ATC221209: Report of the Select Committee on Finance on General Laws (Anti-money Laundering and Combating of Terrorism Financing) Amendment Bill [B18B - 2022] (National Assembly Section 75); dated 09 December 2022
Report of the Select Committee on Finance on General Laws (Anti-money Laundering and Combating of Terrorism Financing) Amendment Bill [B18B - 2022] (National Assembly Section 75); dated 09 December 2022
1.Introduction and background
The General Laws Amendment Bill (GLAB) seeks to address deficiencies in at least 14 of the 20 Financial Action Task Force (FATF) recommendations identified in the Mutual Evaluation Report (MER) published in October 2021.
As explained in the memorandum on the objectives of the GLAB, South Africa was recently assessed by a joint International Monetary Fund (IMF), Eastern and Southern African Anti Money Laundering Group and the FATF assessment team.
National Treasury (NT) explained that South Africa rated poorly in the evaluation process, failing in 20 of the 40 FATF core recommendations on technical compliance and failing in all 11 effectiveness measures on immediate outcomes. As a result, South Africa faces the risk of being greylisted by FATF at its February 2023 plenary.
The weaknesses identified in the mutual evaluation process highlighted the need for South Africa to have a robust Anti Money Laundering (AML), Combating the Financing of Terrorism (CFT) and proliferation regulatory framework. According to the NT, FATF recommendations are doable matters relating to amending and enacting laws, whereas the immediate outcomes are more difficult and require that South Africa demonstrates the success of the implementation of legislation such as the number of successful prosecutions, the number of freezing orders of funds, policy and operational documentation.
2.Public Participation Process
On 02 November 2022, the Select Committee on Finance (SeCoF) received a briefing on the GLAB from the NT and the Financial Intelligence Centre (FIC). On 23 November 2022, the Committee held public hearings and received a total of nine written submissions from the Cause for Justice (CFJ); the Congress of South African Trade Unions (COSATU); the NPO Working Group; the Hellen Suzman Foundation (HSF); Webber Wentzel; the NGO Law; Advocate Sello Maema of the Public Prosecutions in the North West Province; Bafokeng Senior Prosecutor, Advocate Mphaga Cavin Tjaro; and Freedom for South Africa.
On 25 November 2022, the NT and the FIC formally responded to the issues raised during the public participation process. The Committee held meetings on 29 November 2022 and 07 December 2022, to further process the Bill.
3.Overview of the objectives of the General Laws Amendment Bill
The GLAB proposes to address deficiencies related to Customer Due Diligence (CDD), clarify the Financial Intelligence Centre’s (FICs) mandate to produce forensic evidence, improve supervision of the estate agency and the gambling sector, and extend the FIC’s powers to access information in registers kept by all organs of the state and address specific recommendations made in the MER.
This is done through amending various pieces of legislation, namely, the Trust Property Control Act (TPCA),1988 under the Minister of Justice and Correctional Services, the Companies Act, 2008, under the Minister of Trade, Industry and Competition, the Non-Profit Organisations (NPO) Act, 1997 under the Minister of Social Development, and the Financial Sector Regulation Act (FSCA), 2017, under the Minister of Finance.
The section below summarises the proposed amendments explained in the memorandum on the objectives of the GLAB and the NT and FIC presentations.
3.1Mutual Evaluation Report findings requiring amendments to FIC Act
3.1.1Enhancing the Customer Due Diligence requirements of Accountable Institutions
According to the NT, the primary objective of the General Laws Amendment Bill is to address the deficiencies identified in the MER relating to the CDD measures contained in the FIC Act. The proposed amendments to the FIC Act contained in the Bill do not substantially change the principles on which the CDD provisions are based but are expected to result in a stronger anti-money laundering regulatory framework. For example, the definition of “beneficial owner” is amended to ensure that it encapsulates every natural person who is a beneficial owner of a client that is a legal person, partnership or trust “look through” principle.
3.1.2Production of forensic evidence
One of the ways identified to improve South Africa’s legal and institutional framework; and to strengthen the implementation of measures to combat money laundering, terrorism financing and proliferation financing was a clear mandate for the FIC to produce forensic evidence on the results of the analysis it produces that could be used as expert testimony in cases where this may be relevant in court proceedings.
3.1.3Amendment of Schedule 2
The proposed amendments to Schedule 2 of the FIC Act aim to ensure effective supervision of the estate agency and gambling sector. The proposed amendments seek to remove the references to the regulators of the estate agency and gambling sectors as supervisory bodies from Schedule 2 to the FIC Act.
