Finance Intelligence Centre Act (FICA) Implementation: briefing

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Finance Standing Committee

01 August 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
2 August 2007
FINANCE INTELLIGENCE CENTRE ACT (FICA) IMPLEMENTATION: BRIEFING

Chairperson:
Mr NM Nene (ANC)

Documents handed out:
Background to Anti-Money Laundering & Combating of Financing of Terrorism System in South Africa in Implementation of Finance Intelligence Centre Act

Audio recording of meeting

SUMMARY

The Finance Intelligence Centre reported on the implementation of the Finance Intelligence Centre Act which was designed to combat money laundering and the financing of terrorist organisations. They reported that the Finance Intelligence Centre received information from banks, insurance companies and other companies in the financial sector, as well as from non-financial companies such as estate agents and motor car dealers. The Finance Intelligence Centre was liaising with the Finance Action Task Force, and was a member of its East and Southern Africa region. A peer review mechanism was in place, and South Africa would undergo a mutual evaluation during 2008.

The Centre had received over 21 thousand suspicious transaction reports, of which 88% came from financial institutes. These had resulted in 549 referrals to the law enforcement agencies. The Centre did not deal with investigations resulting from its referrals. It had been established during 2002, and still had some developing to do.

Institutions were becoming more aware of their responsibility to assist in combating crime. The Centre confirmed the importance it placed on safeguarding data from public disclosure and abuse.

Members questioned the cost entailed by the Act, both in terms of money and in inconvenience to the law-abiding public. They were concerned over the low ratio of referrals to reports received. More detail was requested on South Africa’s role within the region.

The members then had a brief discussion on a forthcoming oversight visit to the National Treasury.

MINUTES

The Chairperson welcomed the delegation from the Finance Intelligence Centre (FIC). Mr Murray Michell (Director, FIC) introduced the members of the FIC.

Finance Intelligence Centre (FIC) briefing

Mr Murray Michell, Director: Finance Intelligence Centre, gave the briefing which provided an overview of the legislation, placed the work of the IFC in an international context, reviewed the structure of the FIC itself, and gave an update on their work in the past year, and outlined the challenges faced by the FIC.

The key elements were anti-money laundering measures and the combating of financial terrorism. There were six elements to this: criminalisation of activities, the administrative component and the obligations placed on business to support the Finance Intelligence Centre Act (FICA), law enforcement, supervision, the FIC itself, and international cooperation.

FICA had been passed in 2001. It created an environment to combat the practice of money laundering. Concerns were the integrity of the financial sector, the identification of the proceeds of suspicious activities and also the financing of terrorist organisations. FICA had also shown the need for building partnerships between the private and public sectors. The Act complemented the Prevention of Organised Crime Act ("POCA") and the Protection of Constitutional Democracy Against Terrorist and Related Activities Act, Act 33 of 2004 ("POCDATARA"). There was an obligation on business in nineteen different categories. Staff had to be trained to implement the Act.

Mr Michell said that the FIC dated back approximately twelve years, whereas other countries had started to take anti-money laundering measures in the 1980s. There had been a rapid integration into world trends from the late 1990’s in order for South Africa to meet international standards. The standards had evolved at the same time, which had an impact on South African practice and legislation. The attacks of 9/11 had been a main force in measures to combat the funding of terrorist organisations. The methodology had changed, and there were many ramifications to this.

He showed that there were various structures involved in the battle to combat financial crime, and FIC served as a pivot to their activities. On the one had there was formal business such as banks, insurance companies and financial intermediaries; on the other non-financial institutions such as estate agents and casinos also dealt with large amounts of possibly laundered money and also had to be involved. The National Treasury also played an oversight role, while the FIC played a regulatory role and made policy. It also had an intelligence relationship with law enforcement agencies, although he stressed this was not in the normal understanding of the term ‘intelligence’.

In the international context, Mr Michell added that there were three United Nations (UN) conventions that applied while there were also various Security Council rulings. As a member of the UN, South Africa was obliged to implement these obligations. Standards were set by the Financial Action Task Force (FATF). South Africa had been invited to join this body in June 2003. The body set international standards, which were knows as the 40 Regulations and 9 Special Regulations. There were 33 members, grouped into nine regional bodies. South Africa fell under the Eastern and Southern Africa region, and was one of fourteen members. The FATF worked with bodies such as the International Monetary Fund and the World Bank.

