Financial Intelligence Centre Amend Bill & Mineral and Petroleum Resource Royalty Bill [B59-2008]: Response to hearings

Meeting report

Financial Intelligence Centre Amendment Bill: Response to submissions by Treasury and FIC
Ms Jo-Ann Ferreira (Chief Director: Legislation, National Treasury) and Mr Pieter Smit (Senior Manager: Legal and Policy, FIC) briefed the Committee on the FIC’s responses to the comments received on the Financial Intelligence Centre Amendment Bill (see attached document).

Seventeen organisations submitted comments and recommendations.  The issues raised under each clause of the Bill were summarised.  The responses from National Treasury and the FIC included explanations for the acceptance or rejection of comments and answers to questions raised in the submissions.

Under Clause 1, the comments regarding the definition of ‘this Act’ were accepted.  Replacement of the term ‘of’ by ‘with’ in the heading of Clause 2 was accepted.  Comments concerning the legal professional privilege under Clauses 10 and 11 and under Section 37 of the principal Act were accepted.  The suggestion that Schedule 2 to the Act be amended was accepted.  104 comments were not accepted or considered not necessary.

Discussion
The Chairperson asked if clarity was requested where the issues raised in the submissions were not clear.

Ms Ferreira replied that the Johannesburg Stock Exchange (JSE) and the Law Society of South Africa (LSSA) approached National Treasury to obtain clarity after the oral submissions were heard.  She was satisfied that the broader issues were adequately addressed in the Bill.

Dr D George (DA) said that the Committee was given the assurance that all the supervisory bodies had been consulted.  It would appear from the comments that the position of the supervisory bodies was still some distance from that of National Treasury.  In terms of clause 13, guidelines in respect of the powers of the FIC still had to be agreed with the supervisory bodies but he was concerned over the apparent distance between the parties.

Mr Smit listed the entities that submitted comments and said that discussions were held with National Treasury, the FIC, the Financial Services Board (FSB) and the South African Reserve Bank (SARB).  The Independent Regulatory Board for Auditors (IRBA) was initially uncertain about the roles played by IRBA and the FIC but the concerns were being addressed through ongoing consultation.

The Chairperson remarked that the Bill was intended to ensure that the country was not regarded as a safe haven for money-laundering and fully complied with international standards.  He was satisfied that extensive consultation took place and did not expect the FIC to reach consensus on every comment.

Ms J Fubbs (ANC) asked what was meant by the response that a comment was ‘noted’.  She asked why the suggestion from the Casino Association of South Africa (CASA) that terminology such as ‘suspicion’ and ‘opinion’ should be qualified with ‘reasonable grounds’ was not accepted.

Mr Smit explained that the response ‘noted’ essentially meant that the comment was in agreement with the FIC’s position.

Ms Fubbs said that it was not clear what will be done in the case of CASA’s comment about the issue of prior notice.

Mr Smit explained that the FIC agreed with CASA that prior notice would defeat the objectives of an inspection.  However, an inspection will be held on an agreed date so there was an element of prior notice.  The FIC did not agree that guidelines in this respect were appropriate.

Ms Ferreira replied that jurisprudence allowed for what constitutes ‘reasonable’.  Adequate guidance was provided for inspectors and provision was made for recourse should any unreasonable action occur.

Mr S Marais (DA) remarked that the proposed penalties were substantially higher than the amounts that the courts imposed and asked why the submissions on this issue were rejected.  Clause 8 dealt with cross-border cash conveyance and applied to individuals only.  He asked if a loophole was created because the clause did not apply to businesses.  Comments made by CASA on Section 45(B) (clause 14) were not accepted but no reasons for the rejections were given.

Mr Smit said that the criminal penalties provided for in the Act were among the highest provided for in the justice system.  The issue was the deterrent effect that needed to be part of both criminal and administrative sanctions.  The amounts quoted in the Bill were the maximum applicable.  The amount of the penalty imposed will depend on the given set of circumstances.  In the criminal context, courts seldom applied the maximum amount of penalty and he expected a similar trend in the application of administrative penalties.  The amount will depend on the magnitude of the offence.