3.1.4FIC’s access to databases and registers held by an organ of state
The Bill seeks to extend the powers of the FIC to request information or for access to any database held by any organ of the state as well as to have access to the information contained in a register that is kept by an organ of the state. This is necessary to ensure that the FIC has access to a sufficiently wide range of information that is held in the public sector to perform its functions effectively.
The objectives of the FIC will therefore be expanded to include the identification of persons involved in money laundering activities, terrorist financing and related activities, and proliferation financing activities to produce forensic evidence relating to the flow of financial transactions. This will allow the FIC to share information with the Auditor General (AG) office by amending “an investigative division in an organ of state” to read a national department to remove any ambiguity as to whom the FIC may share information with.
New powers for the FIC will include the power to enter into Public-Private Partnerships (PPPs) to enable it to achieve its objectives and perform its functions effectively.
3.2Addressing specific recommendations in the Mutual Evaluation Report
The Bill seeks to address several recommendations in the MER through amendments to the NPOs Act, of 1997, the TPCA, of 1998, the Companies Act, of 2008, and the FSRA, of 2017. These recommendations are explained below:
3.2.1Amendments to the Trust Property Control Act
Proposes to amend the TPCA to provide the legal framework for beneficial ownership information in respect of trusts require trustees to hold information on agents and service providers to trusts; keep information which they obtain up to date and accurate; provide for broader grounds for disqualification to be a trustee, and for offences for trustees in respect of specified breaches of the TPCA.
3.2.2Amendments to the Non-Profit Organisations Act
Proposes an amendment to the NPO Act to implement policy recommendations to improve the oversight of its broader NPO sector; apply controls of the NPO Act to all NPOs, not just NPOs that register voluntarily; and provide for offences and penalties in respect of specified contraventions of the NPO Act.
3.2.3Amendments to the Companies Act
Proposes an amendment to the Companies Act to provide for a legal framework for beneficial ownership information in respect of companies to provide for a requirement that companies must keep securities registers on shareholding up to date; require that companies keep accurate and up-to-date information on their beneficial owners; provide for a comprehensive mechanism through which the Companies and Intellectual Property Commission (CIPC) can keep accurate and updated beneficial ownership information; and expand the grounds for disqualification to be a director of a company to include convictions for offences relating to money laundering, terrorist financing or proliferation financing activities.
3.2.4Amendments to the Financial Sector Regulation Act
Proposes an amendment to the FSRA to provide an enabling framework for financial sector regulators to test the fitness and propriety of beneficial owners of financial institutions as part of market entry controls and on an ongoing basis; define ‘‘beneficial owner’’ in respect of financial institutions; provide a legal mechanism through which financial sector regulators can test the honesty and integrity of beneficial owners of financial institutions and require them to provide relevant information regarding their beneficial ownership; provide a legal mechanism through which financial sector regulators can require financial institutions to identify and verify their beneficial owners and require them to provide relevant information regarding their beneficial owners, and enable financial sector regulators to take specified action against beneficial owners who contravene or are likely to contravene a financial sector law.
4.Key issues raised during the public participation process
The concerns raised by the stakeholders are about inadequate public participation process; opposition to the mandatory registration of NPOs and prescribed administrative sanctions in the NPO Act; irreconcilability of the B-version of the GLAB, the draft NPO Amendment Bill and the administrative capacity of the national Department of Social Development (DSD), which has a current backlog of 6 041 registration applications; the definition and disclosure of beneficial ownership; and that the provisions in section 56 of the Companies Act that do not provide for the disclosure of or access to this information.
Most recommendations were made on the NPO Act, and include; that the Committee should thoroughly investigate and scrutinise the proposed NPO amendments to ensure that the fundamental rights and freedoms are indeed protected; the NPO registration should remain completely voluntary and the “prescribed administrative sanctions” should be specified; and the exclusion of the NPOs that are already registered as Public Benefit Organisations (PBOs) with the South African Revenue Service (SARS) from being deemed “at-risk NPOs” that need to register with the DSD.