Mr Michell said that a range of government departments were involved. The FIC had a particular mandated to assist with anti-money laundering and combating of financial terrorism operations. FIC’s main role was to receive and disseminate information. It also had a role to oversee the various supervisory bodies.

The FATF stressed that a key area was mutual evaluation, which should take place in the form of peer review by all members. South Africa expected to be evaluated in mid-2008. The resulting report would guide the member into taking remedial actions.

He said that credit rating agencies had a role to assess the risk rating of customers. High thresholds were set which made it difficult to implement regulations. Recent evaluations showed that everybody was suffering under the regulations. It was important that FIC had to understand the core elements of the regulations, and after that there would be time to work on the “nice to have” features. FIC submitted reports to Parliament regularly and briefed the Minister of Finance on a daily basis.

Mr Michell said that FIC had relationships with accounting institutions, supervisory bodies and law enforcement agencies. He described the reporting cycle between the different bodies. The FIC was part of a “value-added” chain. There was an obligation on the FIC to share information with equivalent structures. There were strict protocols in place to regulate this process. It was part of a global network. There was an obligation on accountable institutions. More categories might be needed, and this would be the subject of further discussions. Concerns were cash transaction reports, electronic funds transfers and cross border funding. The FIC would request promulgation of regulations when the integrated technology (IT) to deal with these reports was ready.

Suspicious transaction reports (STRs) were generated by institutions. In terms of Schedule 2 of the FICA, supervisory bodies had to monitor the level of compliance with FICA. A phased approach had been taken, starting with banks and then spreading the blanket to other financial institutions. The banks were doing good work, and were setting the standard. Some non-supervised sectors, for example motor car dealers, also had an obligation to report STRs, and the FIC was wondering what to do about them. They would like to see FIC step into the breach, but additional powers were needed to achieve this.

Mr Michell said that the monitoring of compliance had to happen at a low level. The approach was to work closely with supervisory bodies, with joint assessment of results. FIC was already getting valuable information.

He then outlined the structure of the FIC. It was a huge task to have a correct sense of tracking transactions. Referrals were made to law enforcement agencies where appropriate. The integrity of information needed to be protected. Referrals could lead to specific investigations. Regular feedback was needed to understand the quality of information. Statistics were being gathered to determine the reliability of information. The ideal process was for there to be reporting followed by feedback.

Mr Michell said that the FIC was regarded as being a juristic person. It was part of the public service. He felt that business people should also be involved. FIC was accountable to the Minister of Finance. It was currently housed in the National Treasury building, but was looking to relocate. Treasury was supposed to help, but had messed up a bit. There was no money at present for IT systems, and FIC was currently using the Treasury system. They were now starting to move away from the Treasury. The FIC did not always understand the work being done in the industry, but they needed to guide business practices.

He said that Ms Fikile Zitha (Manager: Legal & Policy, FIC) had recently been in Mozambique where she had assisted their structures.

Mr Michell said that there were three main structures in FIC. These were related to compliance and prevention, monitoring and analysis, and legal and policy. The Annual Report would be completed in the next few weeks. A lot of work had gone into amending legislation. The FATF had highlighted current discrepancies. There were two processes. An amendment to the FICA would be presented late in 2007. The other was more a longer term plan vis-à-vis intelligence practices and resulted form the evaluation conducted during 2003. FIC was seeking to be proactive, and was preparing for the mutual evaluation process.

He said that there had been 21 466 STRs to date. The majority were from financial institutions, and some 12% from the non-financial sector. This had resulted in 549 referrals to investigative authorities, involving an amount of more than R1.4 billion. He could not report on the state of investigations. There had been a gradual increase on a year-on-year basis.

Mr Michell said that there were some achievements in compliance and prevention measures. On site visits had been made, and audits had been done on the various sectors.