Mr Smit explained that the provision dealing with cross-border cash conveyance applied to persons in their individual capacity.  A person will have to declare the cash and travelers cheques he had with him when crossing the border.  The provision does not apply to remittance payments by businesses and other regulations were applicable.

The Chairperson asked if this would apply if a person was carrying cash on behalf of a company.

Mr Smit replied that the provision will apply. Such transactions were usually done electronically.

In response to Mr Marais’ question, Ms Ferreira explained that where a response of ‘not accepted’ only was given, the issue may have been addressed in an earlier response in the same section.  She said that provision was made for appeals and there was no intention to circumvent the courts.

Mr N Singh (IFP) wanted reassurance for the Committee that consultation took place to clarify any unclear issues.  He asked what the financial implications of the implementation of the Bill were for the State.  He complimented National Treasury and the FIC on the way the comments and responses were presented to the Committee.

Ms Ferreira explained that a response of ‘not understood’ was used when the comment fell outside the context of the Bill or if it related to another issue.  She felt there was adequate understanding by the parties on the issues and offered to add further details to the Committee where necessary

Ms Ferreira said that initial assessments of the cost implications were done by supervisory bodies.  National Treasury was consulting with the supervisory bodies on providing funding for inspections, either through the existing levies or through additional funding by the State.  A need for additional personnel and a restructuring of the FIC was identified.  She pointed out that the Bill will only take effect in 2009 and there was sufficient time to make provision for adequate funding in the following year’s budget.  She said that National Treasury was aware of the economic constraints in the business environment and would assist as far as possible.

Mr K Moloto (ANC) asked if there was a definition of ‘in the public interest’ or if it will be left to the courts to interpret this on a case-by-case basis.  He asked if the recovery of the costs of inspections would be regulated and wanted to know what the international practice was in this regard.

Ms Ferreira replied that the phrase ‘in the public interest’ appeared only under the section in the Bill dealing with inspections.  The intention was to warn the public of any nefarious practices that may be uncovered.  Provision was made for prior consultation before information was made public.

Mr Smit said that supervisory bodies were allowed discretion in the matter of the recovery of the costs of inspections.  Costs would be determined according to their normal business practices.  Standards differed from supervisor to supervisor and from country to country.  He said that the FIC was reluctant to prescribe to supervisory bodies.

Mr Smit said that the legal privilege applied to advocates as well.

The Chairperson thanked the presenters and advised that the Committee will consider the Bill on 14 May 2008.

Response to submissions on Mineral and Petroleum Resource Royalty Bill
Mr Cecil Morden (Chief Director: National Treasury) briefed the Committee on National Treasury’s responses to the comments received from thirty entities on the Mineral and Petroleum Resource Royalty Bill (see attached document).

Comments were received from thirty interested parties and covered both issues of policy and technical matters.  Mr Morden explained the State’s motivations and policy under each point before taking the Committee through the applicable comments and responses.

The issues included the tax base, deductible expenses and integrated companies, the tax/royalty rate, community royalties, lease payments and share of profits payable to the State, earmarking of royalty revenue, provision for bad debts, relief for small miners and marginal mines, the gold mining sector, the petroleum sector, coal bed methane gas extraction, promotion of fiscal stability, mine dumps and tailings, the date of implementation, income tax deductions, VAT on royalties, brick-making clays, ring-fencing and the administration of royalty returns.  The Bill will come into effect on 1 May 2009.

Mr Jacinto Rocha (Deputy Director-General, Department of Minerals and Energy) explained the lease agreement between De Beers and the State for the Finsch Mine.  Royalties were payable in addition to the lease payments in the case of this kimberlitic mine.

Mr Keith Engel (Chief Director, National Treasury) explained the issue of agreements between Government and mining/oil companies to promote fiscal stability.  The change in the tax base to EBIT (earnings before interest and taxes) addressed the issue to a certain extent.  Mr Morden added that National Treasury did not consider it appropriate to apply international legislation on fiscal guarantees.

Mr Morden said that the intention was to include mine dumps in the payment of royalties on the minerals extracted.  Mr Rocha explained that the court ruling referred to on page 27 of the response document applied to the dumps in Jagersfontein only.  That dump was not licensed under the Minerals and Petroleum Resource Development Act (MPRDA).  The Department of Minerals and Energy (DME) was working on an amendment to the MPRDA to ensure that old order mining rights on dumps were included.