Other recommendations include a general extension of the call for comments by at least a further 10 days; that the legislative framework should utilise a single broad definition of “beneficial owner” within the FIC Act; the secondary legislation such as the Companies Act and the TPCA should not seek to alter or expand the definition, as this introduces regulatory uncertainty and creates loopholes that can be exploited; making beneficial ownership information publicly available so that various role-players can continue to assist in the fight against tax evasion and corruption; training of prosecutors and the police with the necessary skills to implement the legislation; and extend the definition of Accountable Institutions (AIs) as tabled in schedule 1 of the FICA 38 of 2001, by now including a trust, trustees and or beneficial owners, also Attorneys, Auditors, Accountants and Banks.
5.Summary of submissions made
5.1Cause for Justice
The CFJ commented only on the NPO Act.
The CFJ raised concerns that public participation in the legislative process was inadequate as the call for comments was published before the B-version of the Bill was made available; there is a need for and justification of the legislative intervention to avoid unforeseen and unintended detrimental consequences; the likelihood of the legislative amendments achieving their purpose; and the existence of less restrictive means to achieve the legislative purpose.
CFJ noted that the Bill seeks to amend certain sections of the NPO Act, including making registration mandatory for a limited subset of “at risk” NPOs. CFJ raised a concern that the proposed amendments will impose legal obligations and limit the constitutional rights of affected NPOs, their governors and office-bearers, the majority of whom are unlikely to ever be involved in money laundering or the financing of terrorism.
CFJ sought clarity on the level of assurance that making registration under the NPO Act compulsory for affected NPOs, will translate to preventing money laundering enterprises in the NPO sector; complaining that otherwise, the amendments will serve no legitimate purpose and place an unconstitutional burden on affected NPOs. Another concern raised was that the additional burden may cause many religious organisations to cease operations. CFJ reiterated that religious organisations do tremendous good public benefit work, impacting millions both locally and abroad, and often for the benefit of society’s socio-economically vulnerable and marginalised. If the proposed amendments will force these organisations to cease operations, much harm will be suffered by South African society.
CFJ further submitted that an important and central aspect of a successful NPO registration and regulation system is the support and oversight provided by the NPO Directorate, which is situated in the DSD.
CFJ requested the general extension of the call for comments for at least a further 10 days; and that the Committee should thoroughly investigate the proposed NPO amendments, by requesting the appropriate government departments to furnish it with sound evidence and a rational basis for why and how the specific proposed amendments in the Bill will translate into effectively addressing the identified public ills. CFJ urged the Committee to scrutinise any proposed wording to ensure that the fundamental rights and freedoms are indeed protected.
CFJ emphasised that voluntary registration is its preferred option and that it does not support the compulsory registration of any NPOs. It prefers and supports registration remaining completely voluntary or registration being made compulsory for a rationally identified, constitutionally defensible, appropriately limited subset of ‘at-risk’ NPOs only and that it should be specified what the “prescribed administrative sanctions” are or identify an official authorised to prescribe such sanctions in the Regulations.
5.2Freedom of Religion South Africa
The Freedom of Religion South Africa commented on the changes to the NPO Act proposed in the B-version of the GLAB regarding Clause 11’s proposal about mandatory registration for “at-risk NPOs”. The B-version of the Bill proposed mandatory registration with the DSD for NPOs seen as “at-risk NPOs” and these are “any NPO that makes donations to individuals or organisations outside of the Republic’s borders”, and “any NPO that provides humanitarian, charitable, religious, educational or cultural services outside of South Africa’s borders.
The Freedom of Religion South Africa quoted the FATF Recommendation, in footnote 28 to paragraph 6(b)(i) of the FATF’s Recommendation 8 (page 61), which states that specific licensing or registration requirements for counter-terrorist financing purposes are unnecessary for NPOs that are already registered with tax authorities and monitored in the context of qualifying for favourable tax treatment such as the PBOs who successfully applied for, and are monitored for tax exemptions.
The Freedom of Religion South Africa recommended that the Bill exclude the NPOs that are already registered as PBOs with SARS from being deemed “at-risk NPOs” that need to register with DSD. This will lessen the burden on the government and NPOs without falling foul of FATF’s recommendations. It will also prevent numerous religious organisations from being subjected to additional administrative/financial burdens which they may find difficult to cope with.
5.3NPO Working group
The NPO Working Group responded to the updated B-version of the Bill. The Working Group supports the multi-pronged and tailored approach to beneficial ownership and appreciated consideration given to privacy rights; the parallel process to conduct a full scan of the Non-Governmental Organization (NGO) sector and assess risks; a move of the NPO registry out of the DSD to be an independent but public, properly funded, credible and operational structure; and that mandatory registration be restricted to the ‘at risk’ category of non-profits as defined in the amended section 12 of the B-version of the Bill (no knitting clubs are required to register). The NPO Working Group submitted that the FIC registration suggested as an alternative to compulsory NPO registration for at-risk non-profits is still its preferred option.