He said that FIC employed several interns. The regulations created a market for compliance officers, and the training given to these interns made them very attractive candidates for the private sector, which resulted in a high turnover of staff. More funds were needed for training.

The Auditor General had given FIC a clean audit, and this was a compliment to the organisation’s Chief Financial Officer. History showed that an amount of R73 millions had been allocated in the first three years of the legislation, when FIC was still a non-existent entity. The surplus had been held over until implementation had started. There had been some rollover of funds.

Mr S Asiya (ANC) said that the content of the presentation was moving into the territory of the Annual Report.

The Chairperson said that it might save time if Mr Michell moved on rather.

Mr Michell continued with the next steps to be taken. Capacity had to be built in the law enforcement agencies. Compliance and prevention followed a risk-based approach, and they were working with international bodies such as their counterparts in the United Kingdom. Implementation was following a three year cycle. New legislation would have to make provision for an inspectorate to cross over the various sectors and supervisory bodies. He asked how FIC could be proactive. The organisation was growing, and would be moving to a new building. FIC needed to be independent. He wished to see FIC in its own property within two and a half years from the present. A massive scoping exercise was being undertaken to determine IT requirements. It was being modelled on systems used in Canada and Australia, and would be world class. The system would have to be tested thoroughly, and would have to be secure.

Mr Michell said that the staff numbered 135 at the end of the financial year. It was envisaged that this would increase to 350 to 400. Some functions such as IT were being outsourced. There was also an increasing number of seconded staff. This helped to build up; knowledge and stimulated the flow of information between the different bodies.

Discussion

Dr G Woods (NACEDO) cited an article which had appeared in the Mail & Guardian newspaper the previous day under the title of “FICA’ed to Death”. The implementation of FICA was proving to be a pain for law abiding citizens while it was only an irritation to criminals. The provisions of the Act were more onerous than those in the United States and United Kingdom. The cost to the local industry was estimated at R750 million, and this did not take into account the inconvenience caused to the public. He asked if there had been complaints, and if there was any thought to relax the regulations.  In other countries, the approach was more to concentrate on risk areas. There had been a deluge of paperwork. He noted that there had been over 21 thousand STRs, but he suspected that there was a low conviction rate. He had met the Financial Service Board. There some 16 thousand service providers in the financial industry. They had great influence in financial maters, and were outside the banking and insurance areas. He asked how they would be accommodated.

Mr D Gibson (DA) was aware of the huge intelligence dimension. There was an obligation to the intelligence community. It was not possible to quantify how much crime had been prevented by FICA. The public were complaining about high bank charges, and the banks countered that they had to find the money to pay for the costs of compliance to FICA. The customers had to pay for this. He said that 99% of the public were honest. There was an enormous amount of paperwork, and he had had to submit documentation on a dormant bond account in case he wished to have a re-advance on this at some future stage. He noted the discrepancy between the number of STRs and the number of referrals: 21 000 STRs with just 549 referrals. FIC could not say how many cases had been prosecuted. He asked how many convictions there had been. He asked if a cost benefit analysis had been done on the implementation of FICA.

Mr B Mnguni (ANC) commented that FIC was playing a catch-up role. He asked if other countries in the region would also be catching up. He asked how far FIC was to having its full staff complement. He asked if the seconded personnel were complicating the issue of confidentiality.

Mr K Moloto (ANC) asked if there was any feedback on the benefits of FICA. Compliance was a challenge. The KPMG company had done an international comparison of anti-money laundering practices. He asked if there were any Memorandums of Understanding (MoUs) with other countries in the region.

Mr Michell replied that the KPMG survey had covered most areas. Banks had initially dug in their heels against the FICA, but the attitude was changing. On the subject of integration, it was envisaged that it would take up to five years to get FIC established properly. The compliance elements were in place. It was now the fifth year of the organisation’s existence. At present the core staff of 135 were in place, and there was a spread of compliance and monitoring functions. It would take another three years to have FIC fully functional, and they were working towards this goal. They were on track.

