ATC221014: Report of the Select Committee on Finance on the Draft Amendments of Schedules 1,2 and 3 of the Financial Intelligence Centre Act; dated 14 October 2022
NCOP Finance
Report of the Select Committee on Finance on the Draft Amendments of Schedules 1,2 and 3 of the Financial Intelligence Centre Act; dated 14 October 2022
1.Introduction and background
The proposed Amendments to Schedules 1, 2 and 3 of the Financial Intelligence Centre Act (FICA) seek to strengthen the financial system and improve its resilience against abuse by money launderers and terrorist financiers. This is in response to the threat of greylisting by the Financial Action Task Force (FATF).
The FIC Amendment Act, 2017 sought to address some of the weaknesses identified in the country’s anti-money laundering system following the 2009 FATF Mutual Evaluation Report (MER) findings. As NT clarified, some of the weaknesses identified related to compliance, supervision and sanctions in respect of non-banking financial institutions. Therefore, the amendments to the Schedules, seek to address the weaknesses identified by including the necessary sectors and business activities in the schedules and streamlining the number of supervisory bodies to enhance the quality of supervision and enforcement identified in the MER.
It was emphasised that the approval of the proposed amendments has become urgent, since the failure to comply with the set deadline of October 2022 might lead to the grey-listing of the country by the FATF. The consequences for the country are expected to be dire and could include severe and adverse economic consequences for trade and transactions; the risk of losing critical correspondent banking relationships with overseas banks; restriction of banking transactions with South African banks by overseas regulators in the United States of America (USA), United Kingdom (UK), European Union (EU), Japan, China and imposition of penalties and fines for breaching such restrictions.
2.Public Participation Process
NT reported that it started its consultation process with the relevant sectors and supervisory bodies between March 2017 and 2019. The proposed amendments to the Schedules were published on 19 June 2020, with a closing date of 18 August 2020. About 2 295 non-material comments were received through a Civic Organisation called Dear South Africa. Of the 2 295 comments, 1 983 opposed the proposed amendments, while 312 supported them. NT incorporated comments received, where relevant. The Minister of Finance approved that the amendments be tabled in Parliament at the end of March 2022 and the amendments were tabled on 17 May 2022.
In terms of the process followed by the Committee, on 23 June 2022, the Committees on Finance in the National Assembly (NA) and the National Council of Provinces (NCOP) received a joint briefing from the NT and the FIC on the proposed amendments to the FICA Schedules. On 25 August 2022, the Finance Committees held joint virtual public hearings on the FICA regulations. The Standing Committee on Finance (SCoF) received a total of 11 submissions, three oral and eight written submissions, from the Mineral Councils South Africa (MCSA), Agricultural Business Chamber (AGBIZ), AGRISA, Banking Association South Africa (BASA), FEM Construction Industry Loan Fund Pty (Ltd), Franklin Templeton Investments, South African Institute of Chartered Accountants (SAICA), Nathan Lindsey Hittler of the Corwil Investments Group and OUTsurance Life Insurance Company (OUTlife).
After the adoption of the report on the draft amendments of the FICA Schedules by the SCoF and the NA, these Schedules were referred to the Select Committee on Finance (SeCoF). The SeCoF received two submissions from Vodacom Pty (Ltd) and the National Clothing Retail Federation of South Africa (NCFR). On 20 September 2022, the Committee held public hearings in which the NCFR participated and the meeting received preliminary responses from the NT and the FIC. As the Committee resolved, NT, the FIC and the NCFR met on 22 September 2022 to address the concerns raised by the NCFR in its submission. On 23 September 2022, the NT and the FIC formally responded to the issues raised during the public participation process and provided feedback on the meeting held with the NCFR. The Committee held a meeting on 12 October 2022 to further process the proposed amendments.
3.Overview of the Schedules 1,2 and 3 of the FICA proposed to be amended
This section summarises the proposed amendments to the FICA as presented by the NT and the FIC. Overall, of the total 20 amendments proposed in the three FICA Schedules, six items propose technical amendments, five items are to be deleted, five items are newly proposed and four items seek to widen the scope of each category.