The NPO Working Group submitted its remaining concerns, and these are discussed below.
5.3.1The inappropriateness of the DSD to accommodate the NPO directorate
The current NPO Directorate is constrained and restricted by the operations and processes of the DSD. The directorate does not have the power to advertise or fill vacant posts or source funding for posts that are, to date, unfunded.
5.3.2Staffing and skills
The existing staff at the NPO Directorate require re-training to operate the anti-fraud oversight required to implement the FATF guidelines. They do not possess the skills to carry out their current functions. Some of the skills set required include auditing, analytical, financial, forensic, governance, legal and inspector to regulate compliance.
5.3.3Systems and Infrastructure
The existing IT systems and infrastructure require overhauling and upgrading, as they do cannot perform the basic search functions. The current system is insecure, unstable, and poorly maintained. The NPOs often have to resort to sending annual reports through registered mail to the National Office in Pretoria or an email address. Even when reports are digitally lodged, data is not able to be retrieved, separated and stored appropriately. The upgraded system of the NPO Directorate should be linked to other departments such as SARS, CIPC, Home Affairs and banks.
5.3.4Migration to e-certification
The NPO Directorate currently operates, for the most part, on a paper-based system with printed certificates. Existing legislation empowers the NPO Directorate to begin the transition towards issuing electronic NPO certificates and alleviate the barriers associated with operating on a solely paper-based system.
5.3.5Move to an independent Directorate
The DSD focuses on social services and does not have the skills for the full scope of the work of non-profits in South Africa. It is therefore the inappropriate department to house the NPO directorate.
The NPO transition to e-certificates should occur immediately, by proclamation in the Government Gazette;
The NPO Directorate must clean up and update the register, removing non-compliant or non-existent organisations by June of 2023, and demonstrating progress by February 2023.
The NPO online reporting system must be fixed and stable by March 2023.
The NPO Directorate must create and fill the following key positions by June 2023, three Lawyers, Auditors and financial skills, each.
The existing information and technology systems must be inspected by independent technical experts to ensure the security and stability of the NPO systems and data protection capability to protect the most vulnerable individuals served by non-profits.
5.4Helen Suzman Foundation
The HSF commented on the urgency to ensure compliance with the Financial Action Task Force (“FATF”) recommendations and the importance of proper public consultation. The HSF raised two concerns about the proposed amendments, namely, the irreconcilability of the B-version of the GLAB and the draft NPO Amendment Bill and the DSD.
According to the HSF, the B version of the GLAB and the draft NPO amendment Bill appear to follow two concurrent processes; with different registration requirements, where the B version of the GLAB refers to, “makes donations to individuals or organisations outside of the Republic’s borders” and “provides humanitarian, charitable, religious, educational or cultural services out of the Republic’s borders”, and the draft NPO amendment Bill, Section 2(f) states that “facilitating voluntary registration of NPOs and compulsory registration for foreign organisations operating within the borders of the Republic of South Africa”; Section 12(1) states that “any NPO that is not an organ of state may apply to the Office of the Registrar for registration”; and Section 12(5), states “any NPO, including foreign NPOs that intend to operate business within the Republic must be registered in terms of this Act before operating and shall be subjected to the provisions of this Act and any other laws of the Republic”.
The HSF raised concerns about the administrative capacity of the DSD, which has a current backlog of 6 041 registration applications and the fact that the FATF Report stated that the DSD is not able to monitor or investigate those NPOs currently registered, while Section 13 “deemed” registration is not the answer. The HSF believes that the amendments will not achieve their purpose.
5.5The NGO Law
The NGO Law submitted that the NPO Directorate is an inappropriate body to collect the data required for the oversight of the at-risk class of non-profits. The NPO Law emphasised that its preferred outcome is that the compulsory registration of a limited and defined class of non-profits takes place not under the NPO Act, but under FICA, as a “reporting institution”. However, if this is not accepted, the pre-requisite for limited-ambit compulsory registration as an NPO would need to be that, (1) the NPO Directorate should keep a list of organisations separate from those of voluntary NPO registrations; so that they can be separately tracked, (2) the NPO Directorate systems are substantially upgraded and reinforced for security, stability and to allow data required to be found and extracted, (3) the NPO Directorate is relocated as structure independent of DSD, and (4) the staffing and skills at the NPO Directorate are overhauled and upgraded. People with legal and audit skills should be on the team.