Mr Michell said that they were in consultations with other countries. They were very much in line with international practice, and followed a one-on-one relationship with some countries. FIC was on the very front of the curve, in particular in regards to IT and electronic systems for reporting and analysis. This was heartening. They were also on a par on the reporting side. The ratio of reports to referrals was in line with international experience. The majority of reports had been considered. Some were placed on the database only for future reference. They remained suspicions of illicit activity but were not proof. Proving offences was beyond the scope of FICA. There was seldom a one-to-one relationship between STRs and referrals. Normally a number of STRs led to a single referral.

Mr Pieter Smit (Analysis and Senior Manager Legal & Policy, FIC) said that banks had now focussed their process in regards of compliance. They had had to play a catch-up role at first in obtaining the details of existing and new clients. They had adopted a cautious approach, and were not relying on their internal systems to cross-check on multiple account holders. It was a learning process. They were taking these lessons seriously and aspects would be included in the forthcoming Amendment Bill.

He said that banks were beginning to understand the activities of their clients and to improve their business relationships. There was still a large amount of work to improve this in the foreseeable future. The client had been on the receiving end, and there had been a considerable hassle factor. This was part of the business internationally. South Africa was falling behind international standards. Institutions had to know more about their clients. In some instances more interrogation was needed. Money spent on implementation systems exceeded expectations, as international standards were revised. The African and Middle East regions were spending a higher percentage of funds on this aspect that other regions.

Mr Smit said that this was indicative of lots being done to reach the same level as other countries, and comparisons were made to Europe and North America. South Africans had to be able to compete on an equal basis with international business, and much depended on the trust in the integrity of information. South African regulations exceeded international standards in some areas, but some work was still needed in others. Feedback was given by FIC. Mutual evaluation would take place.

He said that one should not assume that less cost would result in less or more of the hassle factor. This would have to be determined. In South Africa there was an expected perception that clients would change their attitude. Monitoring was in place, and new business was compliant. Institutions had been given guidelines. There should be cross checking of activities on different products of the institutions. He admitted that the hassle factor would always be there to some extent.

Mr Michell said that no cost benefit analysis had been undertaken. Researchers had been appointed to begin the process of improving the FIC. Understanding of the environment would improve the effectiveness of FIC, and would identify blockages. This would enhance the efficiency of the organisation. This would relate to convictions. The Minister had referred to this during June. He could not say how many investigations were underway, nor how many convictions had been achieved. This was a matter of concern, and had been discussed with law enforcement agencies. The provisions of POCA were already in place and available to all agencies. They could not influence the investigations, and that was a concern. FIC would need to provide a standard. More investigations would have to be cleared with a financial component. . Details of convictions for money laundering could not be made public in the media. FIC needed to intervene to ensure that all the elements of the chain were linked.  A case could then be prepared and a conviction secured. They needed to understand the system better, and it could then be a model. New tools would include the ability to analyse a product.

Ms Zitha said that MoUs could only be signed with governments which had established their own FIC structures. They had agreements in place with Zimbabwe and Mauritius, and were in the process of establishing agreements with the Seychelles, Namibia, Nigeria and Mozambique. They were assisting Mozambique to establish their structure.

Mr M Malan (FIC) said that there was a framework of nineteen categories. The system was compartmentalised. Good business sense was needed. The process needed to be cleaned up. It was possible that criminals would abuse financial institutions. Financial advisors were subject to a direct licensing authority, and FIC needed to play an oversight role.

Dr Wood asked what the nature of the services provided by the 16 thousand financial advisors was. They might be vulnerable to money laundering practices. He asked if they were accredited.

Mr Smit said they were, and their services were divided into categories.

Mr S Dithebe (ANC) asked about the number of STRs, referrals and the amounts of money involved. He was concerned about the security of information. He asked if sufficient measures had been brought into place. He asked what would happen if any of these untested allegations were leaked to the media. He asked what the risks were. Information had to be processed properly. He asked about the number of STRs which did not lead to referrals. He asked if the FIC would be entitled to any portion of funds recovered should cases be prosecuted successfully. He asked what role could be played by organisations such as Business Against Crime. He asked if FIC had a long term plan for the implementation of measures incorporating the international peer review mechanism. Motor car dealers had no supervisory body. He asked if they would be automatically placed under FIC supervision or if the legislation would have to be amended.