3.1Schedule 1 amendments
The proposed amendments in Schedule 1 pertain to Legal Practitioners, Trust Service Providers, Authorised Users of an exchange, Cooperative Banks, Long-term Insurance Businesses, Credit Providers, Financial Services Providers, Ithala Development Finance Cooperation, Money remitters, High-value goods dealers, South African Mint Company (SA Mint), Crypto Asset Service Providers (CASPs) and Clearing system participants for facilitation of electronic fund transfer.
3.1.1Item 1: Legal practitioners: Technical amendment to take into account new legislation and include attorneys practising for their account; advocates that practise with a Fidelity Fund Certificate, who can deal directly with the clients from the public; and legal firms.
3.1.2Item 2: Trust Service Providers: Proposed amendment to include certain activities carried out by Trust and Company Service Providers, where accountants, estate agents, lawyers, notaries and other legal professionals are involved in conducting transactions on behalf of their clients. These activities include buying and selling real estate or managing client money, securities or other assets. Almost 2 000 cases involving South Africans have been identified in the Panama Papers.
3.1.3Item 4: Authorised users of an exchange: Technical amendment to update the reference to the relevant legislation, following the replacement of the Securities Services Act with the Financial Markets Act. The scope remains the same.
3.1.4New proposed Item 7A: Co-operative banks: A proposal to include this category to protect them from exploitation by launderers.
3.1.5Item 8: Long-term insurance business: A proposal to amend the legislation, Insurance Act, 2017, to ensure that the risk-based approach is followed.
3.1.6Item 11: Inclusion of credit providers: A proposal to include a wider sector of credit providers within the anti-money laundering framework. Item 11 is currently identified as “a person who carries on the business of lending money against the security of securities”. Concerning having “financial institutions” covered under the scope of the anti-money laundering legislation, it was found that under the type of financial activity of “lending”, banks were covered but not “other credit providers”.
3.1.7Item 12: Financial Services providers: Technical amendment to replace “and” with “or” so that it would read “to provide advice or intermediary services”. This is a technical amendment that will make it expressly clear that a person who provides either of those services falls within the scope of this Item.
3.1.8Item 16: Ithala Development Finance Corporation: A proposal to delete the Corporation from Schedule 1 of the FICA. The entity will fall under Item 11 as a credit provider.
3.1.9Item 19: Money remitters: A proposal to widen this category. Item 19 of Schedule 1 to the FIC Act applies to a “person who carries on the business of a money remitter”. However, it is not expressly clear that this includes any type of value transfer provider, including those who facilitate value transfers where funds are not sent from one location to another. The FATF found that the authorities have not taken any substantial action to address the informal remittance sector.
3.1.10New proposed Item 20: High-value goods dealers: A proposal to include a new item which will include all businesses dealing in high-value goods that are priced at R100 000 or more, whether payments are a single transaction or more operations. These include motor vehicle dealers, Kruger Rand dealers, and precious metals and stones dealers.
3.1.11New proposed Item 21: South African Mint Company: A proposal to include this item on request by the South African Reserve Bank (SARB) and SA Mint. Its business includes selling collectable and non-circulation coins of different precious metals to the retail trade.
3.1.12New proposed Item 22: CASPs: A proposal is made to include this item following the revision in the FATF standards which require that countries regulate CASPs for anti-money laundering purposes. Recently South Africa has received attention for being the country that has had the largest scams/fraud/money laundering, possibly going into billions of Rands, with the cases of Mirror Trading International and Africrypt.
3.1.13New proposed Item 23: Clearing system participants for facilitation of electronic funds transfer: The SARB’s National Payment System Department (NPSD) requested that this item be included. It will enable the capture of electronic payments made through non-bank clearing houses. It will facilitate the origination or receipt of any electronic funds transfer and or act as an intermediary in receiving or transmitting the electronic funds.
3.2Schedule 2 amendments
The amendments to Schedule 2 of the FICA aim to reorganise the structure of supervisory bodies that are responsible for supervising compliance with the FICA. This reorganisation is required partly because of amendments in other legislation and partly because certain supervisory bodies do not actively perform a supervisory function as far as the FIC Act is concerned.
3.2.1Technical amendments to Items 1 and 2: The enactment of the Financial Sector Regulation Act, 2017 requires certain technical amendments to Schedule 2 of the FICA. This includes replacing the reference to the Financial Services Board (FSB) with a reference to the Financial Sector Conduct Authority (FSCA) and the reference to the Registrar of Banks with a reference to the Prudential Authority (PA). These items address that.