The NGO Law proposed the addition of clauses in the Companies Act as an alternative to compulsory NPO registration. This will bring the class of organisations under the detailed regulatory requirements of the Companies Act into the public visibility that requires the annual reporting on financials and details of compliance which the Companies Act and regulations require. The proposed amendment requires the registration with CIPC also of the foreign equivalents of voluntary associations which may be carrying out non-profit activities in South Africa. This proposed amendment is needed to support compulsory registration under FICA or the NPO Act.
COSATU and the South African Clothing and Textile Workers Union (SACTWU) support the Bill and believe that the Bill is a positive step by the government to address gaps and weaknesses in the existing legislation. The following concerns were raised:
5.6.1Amendments to the definition of beneficial ownership
The Bill, in some instances, is not sufficiently clear enough about the definition and disclosure of beneficial ownership. By its internationally accepted definition, a beneficial owner should always mean a natural person and nothing else. Without a reference to a natural person, only the first layer of ownership may be pierced and the actual owner may never be revealed. COSATU and SACTWU believe that the legislative framework should utilise the single broad definition of “beneficial owner” within the FIC Act; and that secondary legislation such as the Companies Act and the TPCA should not seek to alter or expand the definition, as this introduces regulatory uncertainty and creates loopholes that can be exploited.
5.6.2Amendments to publishing information
COSATU noted with disappointment that the Bill does not seem to seek to make beneficial ownership registers publicly available. Clause 53 of the Bill refers to making annual returns available electronically but it is not clear that this would mean that such annual returns would then be publicly available. Also, FATF has listed the requirement of making beneficial ownership information publicly available in their Guidance on Transparency and Beneficial Ownership as part of understanding the risk associated with legal persons, particularly in respect of companies’ registers.
COSATU believes that by making beneficial ownership information publicly available, unions, shop stewards, workers, civil society and journalists can continue to assist in the fight against tax evasion and corruption. Trusts beneficial ownership records at the Master’s offices should also mirror how companies’ records are envisaged in the Bill to be published and made available annually and when updated.
5.6.3Amendments to personal data
COSATU submitted that, in South Africa, privacy and data protection concerns are given legal effect through the Protection of Personal Information Act (POPIA). This Act may be used as an excuse to block the publication of beneficial ownership data. Yet, sections 37 and 38 of POPIA list several grounds on which processing of personal information is not a breach of the processing conditions in the Act. Part of those grounds includes where the public interest outweighs the interference with privacy rights, prevention, detection and prosecution of offences, fostering compliance with legal provisions, to protect the public against financial loss due to dishonesty, and malpractice. Any one of these grounds could be relied upon to substantiate publishing beneficial ownership data when concerns are raised regarding privacy rights and data protection laws.
5.6.4Amendments to updated records
COSATU noted that Clause 55 of the Bill proposes the addition of two subsections to section 56 of the Companies Act, which would require filing additional notices within a “prescribed period”. These proposed additions introduce important reporting obligations for companies in respect of their beneficial ownership information. However, these provisions do not provide for the disclosure of or access to this information.
While it is not clear what that prescribed period will be until it is prescribed in terms of the Act, it seems clear to COSATU that it will be more regular than annual. COSATU argues that this should be at least quarterly and recommends that provisions for disclosure of this information be added to the Bill or Regulations.
5.7Advocate Mphaga Cavin Tjaro
Advocate Tjaro submitted that the Bill should extend the definition of Accountable Institutions as tabled in schedule 1 of the FICA 38 of 2001, by now including Trust, trustees and or beneficial owners, thus now closing the long lacuna or loophole used by syndicates to launder and hide proceeds of crime. Advocate Tjaro supports the further inclusion of Churches as NPOs as Accountable Institutions and said that it is long overdue given the proliferation and mushrooming of churches as vehicles used to wash dirty money and hide proceeds of crime.