An explanation of ‘the first saleable point’ and a list of what were considered to be ‘refined’ and ‘unrefined’ minerals were submitted.  These concepts applied in the determination of royalties.

Discussion
The Chairperson asked whether the DME supported the Bill.  He said that the Committee had to ensure that the Bill did not undermine the objectives of the MPRDA.

Mr Rocha replied that the DME worked closely with National Treasury on the drafting of the Bill and the responses to the submissions and comments.  He said that the DME and National treasury were in agreement on the Bill.

Mr Mnguni agreed with the change in the formula to calculate the royalty rate (i.e. from EBITDA (earnings before interest, taxes, depreciation and amortization) to EBIT).  He asked how many petroleum exploration fields were in production and how much the State expected to receive in royalties from these fields.  He asked if the environmental impact assessment done on the Jagersfontein mine dumps was affected by the licensing of the dumps.

Mr Marais complimented National Treasury on the manner in which the comments and responses to the Bill were dealt with.  It was apparent that the input from stakeholders was taken into consideration in the preparation of the Bill.

Mr Singh noted that ‘unrefined mineral’ and ‘concentrate’ had the same meaning.  He suggested that one or the other phrase was used in the interest of clarity.  He wanted to know if there were any changes to matters of policy that required further consideration by the stakeholders.

Ms Fubbs asked how communities, that held the rights to royalties from mining activities in their area, would be affected by the Bill.  She was concerned that the court ruling on the Jagersfontein dumps could set a legal precedent and asked if there were other similarly affected dumps.

In response to Mr Mnguni’s questions, Mr Morden said that provision was made for a minimum royalty rate of 0.5% to apply.  He explained that the petroleum industry in South Africa was very small and although there were a certain number of exploration initiatives along the coast, significant finds were unlikely and the amount of royalties anticipated was not expected to be a major source of revenue.  Nonetheless, the Bill made provision for royalties on crude oil and natural gas.  Coal bed methane gas was expected to be produced much sooner.

Replying to Mr Singh’s questions, Mr Morden agreed that there needed to be consistency in the terminology used in the Bill.  He said that a workshop was held on 23 April 2008 with the major stakeholders to present the implications of the Bill.  The final version of the Bill would be circulated for technical comments but no changes in matters of policy would be made.

Mr Engel explained that the royalty was payable on the transfer of the mineral.  In cases where the mineral was mined before the effective date of the Bill and was subject to a royalty payment in terms of a State lease, there may be a double royalty charge if the mineral is transferred after the effective date.  It was not the intention to impose double royalties.

In response to Ms Fubbs’ questions, Mr Rocha said that the MPRDA dealt with the licensing of dumps in existing mining areas.  For example, the mine dumps around Johannesburg were being re-processed under old order mining rights in the MPRDA.  The old order rights must be converted by 30 April 2009 and a new order license issued.  Royalties took effect on 1 May 2009.  The dilemma with the Jagersfontein dumps occurred because they were unlicensed and the court interpretation was that the dumps fell outside the MPRDA.  The DME disagreed with this interpretation and was engaged in amending the MPRDA to allow for the licensing of all dumps.

Mr Rocha explained that the Namaqualand Trust was created before April 1994.  It was an agreement between the Local Government and the State for royalties to be paid into the Trust for the benefit of the community.  The Trust did not own any mineral rights.  This differed from the Royal Bafokeng agreement with Impala Platinum and the transfer of land with its mineral rights from the former Zululand homeland into the Ngoma Trust.  He said the question of royalty payments depended on whether the community involved actually benefited or not.

Mr Morden added that National Treasury intended to convene further discussions with the DME and the Department of Land Affairs in an attempt to work out a reasonable and sensible solution to the issue of community royalties.

The Chairperson thanked the presenters and advised that formal consideration of the Bill was scheduled for 27 May 2008.

Mr Morden advised that it may be necessary to postpone the formal consideration of the Bill.  The Chairperson requested that a formal request was submitted to the Committee.

The meeting was adjourned.