3.2.2Deletion of Item 5: Independent Regulatory Board for Auditors (IRBA): A proposal to remove IRBA from Schedule 2, on its request, as its function of regulating the auditing profession does not fall within any category of accountable institutions.
3.2.3Deletion of Item 6: National Gambling Board (NGB): A proposal to delete Item 6 of Schedule 2. Gambling activities such as casinos, racing and wagering fall within the scope of Item 8 of Schedule 1 of the FIC Act. The NGB has no responsibility currently for the regulation of gambling activities by any institution that falls within the scope of the FICA.
3.2.4Deletion of Item 8: Law Societies: A proposal to remove this category as the provincial Law Societies are no longer responsible for the regulation of the relevant services of attorneys that fall within the FICA. The FIC will become responsible for the supervision of legal practitioners in this respect. Also, the FATF found that attorneys are subject to no anti-money laundering oversight.
3.3Schedule 3 amendments
Deletion of Items 1 and 2: Motor Vehicle Dealers and Kruger Rand Dealers: A proposal to delete this category and include it as accountable institutions in the scope covering high-value goods dealers in Schedule 1. Currently, these sectors have no compliance or legal obligations to conduct customer due diligence or retain client and transactional records.
4.Key issues raised during the Committee’s Public Participation Process
SeCoF received no comments on Schedules 2 and 3 of the FICA. The stakeholders commented on Schedule 1, Items 11, 19 and 20 dealing with the inclusion of credit providers, money remitters and high-value goods, respectively.
4.1Inclusion of credit providers
A key concern raised was the blanket inclusion of credit providers in Item 11. An alternative wording that the FIC and the NT could consider to accommodate this concern was proposed. The NT and the FIC responded that the terms of the newly proposed wording are not defined in the National Credit Act (NCA). It was emphasised that the category of credit lending was non-negotiable under the FATF rules; that a carve-out would create an untenable precedent that could lead to many other requests for carve-outs in other areas; that there are no examples internationally where there have been carve-outs provided in primary legislation, including where there are financial inclusion concerns present and that the European Union’s 5th Anti-Money Laundering Directive includes credit institutions without setting thresholds or having exclusions.
The stakeholder also cautioned about the potential unintended consequences on both the credit retailers and retail credit consumers should the draft amendments be implemented in the current form. Some of the implications identified include the inevitable exclusion of a large segment of South African consumers from access to credit; because they are not able to provide proof of residence; additional compliance costs and potential Constitutional issues. A recommendation was made that the FIC should conduct a Sector Risk Assessment (SRA) study on the credit provider sector before Item 11 of Schedule 1 to FICA is implemented and comparisons were made with Botswana and Namibia. These matters are discussed below.
4.1.1Requirement of proof of address: The FIC clarified that the requirement of proof of address when consumers apply for credit; is not a FICA or FATF requirement and the FATF requirements are not prescriptive on the documents required and are clear and focused on the issue of financial inclusion.
4.1.2Additional costs of compliance: The NT queried the NCRF’s calculation that arrived at additional compliance costs of at least R25.00 to R30.00 per credit applicant. According to the NT, there should not be additional costs of compliance beyond the obligations of the NCA, 2005. The NCFR provided no detail regarding the nature of additional information that would be required from the customers as a result of the implementation of Item 11.
4.1.3Issues of Constitutionality: Clarity was provided that the procedure of referring Bills to the Constitutional Court would only be available in specific and narrow circumstances, and in practice, has been used very infrequently. As the FIC explained, there is, therefore no process that allows for the amendments to the Schedules to be referred to the Constitutional Court for its consideration. The only manner in which the question of constitutional validity can come before the Constitutional Court is if the litigant has the standing to challenge the Constitutional validity of the specific item in the Schedule.