Advocate Tjaro recommended that the Estate Agents and Car dealerships as Reporting Institutions defined in schedule 1 of FICA, must be strictly monitored for strict compliance with their reporting duty of any suspicious transactions by their clients given almost all criminals launder their dirty money as proceeds of crime by buying luxurious houses and expensive cars. Furthermore, Attorneys, defined as Accountable Institutions in schedule 1 of FICA, must also be strictly monitored for their strict compliance with their reporting duties in respect of suspicious transactions or money received from their clients exceeding the stipulated threshold because many criminals use or collude with attorneys to launder and or hide proceeds of crime. Similarly, Auditors, Accountants and Banks as Accountable Institutions must also be strictly monitored for their strict compliance with their reporting obligations of any suspicious transactions of their clients or departments
5.8 Advocate Sello Maema
Advocate Maema submitted that the Bill makes a brilliant attempt to address the weaknesses that were identified by the joint IMF Group which assessed South Africa’s regulatory framework’s compliance with international standards to ensure that our country enacts legislation to ensure that international standards to combat money laundering and financing of terrorism activities are dealt with.
While the enactment of appropriate legislation may be the beginning of compliance with international standards, Advocate Maema’s view is that the crucial step is the training of prosecutors and police in the implementation of the legislation, to equip the police with investigative skills to investigate these complicated provisions and enable the prosecutors to develop charge sheets and guide investigations and to develop the law.
Weber Wentzel’s submission proposed technical amendments to the Companies Act; the TPCA; and the NPO Act. These proposed technical amendments refer to, (1) the introduction of a new definition of "affected company", that it should be considered whether a reference to section 2(2)(d) should be included in this definition, (2) the introduction of a new definition of "beneficial owner", that the concept of "control" as used in the definition, should be expressly linked to sections 2 and 3 of the Act, (3) amendment of the wording of subsection (8)(b)(v) which relates to disqualification of the director of a company on the grounds of misconduct, (4) clarification of the term "effective control" to provide certainty or some guidance, (5) insertion of the phrase "the end of" at the beginning of subsection (1B)(b), and (6) amendment of the wording of subsection 1C to make it clear when such a decision of the Security Council of the United Nations has been "taken".
On Trust accounts, Weber Wentzel proposed the following technical amendments, (1) the heading of section 10 should be amended to reflect the expanded ambit of the section, to read "Trust account and disclosure to accountable institutions”, (2) amendment of section 19 about failure by a trustee to account or perform to provide that a trustee will not be guilty of an offence in terms of section 11A(1) if a trustee can show that the trustee took all reasonable steps to establish the beneficial ownership of the trust. Weber Wenzel noted that section 19(2)'s proposed introduction of these new offences for failure to comply with an administrative obligation embodied in sections 10(2), 11(1)(e) or 11A(1)) is likely to disincentivise persons to act as trustees. On removal of trustees, in line with the gender-neutral amendments proposed to be made to section 20(2) of the Act by the Bill, it is submitted that section 20(2) should be amended.
Weber Wentzel further noted that the proposed amendments now make it mandatory for certain NPOs to register under the Act and that it would be helpful to clarify that this registration is required notwithstanding other forms of registration NPOs may already have. It should also be clarified that the NPO registration under the Act will be in addition to any form of existing registration and that NPOs will not have to de-register from existing forms of registration. In addition, it is important to clarify whether NPOs are required to have a constitution in addition to their existing governing documents. It should also be clarified that an NPO that has applied for registration will be deemed to be registered with effect from the date of submission of the application.
On amendment of section 18, Weber Wentzel submitted that the proposed new section 18(1)(bA) should be amended to read as follows: "prescribed information about its office-bearers, control structure, governance, management, administration and operations of registered NPOs”. In section 24, about the register of NPOs, it is submitted that subsection (4) should be amended to read as follows: "An NPO must make the information referred to in section 18(1)(bA), and the director must provide access to make the information in the register referred to in subsection (1)(d), available to any person as prescribed”.
6.Responses by the National Treasury to issues raised by the stakeholders
On a concern about the alignment of the NPO Amendment Bill with the B-version of the GLAB, the NT responded that the NPO Amendment Bill is at a draft stage and has not yet been tabled in Parliament. It further explained that while the GLAB was developed to address specific deficiencies identified in the MER, further development of the NPO Amendment Bill will be based on the NPO Act as amended by the GLAB.; and will address the issues raised around the alignment as well as the additional issues not addressed in the GLAB.