Mr S Marais (DA) asked about other sectors such as motor car dealers. He asked if the one slide in the presentation suggested that a new ministry should be created to implement FICA. All the information was overwhelming to the layman. He asked what lessons had been learnt, and what challenges still faced FIC. He wanted to know how fraudsters were still succeeding to launder money. At least 95% of citizens were honest. Many fraudulent transactions started in cyberspace. Money mules were used to handle small transactions, and their actions escaped notice. The priority was rather to prevent than be retrospective.

Mr Y Bhamjee (ANC) had a cryptic input. It was difficult to understand the major concerns. The Act was broad, and there were overlapping areas which led to conflict. There was a need to focus on specific issues. One of the aims of FICA was to combat the financing of terrorist organisations, and yet the country setting the policy was one of the major terrorist nations. He referred to a book called “Confessions of an Economic Hitman” which described how major corporations engage in fraudulent actions. These companies were destabilising the economies of other countries which drove them into a state of subservience. He asked if FIC’s work should not focus rather on what it deemed important.

Mr Asiya said that one should look at strategic plans and objectives so that the Committee could fulfil its oversight role. It seemed that FIC worked in a number of silos. MoU’s had been concluded with other countries, but he asked if there were MoU’s in place domestically or if regulations sufficed. He commented on the migration of staff in that they seemed to leave as soon as they were trained. Sensitive intelligence issues were involved. He asked what would happen if criminals were able to bribe FIC staff. Money talked, after all. He asked if there was any risk management plan in place. It was a poor show that the Committee had not met with FIC for two years. There should have been more regular meetings and briefings.

Mr Mnguni said that FIC would need more staff from other agencies. He asked if there would be any compromise of confidentiality. He asked if the oversight rule played by FIC would not eventually lead it to becoming a law unto itself. On the subject of intelligence interaction, he asked if any policy issues were being discussed.

Mr Michell said that information, staffing, relationships and risk control were all huge concerns. It was a continuous process to identify and develop controls. Integrity of information was the core, and was embedded in legislation. Information was protected, and staff were not at liberty to make disclosures. The penalty was immediate discharge. MoU’s were in place, together with contracts, value systems and vetting of personnel. All risks could not be eradicated, but there were attempts to reduce risks to an acceptable level. This was the culture of the organisation, and the way they worked. There was a robust ethical and value base. A Code of Conduct was in place, which was linked to a full understanding of the institution’s work. It was a complex issue, and he admitted to having sleepless nights. Any breach of security could destroy trust. There could be no consistent public/private partnership if there was no data integrity. This applied to all persons involved with FIC. They had to live by this ideal, and a sense of loyalty was required.

Mr Michell presumed that this applied to the other departments involved. He trusted that other agencies were watching this example. FIC was on its guard against false information. It also needed to ensure that information exported to other countries was not being abused. There was a collective approach across the law enforcement spectrum.

Mr Michael Melazi (FIC) asked how all countries were meeting standards. A common evaluation was needed. The region had its base in Dar es Salaam. Many countries lacked resources. There was an intermediate process underway to evaluate their needs and to assist where needed. Once this was done, then the full mutual evaluation process could be applied. In 2005, SADEC financial ministers had agreed on an annex concerning anti-money laundering. There had been another agreement during the current week on this subject. All participating countries would sign this agreement soon. The African Peer Review Mechanism was a governance issue. Some were busy with anti-corruption initiatives. These could then be incorporated into a larger system.

Mr Smit added that the FIC was not entitled to benefit from the money recouped from criminals. These funds were administrated by a committee representing law enforcement agencies and the Departments of Justice and Finance. This committee decided on the distribution of funds. The FIC was not contemplated in these regulations, and other agencies were better placed to make use of such funds.

Mr Michell said that FIC was a member of the steering committee of Business Against Crime. They were committed to share their experience and insights. It was an additional forum to interact with business on a broad front. The question was how to deal with commercial crimes. There was a broad co-ordination and allocation of resources. Technical assistance and training was being provided. No details were available from the information database. There were legal constraints on the sharing of information with other SADC countries.