4.1.4SRA study: NT explained that the Minister’s Notice to amend the Schedules is not a Bill and did not go through a Cabinet Process. It was further explained that an SRA study determines the Money Laundering and Terrorist Financing (MLTF) risks in a particular sector; so that the risks are understood and can be mitigated. Although the FATF Standards do not envisage that each country should do a prior SRA on each sector that is covered or designated by the FATF Standards to decide whether that sector should be included in the scope of its anti-money laundering framework, the NT, working with other departments, do regularly undertake sectoral risk assessments. According to the NT, the only basis for the exclusion of a sector that is covered by the FATF Standards is that in a particular scenario there is no risk of money laundering or terrorist financing or proliferation financing.
4.1.5Best practice with neighbouring Countries: In response to the examples of Botswana and Namibia, the FIC said that the parallels drawn were irrelevant because both countries were grey-listed on account of different matters and not lending. Also, these countries have not identified deficiencies in the scope of lending and both countries, lending is fully covered consistent with the FATF Standards.
4.2Money remitters
The stakeholder sought clarity and guidance on the definitions of Schedule 1 Item 19. Specific questions raised include what constitutes the business of a money remitter, which institutions will fall within the scope of the business of a money remitter, and how do accountable institutions deal with other areas of their business where the business falls outside the scope of a money remitter, whether the activities that fall outside the scope of a money remitter can be excluded from the provisions of FICA and whether the new accountable institutions will be given time within which to comply with the provisions of FICA. Vodacom proposed that there should be a transitional period of 12 months applicable to the Draft Amendments to allow new accountable institutions to comply with FICA.
NT clarified that the current Item 19 includes money remitters as accountable institutions. The proposed amendment takes into account the deficiency identified in the MER that the FIC Act does not fully cover the concept of “money or value transfer providers” as described in the Standard. The current item 19 covers those entities that are authorised dealers (such as banks) and authorised dealers with limited authority such as money remitters other than banks, that are required to be authorised by the Financial Surveillance Department of the South African Reserve Bank (SARB) to conduct their business. This amendment intends to cover the informal money remittance business as required under the FATF Standards.
With regards to the proposed transitional period, NT explained that once the amendments are approved and enter into force, inspections and enforcement will only commence after a window period of 12 to 18 months. Also, guidance aimed at clearly communicating supervisory expectations and approaches will take place during this time for the new accountable institutions to understand their FICA obligations.
4.3High-value goods
Stakeholders submitted that some of the draft Amendments are too wide and unclear. These amendments referred to businesses receiving “payment in any form” to the value of R100 000; the definition of “high-value goods” as any “item” that is valued in that business at R100 000 or more; the scope of "any person" not restricted to high-value dealers within the retail sector FATF identified by the risks; the meaning of “dealer” and the disjuncture between “high-value goods dealers” who become accountable institutions at a transaction value of R100,000 or more and providers of a credit facility where the average facility value is R3.348. Recommendations were made to change the wording and that the proposed amendments should be limited to cash transactions to the value of R100 000 or more.
NT and FIC responded that the FATF Standards include the non-financial businesses that should be covered by a country’s legislation against money laundering financing and terrorist financings such as casinos, estate agents, trust and company service providers and dealers in precious metals and precious stones. Dealers in precious metals and precious stones are businesses that are not covered at all by the scope of Schedule 1 of the FICA.
5.Committee observations
5.1The Committee noted that of the total 20 amendments proposed in the three FICA Schedules, technical amendments are proposed on six items, five items are to be deleted, five items are newly proposed and four items seek to widen the scope of their respective categories.
5.2The Committee observed that most of the comments made in the submissions to SCoF were technical in nature, including the definitions that were deemed vague and unclear, recommendations to change the wording of various sections and clarity and guidance-seeking concerns.
5.3The Committee also noted that Items 11, 19 and 20 dealing with the inclusion of credit providers, money remitters and high-value goods, respectively, were the focus of the submissions.
5.4The Committee noted the NCRF’s concern that for many years, it had conversations with the NT through its workshops and made written submissions to the SCoF but it had not received a response. The Committee resolved that the National Treasury, the FIC and the NCRF should meet to address outstanding issues.
5.5The Committee noted the concerns and issues raised by the stakeholders which include a blanket inclusion of credit providers in Item 11, additional compliance costs, potential Constitutional issues, and unintended consequences on both the credit retailers and retail credit consumers should the draft amendments be implemented in the current form. The Committee also noted the responses by the NT and the FIC on the concerns raised.
