBA) submission
Mr Kariem Hoosain (Chief Executive Officer) presented IRBA’s overall and specific comments and recommendations (see attached document). The concerns raised included the process followed in obtaining public comment on the Bill, the status of IRBA as a supervisory body, the right of the Financial Intelligence Centre (FIC) to override decisions made by IRBA, the FIC’s power to issue directives, the excessive nature of the penalties, the cost of inspections and the multiple registrations the sector was subjected to.

Discussion
Dr Deon George (DA) asked if BASA had calculated the cost of compliance to the regulations for the banking sector and to their clients.

Mr Grobler replied that the cost of implementing the Bill had not yet been determined. He gave examples of comparative costs incurred by banks, for example the cost of implementing the FICA existing client re-identification requirements amounted to between R750 million and R1 billion. Implementation of the National Credit Act cost one major bank R235 million in system development costs. BASA had motivated conducting a regulatory impact analysis with the Office of the President and intended to determine the cost of implementing the Bill. He expected the costs to be significantly higher than the costs associated with Y2K.

Mr Coovadia added that the banking industry would prefer to conduct the regulatory impact assessment with Government.

Dr George asked if IRBA considered that the high amounts of penalties would result in increased vigilance by auditors.

Mr Hoosain replied that IRBA considered any contravention of regulations as a serious matter and penalties applied to auditors could result in disqualification and a withdrawal of their licence. This applied to fines from as little as R5000. It was however a matter of proportionality as the penalties provided for under FICA were potentially more substantial. IRBA wanted to see the amounts of penalties brought in line with other regulations.

Mr K Moloto (ANC) referred to IRBA’s concern that the independence of the auditing profession would be compromised by the Bill. He considered the Bill to be confined to financial transactions and had nothing to do with accounting standards. He did not understand the claim that the independence of auditors would be compromised.

Mr Hoosain replied that auditors operated according to a set of standards. If the Bill allowed for information to be released to other parties, this may be in contravention of auditing standards applicable to confidentiality. The Bill allowed for broad directive powers and IRBA cautioned against that as this could be in conflict with auditing standards.

Mr Moloto asked SAIA to clarify its concern that Section 62(A) did not allow for justifiable non-appearance. He said that the action taken by authorities must be considered to be reasonable.

Ms Moletsane explained that the Bill allowed for a process of inspections to be followed and for certain persons to be present during an inspection. If a person failed to appear for an inspection, it would be taken into account and therefore failure to appear was deemed to be an offence.

Mr Moloto asked BASA to clarify its comment about the Financial Intelligence Centre (FIC) making information available that was not in the public interest. He said that the courts decided what was in the public interest and the confidentiality requirements were clear in the Act.

Mr Grobler explained that the new Section 6 (A) provided for “any information” to be made available. Extremely sensitive information was accessed by supervisory inspections but the provisions of Section 6 (A) overrode the checks and balances in the existing Act. Recourse to the courts was available only after the information was disclosed. By then it was too late as the information was already divulged and may be in the public domain.

Mr B Mnguni (ANC) asked SAIA to explain the comment that administrative sanctions were punitative and not compensatory in nature.

Ms Moletsane replied that the Bill did not cover consumer protection. She said that there would be parties affected by cases of money-laundering but the Bill made no reference to how the affected parties would be compensated.

Mr Mnguni asked BASA to clarify what policies were affected by the Bill’s conformance to international standards. When asked by Mr Coovadia to clarify his question, Mr Mnguni referred to the comment in BASA’s presentation that the Association had made suggestions for amendments to suit South African conditions but these were not taken into account when the Bill was formulated.

Mr Grobler explained that in many cases, South Africa exceeded minimum international requirements. For example, there was no single transaction exemption in South Africa. However, not all Financial Action Task Force (FATF) requirements pertaining to credit transactions were implemented.

Mr Coovadia replied that the Financial Services Board (FSB) was responsible for interpretation of international standards. He explained that the comment referred to the approach taken by the legislature and the involvement of critical stakeholders in formulating legislation. He cited the National Credit Act as an example of how the interaction of the Regulator with the banking and financial sectors resulted in good legislation that can be efficiently implemented.

Mr Mnguni referred to IRBA’s concern that its core auditing function would be changed if it was required to report to the FIC. He said that if an IRBA inspection revealed non-compliance, it would have to report the matter to the FIC.

Mr Hoosain replied that although IRBA was required to report to the Regulator, Parliament and the public, the focus of the reporting to the FIC was different. He suggested that the multiple reporting requirements were aligned.

Mr Mnguni asked the presenters for their comments on the skills required of members of the proposed Appeal Board.

Mr Grobler said that the focus of the Appeal Board was on the financial sector. The challenge was that the range of accountable institutions was much wider. Provision was made for an assessor but that person had no voting rights.

Mr Hoosain suggested that the Appeal Board comprised members with legal skills (particularly in administrative law) and skills in the financial services industry. Experts in the various fields could be co-opted by the Board.

Ms N Mokoto (ANC) referred to BASA’s comments on the proposed Section 3(C). She considered the section to promote self-regulation by the financial sector and asked why the banking sector assumed that there would be a conflict between the Minister and the Department of Finance.

Mr Grobler replied that the Bill made no provision for self-regulation. Section 3 imposed new powers on the FIC as a regulator and a supervisor. The Bill allowed for effective supervisory bodies to continue operating and for the FIC to carry out supervision in the event of failure of a regulator. The concern over the potential for conflict arose out of the definition of “this Act” as it allowed for regulations to be imposed without following the legislative process.