In response to the proposed compulsory registration of NPOs and recommendations made, the NT said that PBOs are currently monitored for annual submission of tax returns and compliance with the Income Tax Act but SARS does not monitor specific funds expended on activities conducted outside South Africa, except in the instances of s.18A approved entities where funds may not be expended outside of South Africa. Further clarity was provided that NPOs that will be required to register under the NPO Act will be subject to the requirements of the NPO Act and that the objective of introducing the register of NPOs is to have a unified register for the categories of NPOs that are identified as being at potential risk and that have to comply with the NPO Act.
On the capacity of the DSD to accommodate the NPO directorate and other concerns raised, the NT clarified that the requirements for NPOs under the NPO Act for which they are supervised under the Act, are to have a constitution that meets the requirements of section 12(2), to keep accounting records, to draw up annual financial statements and balance sheets, to have annual audits of its financial statements and its activities under its constitution. There is no other entity or agency that has the legal mandate to monitor NPOs. It was further explained that capacitating the DSD to be effective as a supervisor of compliance with the NPO Act is key to demonstrating the expected FATF outcomes and that the amendments to the NPO Act are necessary to address some of the technical compliance deficiencies identified.
On access to beneficial ownership information, NT said that access to the various registers will be addressed through regulations, after consultation with all stakeholders, and will be a staged process in line with the approach by most other FATF-compliant jurisdictions. Regulations will set out the details around access to the information contained in the register and the Bill provides for the regulations in the different laws to be made, after consultation with the Minister of Finance and the FIC. NT envisages that the registers will be accessible to competent authorities and obliged entities having CDD obligations, on a tiered access basis, taking into consideration the POPIA and the Promotion of Access to Information Act (PAIA) and international law. Further clarity was provided that the FATF left open access to the general public for countries to decide and in South Africa, this decision has not yet been made as it requires full consultation with all stakeholders.
NT mentioned that guidance will be provided regarding the term "effective control" in the definition of the “beneficial owner” to ensure consistent application of the term “beneficial owner” in the different Acts and to provide certainty.
On failure by Trustees to perform duties, NT explained that the forthcoming Regulation of Trusts Bill will propose to provide that a trustee that willfully fails to establish and keep a register of the beneficial owners, or that knowingly keeps false information of a beneficial owner, is guilty of an offence. It will also provide sanctions for the wrong information to a trustee.
NT committed to timeously providing guidance and awareness-raising initiatives regarding the training of prosecutors, police and other role players.
NT clarified that the use of the term “prescribed” in “administration sanctions” in the NPO Act denotes that regulations will be made by the Minister of DSD in respect of administrative sanctions, such as the types of administrative sanctions and maximum financial penalty; and that consideration potentially will be given to addressing administrative sanctions further in the NPO Amendment Bill.
It was further explained that over and above the financial penalties in respect of the FIC Act, there are other administrative sanctions for non-compliance such as restricting business activities or suspension. Also, the penalties are per offence so if there are several contraventions, the penalties will be commensurate with the number of contraventions. The penalty will differ based on the circumstances of each non-compliant natural person or entity and various factors that are typically taken into account such as the effectiveness of the fine to decide the quantum of the fine.
With regards to foreign non-profit companies and foreign trusts, The NT said that the CIPC does not support this proposal, as this would involve taking over the mandate of another authority. The CIPC maintains that it will continue to cater for external non-profit companies as far as they meet the criteria set out in section 23. The NT does not believe that this is a matter which can be addressed in the current GLAB. The proposal to revise the definition of foreign companies is therefore not supported. The term “control” in the Companies Act will take on the ordinary dictionary meaning and be interpreted in a manner consistent with FATF guidance and international law. However, additional domestic guidance will be considered to assist in the consistent application of the term in the different Acts.
On the constitutionality of the amendments to the NPO Ac, the NT obtained a legal opinion from the Senior Counsel, to advise on the provisions in the tabled Bill proposing mandatory registration of NPOs. The opinion examined the constitutional rights to freedom of association, freedom of religion, and the rights of cultural and religious organisations. It examined clause 10 of the tabled B-version of the Bill and concluded that clause 10 is not liable to an interpretation which confers a power to “interfere with the religious organisation’s doctrines/tenets/beliefs”. Clause 10 provides that an NPO “must be registered”, and refers to the mandatory and discretionary content of an NPO’s constitution. The clause confers no discretionary power on the functionary responsible for registering an NPO. It advises that all registration requirements should be in the Bill and recommends the removal of the provision that the Minister may prescribe additional registration requirements. This was proposed to, and adopted by the Standing Committee on Finance (SCoF), and the B-version of the Bill passed by the NA does not contain the provision. The opinion advises that transitional arrangements about registration should be specified in the principal Act, and that is now the case in the revised Bill. The B-version of the Bill entails that registration will be subject to the objective requirements and processes set out in sections 12 to 14 of the NPO Act.