5.6The Committee acknowledges the role played by the retail clothing industry in the economy and financial inclusion, in particular, and noted the FIC’s response that following the amendments of the FICA in 2017, it now requires that the institutions should not apply a one-size-fits-all risk-based approach but a differentiated one in line with the FATF Standards of 2012, which requires that businesses should manage their own risk.
5.7The Committee noted that National Treasury has repeatedly given assurance during the hearings that a risk-based approach will be followed, and that this is both the intention and the effect of these amendments.
5.8The Committee noted the FIC’s response and Parliament’s Legal Services Unit that no process allowed for the amendments to the Schedules to be referred to the Constitutional Court at this stage for its consideration and that the only manner in which the question of constitutional validity can come before the Constitutional Court is if a litigant has the standing to challenge the constitutional validity of the specific item in the Schedule once adopted.
5.9The Committee noted that while the requirement of proof of address by the credit providers might exclude a large segment of consumers from access to credit, which is something it is opposed to, this is not a FICA or FATF requirement and the FATF requirements are not prescriptive on the documents required and are clear and focused on the issue of financial inclusion.
5.10While the Committee recognises the concern that compliance with FICA’s proposed amendments, may be costly, time-consuming, and labour-intensive, the Committee noted that the NCFR did not adequately substantiate the nature of additional information that the registered credit providers would be required to obtain, with evidence-based projections, or additional costs of compliance as a result of the implementation of the proposed amendments.
5.11The Committee also noted the FIC’s response that although the FATF Standards do not envisage that each country should do a prior SRA on each sector that is covered, the NT, working with other departments, does regularly undertake sectoral risk assessments. Also, the only basis for the exclusion of a sector that is covered by the FATF Standards is that in a particular scenario there is no risk of money laundering or terrorist financing or proliferation financing.
5.12Committee believes that the cost of not complying with the FATF requirements will have much more negative consequences while the costs of compliance will be far less than portrayed.
5.13The Committee observed that Vodacom and the NCFR appear to have an inadequate understanding of the proposed amendments and the impact that these regulations might have if implemented in the current form.
6.Recommendations
6.1The Committee is appalled at NT’s tardiness in bringing these very important and urgent proposed amendments to FICA Schedules before Parliament and utterly refutes the false allegations by some in the media that the Finance Committees in Parliament are holding up the process of finalising it. The Committee expresses its severest disapproval of NT for its failure to bring these regulations sooner to Parliament.
6.2Despite the delays in tabling the draft amendments before Parliament, the Committee is acutely aware of the urgency of the amendments and the severe implications of the country’s failure to comply with the FATF deadlines, which would lead to the grey-listing of the country and the economic and financial consequences, among others, that would follow.
6.3The Committee gave considered attention to these regulations and had several meetings to process them, including through engagement with the NCRF in Committee sittings and ensuring that NT and the FIC met directly with the NCRF and reported back to the Committee on the outcomes.
6.4While understanding the key policy issues, the Committee believes that the amendments to the FICA schedules are extremely technically complex. While accepting the need for technical jargon, and that some of this comes from the language used by global multilateral institutions, the Committee believes that these amendments could have been clearer. The Committee recognises that there is a tendency among some stakeholders to oppose proposed amendments on policy grounds to claim that the amendment lacks clarity to further rationalise their opposition. Still, while the policy issues are clear in these regulations, there is an obligation on the executive to draft Bills plainly and clearly. The Committee recommends that NT and FIC should, within time and resource constraints, provide greater clarity and guidance to the relevant stakeholders on the practical implementation and FICA obligations of these regulations. Disseminating information for the public could also be considered.
6.5Notwithstanding the NT’s view that there should not be additional costs of compliance beyond the obligations of the National Credit Act, often, the cost of compliance is borne disproportionately by consumers. The Committee recommends that NT and the FIC should monitor the costs of implementing these regulations, particularly for consumers, and report back on this and progress on the overall implementation of the regulations to the Committee within the next 18 months.
6.6These amendments seek to strengthen the financial system and improve its resilience against abuse by money launderers and terrorist financiers, and crucially, seek to avoid the possible greylisting of the country. According to the legal advice received from Parliament and NT, the amendments are constitutionally sound. The Committee approves of them.
The Freedom Front plus (FF+) reserved its position on the report.
Report to be considered