He said that banks were dealing with a number of issues. They had had to focus on a mammoth task, and it could not all be done at once. Key areas were co-ordination, assistance and collaboration. A joint approach had been taken with the sharing of information. There were common objectives although each party had its different strengths. Members had to understand that FIC was a very new institution. It was a new legal tool, and a new capacity. There was a long struggle to gain trust. The challenge was on how to ensure that information would be as useful as possible. The strategic plan was a major focus area. There were central issues, but he felt these could be held over for a future discussion.

Mr Nischal Mewalall (Deputy Manager Monitoring and Analysis, FIC) said that a better understanding of the extent of money laundering was being reached. There was no current research. SABRIC was an institute set up by the private sector. The banks had worked together to develop a private sector organisation to identify risks. One key area was the development of strategic analysis. There were legal restraints on the sharing of information. FIC was working with SABRIC to develop a better model. The FIC was pushing towards rapid results rather than waiting for research to be completed. There was a closely developing relationship with the Serious Commercial Crime Unit. There was a national strategy to combat crime.

Mr Michell said that what he was seeing was a question of how to cease being reactive. He wanted a sense of where FIC would be going in the next five years. There was ongoing discussion, but there was agreement that this would be the right direction to take. The process was designed to be proactive. Projections were made into the future. Crime in cyberspace was a huge threat, and new technology became available constantly.

Mr Michell asked how they could ensure compliance, and who was responsible. The tools, benchmarks and criteria had to be there to measure progress. Skills had to be developed. Structures were based on past experience. There was value in the interaction with the FATF, and topology reviews were happening. There were new forms of money laundering being devised constantly. FIC needed its own ability to learn from what it had seen. It was young, and not yet set in its own mould. He hoped that the organisation would be flexible.

Mr Michell stated that there was a point that there were areas where responsibility at ministerial level was uncertain. There were mandates, and FIC was a small part of a big process. It was part of the process of checks and balances. Interaction with the UN was mediated through the Department of Foreign Affairs. Calls to combat financial support to terrorist organisations were directed to states, and these were also mediated by Foreign Affairs. In terms of regulatory components FIC worked with the relevant Ministers and Departments.

The Chairperson said that this had been an elaborate presentation. The engagement had been useful. He planned to reduce the two year gap between FIC’s meetings with the Committee. The Annual Report and Strategic Plan were under review, and he wished them well

Mr Michell agreed that the two year wait had been two long. Issues had been highlighted, and this would help the Committee more in its business. Opportunities were needed to meet with the Committee. He appreciated that there were sensitive issues involved, and there were legal limits to what could be disclosed. Discussion was needed on these issues.

The Chairperson said that a closed meeting could be called if necessary. FIC should perhaps have been informed of this possibility.

Discussion on Oversight Programme (13 - 17 August 2007)

The Chairperson excused the delegation from FIC. He then discussed the programme for oversight visits. As there were no comments, he assumed that all members were happy with this.

Noting the visit to National Treasury, Dr Woods said that he did not like the notion of the Members attending a training session or a workshop. As Members of Parliament they needed to retain a sense of objectivity. He agreed that they should make the visit and gather information, but should not be trained to do a job at Treasury.

The Chairperson agreed that this matter should have been raised. This was really an oversight visit in which some information would be imparted.

Mr Gibson asked if the programme for days two and three could be swapped, or some adjustment could be made to the time. The DA Members were required to attend a caucus meeting on the Thursday of that week, and would have to leave for Cape Town on the Wednesday evening.

Mr Nene said that the Thursday had been earmarked for a visit to the South African Revenue Service. This would be an important session for some members. He would check on the possibility of making changes.

Mr Moloto asked what the time was for the meeting the next day.

The Chairperson replied that it would be from 09h00 until 12h30.

Dr Woods said that it might be difficult to swap the programme around at Treasury. The first day was organisational, and he understood the second day would be a working session.

Mr Dithebe felt the visit should be an exchange of information. They could discuss other dates. The tax discussion should be simple.

The Chairperson thought that this might be the reason for the planned training.

The meeting was adjourned.


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