THE BANKING COUNCIL

23 February 2001

FINANCIAL INTELLIGENCE CENTRE BILL

With reference to B1 – 2001 Financial Intelligence Centre Bill (Money Laundering Bill) and its consideration by the Portfolio Committee on Finance, jointly with the Portfolio Committee on Justice and Constitutional Development, we hereby make the following motivated comments on the detail of the Bill for consideration. It would also be appreciated if, should the Committees decide to hold public hearings on the Bill, we could appear before the Committee to make verbal representations over the period 27 – 30 March 2001.

  1. General Comments:

    1. As noted in the Memorandum on the Objects of the Bill (in clause 2.1) the Bill is necessary to complement the Prevention of Organised Crime Act, 1998 and to comply with the recommendations of the Financial Action Task Force on Money Laundering (section 2.11). We therefore urge the Committees and parliament to process the Bill as a matter of urgency.

    2. The key implementation details of the Bill will obviously be set out in the Regulations, per section 53 of the Bill. However, this section restricts the Minister's competency to making Regulations only "after consulting the Council and the Centre." It is therefore critical that the Minister urgently address the appointment of the Money Laundering Advisory Council and the Director of the Centre so that these can become functional as soon as possible after promulgation of the Bill.
    3. While cognisance must be taken of the sovereignty of our neighbouring states, the "seamless" financial environment within the Common Rand Monetary Area (i.e. including Lesotho, Namibia and Swaziland) demands that effective Rand-based anti-money laundering efforts include these member countries as well. Failure to do this will result in opportunities for local crime syndicates to exploit money-laundering opportunities in these countries, thereby largely negating the impact of this Bill and its associated costs.

2. Specific Comments:

    1. Definitions – "accountable institution"

      2. We remain concerned at the narrow focus (in terms of "know your client" and compulsory record keeping) imposed by the FIC Bill through the emphasis on a limited range of "accountable institutions." By its very nature this will create gaps which can/will be exploited by money launderers. This is also in contrast to similar legislation in the USA or EU, for instance, which refers to "every person" (i.e. similar to the Prevention of Organised Crime Act, 1998).

      The motivation for this restricted focus is apparently given in section 2.11 of the Bill's Memorandum where it is stated that the Bill, when implemented, "will produce an anti-money laundering regime substantially in compliance with the recommendations of the Financial Action Task Force on Money Laundering, a multi-lateral body which co-ordinates international anti-money-laundering policy. The Bill aims to achieve this compliance without making unnecessary or inappropriate demands on the country's resources".

      It is unclear whether this particular compromise of restricting the impact of the anti-money laundering scope to only the defined "accountable institutions, will meet with the approval of the Financial Action Task Force on Money Laundering (FAT-F). Government needs to state unequivocally whether the Bill as tabled meets with FAT-F approval, failing which local financial institutions are at risk of being excluded from the global international financial sector.

    2. Definitions – "proceeds of unlawful activities

      3. According to legal advice which we have (and have shared with government). the concept "proceeds of unlawful activities" is difficult to apply legally to tax evasion (i.e. there is a legal obligation to pay tax, but no clear identification of the "proceeds" of such tax evasion). We recommend that a clause be introduced into the Bill to clearly and unequivocally state that the Bill applies to tax evasion to prevent any continuing uncertainty over whether tax evasion is or is not included in the concept "proceeds of unlawful activities".

    3. Section 16(1)(h) – Composition of the Council

      4. Given the wide-ranging impact of the Bill on the whole range of "accountable institutions" identified in Schedule 1, it would seem inappropriate that the whole private sector (as encompassed by the list of accountable institutions) is represented on the Council by only one representative. We would propose that the government/regulatory and private sector representatives be equally balanced in terms of numbers each to ensure fair discussion and perspective. This more equitable representation would also more appropriately meet the Object of the Bill (as stated in section 2.5 of the Memorandum) of being "a forum in which the Centre, accountable institutions and supervisory bodies can consult on anti-money-laundering policies and measures. The Council therefore gives practical expression to the notion of a partnership between government and the private sector in the fight against organised crime with special reference to money laundering" (emphasis added).

    4. Section 22 – Identification when transactions are concluded in the course of a business relationship

      5. This section covers the existing mass of business relationships in existence when the proposed Bill is enacted. While it makes provision for "reasonable steps" within "a reasonable period" it will be very expensive to implement depending on how new prescribed "reasonable steps" differ from historical/current client identification procedures. It could also be very disruptive should all transactions on certain accounts have to cease in terms of subsection (2). Pragmatic regulations and exemptions, as well as realistic time frames are therefore essential for the implementation of this section.

    5. Section 23 – Record to be kept of business relationships and transactions.

Section 23 (1) states, inter alia, that "Whenever an accountable institution ….. concludes a transaction with a client…. in the course of a business relationship which that accountable institution has with the client, the accountable institution must keep record of:

    1. the identity of the client;

    2. if the client is acting on behalf of another person –

    1. the identity of the person on whose behalf the client is acting; and

    2. the client's authority to establish that business relationship or to conclude that single transaction on behalf of that other person;

    1. if another person is acting on behalf of the client –

    1. the identity of that other person; and

    2. the other person's authority to act on behalf of the client;

    1. the manner in which the identity of a person referred to in paragraph (a), (b) or (c) was established

    2. the nature of that business relationship or transaction;

    3. all accounts at that accountable institution that are involved in –

    1. transactions concluded in the course of that business relationship; or

    2. that single transaction; and

    1. the name of the person who obtained the information referred in paragraphs (a) to (f) on behalf of the accountable institution."