Mr Moloto referred to the comments on Section 8 in the BASA submission. He asked why Section 31 of FICA had not been implemented.

Mr Grobler suggested that the question was referred to the FIC and Government. He did not know why the provisions in FICA for cross-border cash transactions and cash threshold reporting were not implemented. Both were FATF recommendations. The provisions were now expanded to include bearer document transactions. He did not understand what was meant by bearer document transactions and could not comment on the impact of an amendment to a provision that had not been implemented.

Law Society of South Africa (LSSA) submission
Ms Marilise van der Westhuizen (Director: Deneys Reitz) presented the LSSA’s submission to the Committee (see attached document). In particular, attorneys were concerned by the sharing of information and documents protected by the legal professional privilege and felt that the provisions contained in the Bill conflicted with this privilege. The LSSA was concerned that the rule of law, the doctrine of separation of powers and the independence of the legal profession would be jeopardised by the Bill. In its present form, the LSSA was unable to comply with the additional duties that would be imposed on it by the Bill. The Association objected to the implication that the LSSA would be answerable to the FIC. Weaknesses in the application of administrative sanctions were highlighted.

Johannesburg Stock Exchange (JSE) submission
Mr Louis Cockeran (Legal Council) presented the JSE’s submission to the Committee (see attached document). Comments and suggestions were made regarding the definitions in Section 1, sharing of information in Section 43 and inspections and obtaining documents and records in Section 45.

Discussion
Mr Moloto agreed with the LSSA that non-practicing attorneys and attorneys who did not deal with the financial transactions of clients should be excluded from the Bill. He asked for clarity on the LSSA’s assertion that an administrative injustice would result from the application of administrative sanctions. He said that there were clear procedures that allowed for recourse to the Appeal Board and the courts.

Mr Moloto asked the LSSA to explain why it considered the imposition of administrative penalties to be inadequate.

Mr Moloto said that offences under the Bill and under the Attorneys’ Act differed and asked the LSSA to explain the perceived unfairness of the Bill.

Mr Moloto noted that the LSSA was not the supervisory body for attorneys and asked if the LSSA would consider the delegation of supervisory powers to the Law Society to be objectionable.

Dr George understood that the LSSA had three main concerns: that the Bill infringed on the Constitution, that the LSSA did not have the resources to implement the Bill and that the Bill compromised the independence of the LSSA. He asked if attorneys should be excluded from the Bill or if the supervisory duties should be conferred on another body.

Ms Van der Westhuizen explained that the LSSA was a voluntary body and had no statutory status. It therefore had no supervisory powers. The regional law societies were governed by the Attorneys’ Act. She explained the procedures followed by the regional law societies when dealing with transgressions and complaints against attorneys. She explained how the procedures described in the Bill differed from the law society procedures and why its handling of incidents of non-compliance was considered by the LSSA to be unfair and unconstitutional. She said that the issuing of directives and administrative sanctions were open to significant abuse. No provision was made for an internal appeal process and compliance was required regardless of the accuracy of a directive. She said that judicial recourse was a protracted process and did not achieve the objective of reducing the burden on the courts.

Ms Van der Westhuizen said that a supervisory body was required to consult with the FIC before issuing a directive. This was considered to grant the FIC unequal power in the light of the meaning of the word “consultation” in recent court cases. Directives issued for transgressions varied and could be open-ended. The FIC had the power to override the law societies’ recommendations if it disagreed with them. Even with the assurance of fair and rational action, the LSSA would prefer that the provisions were clearly specified to avoid numerous instances of recourse to the courts. She said that recourse to the Appeal Board and the courts was only available after payment of the penalty. The size of the amounts involved posed a significant financial burden on an attorney and it was expected that there will be a lengthy delay before a case can be reviewed. She said that the formulation of the Bill and the implementation of its provisions were both unconstitutional.

Mr Mnguni referred to the comment made in the JSE presentation that money-laundering threatened the financial stability of the country. He asked if any delay in the implementation of the Bill would result in financial instability.

Mr Cockeran gave the assurance that the JSE supported the principles of the Act. He pointed out that the JSE was not a supervisory body. The JSE questioned the status of directives and suggested that if they were part of the Act, they were issued by one organ of State. The JSE did not consider it proper that failure to comply with a directive was made an offence. It did not question the purpose of the Act and its concerns were over the manner in which the FIC exercised the powers it was granted.

The Chairperson invited officials from National Treasury to comment on the submissions. He asked that the issue of obtaining warrants to access documents and the proposed amendments to Section 26 were addressed.

Mr Moloto asked if National Treasury and the Reserve Bank had to obtain warrants to access information from banks.

Ms Jo-Ann Ferreira (Chief Director: Public Entities Governance Unit, National Treasury) said that detailed responses to both the written and oral submissions would be given on 13 May 2008. She said that warrants were not required in matters of regulatory compliance.

Mr Pieter Smit (Senior Manager: Legal and Policy, Financial Intelligence Centre) confirmed that the current Section 26 will be amended. Clause 7 of the Bill clarified the circumstances when a warrant will be required to obtain documents and records. He explained the different procedures followed by law enforcement agencies. He pointed out that inspections were not client-specific but were carried out on the institution as a whole to ensure its compliance.

The Chairperson thanked the delegates and advised that responses to the submissions will be heard by the Committee on 13 May 2008.

The meeting was adjourned.

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