This introduces an inordinate amount of client and intermediary identification and record keeping requirements for every transaction, in what is essentially an ongoing business relationship which had certain up-front identification requirements. In addition the normal suspicion-reporting requirement applies to all these transactions.

It is recommended that the section be amended to read as follows:

"23(1) Whenever an accountable institution establishes a business relationship or concludes a single transaction with a client [whether the transaction is a single transaction or concluded in the course of a business relationship which that accountable institution has with the client] the accountable institution must keep record of –"

    1. Section 25 - Centralisation of records

The concept "same business group" is not defined. It is unclear whether there is sufficient consensus in law between the various accounting, corporate control, ownership, etc., definitions of "same business group" to prevent differences of interpretation and/or implementation of the Bill under this section. It is recommended that the concept be defined in terms of ownership (i.e. the Companies Act, including accounting consolidation). Similarly, the "business group" should be required (in terms of regulation) to inform the Centre of which companies it involves and where the centralised records are.

2.7 Section 29 (1) and (2) – Suspicious transactions

As noted previously, there are conflicting legal opinions on whether tax evasion is included under the concept "proceeds of unlawful activities" or "proceeds of criminal conduct." Should government wish to include tax evasion within the ambit of this Bill we recommend the addition of a new clause to this section:

"29 (5) This section applies to actual or suspected tax evasion."

2.8 Section 30 – Electronic transfers of money to or from the Republic

As currently worded this section does not apply to any cross-border electronic transfers of money between any "accountable institution" in South Africa and any bank in any other country. This opens up immense opportunity for potential unreported money laundering transactions, as there is no requirement for equivalent anti-money laundering obligations on the foreign bank, nor even that the foreign banks are part of a properly regulated and supervised banking environment.

We assume that what was intended is to exempt "bank to bank" international transfers.

We propose that the words "that is not a bank" be deleted, and that cross-border bank to bank electronic transfers be properly regulated and exempted via Regulations which can require the Registrar of Banks to approve foreign banks/banking regimes which comply with acceptable banking supervisory and anti-money laundering regulations.

    1. Sections 32(2) and 33(2)

The requirements in law that certain reports must be made "without delay" would seem unduly harsh and/or restrictive. It is recommended that the words "without delay" be replaced with "as prescribed", and that the specifics are covered in the Regulations.

2.10 Section 34 – Continuation of suspicious transactions

This section is important to allow for normal business to continue uninterrupted where suspicion reports are unfounded, or until the authorities issue a freeze order. It also prevents unnecessary "tip-offs" to clients subject to suspicion reports.

2.11 Section 53(1)(e) – Regulations

This subsection provides for the Minister to regulate "the manner and form in which accountable institutions are to keep records required by this Act." It is unclear what is intended by this, but could be an intrusion into the diverse record-keeping databases utilised by accountable institutions for their normal commercial requirements. The Bill requires certain information to be kept – the "manner and form" of this record keeping should not be an issue to be prescribed. This subsection should therefore be deleted.

    1. Section 56 – Application of Prevention Act to accountable institutions.

Section 52 of the Prevention Act makes provision for certain innocent third party rights to be excluded from forfeiture orders. However, these third party rights are subject to certain conditions as set out in section 52 (2) and (2A), specifically that

These restrictions relating to suspicion and prevention would seem to put banks, inter alia, in an invidious position concerning sections 29 (reporting of suspicions) and 34 (continuation of suspicion-reported transactions) of the FIC Bill. Having made a suspicion report, and continued legitimately with the transaction, the bank as innocent third party could be prejudiced should it, in terms of section 52 of the Prevention Act, apply to a court that its interests be excluded from a forfeiture order. We therefore propose that section 56 of the FIC Bill be amended by including the following sub-section:

"56 (4) Evidence that an accountable institution has made a report to the Centre in terms of section 29(1) and (2) of this Act, and continued in terms of section 34 of this Act, will be a defence for that institution in protecting its interests in terms of section 52 of the Prevention Act."

2.13 Schedule 1

2.13.1 No 6 - "business of a bank" should be amended to include "and those institutions exempted from having to register as a bank and specified by the Minister."

2.13.2 No. 17 – It is unclear why accountants and auditors, who may discover evidence or raise suspicions of money laundering during their regular accounting or auditing duties, are exempted from having to report these. They are already under duty to report wrongdoings, e.g. to the Registrar of Banks, to the JSE, to shareholders. There is no common law "duty of privilege" between an accountant/auditor and a client, similar to that between attorney and client. In fact, they are specifically tasked to report certain financial wrongdoings of their clients to outside stakeholders. We therefore recommend that the words "in respect of investment advice or an investment service rendered by such an accountant" be deleted.

2.13.3 We recommend that dealers in gold coins be included in the Schedule.

2.13.4 Evidence over the past few years has confirmed that one of the priority purchases of criminals (especially bank and CIT robbers!) is fancy motor cars, often paid for in cash. We recommend that new and used car dealers be included in the Schedule.

3. Conclusion:

As noted in the Memorandum to the Bill, this Bill is an essential component in South Africa's anti-money laundering regime. The Bill imposes significant compliance costs, as well as the costs to establish and maintain the Intelligence Centre. Absolute assurance is necessary that the compromise of only focussing on a limited range of "accountable institutions" will be acceptable to the international stakeholder community.

Thank you for the opportunity to comment on the Bill, and as noted above should there be public hearings on the Bill we would request the opportunity to address the Joint Committees.

STUART GROBLER

General Manager