The NT does not support the proposal that NPOs be registered under the FIC Act instead of under the NPO Act. It was explained that the requirements that would apply to NPOs if they were required to register as accountable institutions under Schedule 1 or a reporting institution under Schedule 3 of the FIC Act would not be appropriate or aligned with the scheme of the FIC Act. Also, those NPOs that would be required to register under the FIC Act would be regulated and supervised differently from those who voluntarily register under the NPO Act, which would be undesirable. The NT noted the comments and proposals submitted and the concerns raised and committed to seriously consider these comments in the NPO Act Amendment Bill process. The NT further committed to continue engaging the DSD regarding the capacitation of the NPO Directorate.
7.1The GLAB seeks to address the deficiencies identified in the FATF evaluation process by amending the TPCA, the Companies Act, and the FSRA to provide for beneficial ownership information in respect of trusts, companies and financial institutions, respectively, and provide offences and penalties in respect of contraventions; amend the NPOs Act to improve oversight over all NPOs, not just the voluntarily registered ones; and clarify the mandate of the FIC.
7.2The stakeholders raised several technical issues on the wording and definitions of certain provisions of various Acts. Key substantive issues raised include the inadequate public participation process; general opposition to the mandatory registration of NPOs; the constitutionality of the proposed NPO amendments; the alignment of the B-version of the GLAB and the draft NPO Amendment Bill; the administrative capacity of the DSD to effectively oversee NPOs; access to beneficial ownership information; and training of the relevant officials to ensure effective implementation of the GLAB.
7.3The Committee notes that, despite the concerns raised, the majority of the stakeholders support the objectives of the GLAB and acknowledged its crucial importance.
7.4The Committee notes the NT’s comprehensive responses on the constitutionality of the Bill and the legal opinion they obtained from a Senior Counsel that the Bill is constitutionally sound. Parliament’s Legal Services Unit considered the NT’s legal opinion and NT’s further arguments on the constitutionality of the Bill and concluded that the Bill is constitutional.
7.5The Committee notes NT’s commitment that it will ensure the effective implementation of the Bill and that the FATF process will serve as an additional monitoring mechanism as it does not only require the amendment of the laws but also that the outcomes are effectively met.
7.6The Committee notes the stakeholder’s general opposition to the mandatory registration of NPOs, the prescribed administrative offences and the recommendations made. NT argues that greylisting will affect the NGO sector; and that it agrees with the stakeholders that it is important to ensure a registration regulation mechanism that would work for the NPO sector and achieve the intended objectives of the Bill.
7.7The Committee notes the stakeholder’s concerns about the DSD’s administrative capacity to manage the NPO sector, including a 10-year backlog in registrations and the comments in the FATF’s report that South Africa cannot monitor NPOs.
7.8The Committee notes the stakeholder’s concerns about the DSD’s acknowledgement of its current capacity and IT systems challenges; and that the expected additional responsibilities brought by the proposed amended NPO Act will require additional capacity. The Committee further notes the DSD and NT’s commitment that they will work together with the FIC to ensure effective implementation of the legislation and that where there is a need, the DSD will collaborate with and negotiate for the deployment of critical skills from other institutions and government departments.
7.9On the misalignment of the B-version of the GLAB and the draft NPO Amendment Bill, the Committee notes that NT will continue to engage with the DSD and ensure that the objectives and budgets of the two Bills are aligned before the NPO bill is published and tabled before Parliament.
7.10The Committee notes the recommendation to make beneficial ownership information publicly available to enable various role-players to assist in the fight against tax evasion and corruption. The Committee welcomes the NT’s commitment that the relevant stakeholders will be furnished with the additional information requested and that the process will be transparent and allow the public to effectively engage.
7.11The Committee notes that the NT has a Memorandum of Understanding with all the relevant entities to ensure a coherent system of beneficial ownership and that the FIC has a similar arrangement with the relevant government agencies such as the Master’s Office, the CPIC and the Department of Justice and Correctional Services.
7.12The Committee notes the initial objections in the SCoF process by religious organisations related to the constitutionality of the proposed amendments to the NPO Act, particularly on the NPO Directorate of registrations. NT said that it carefully considered the issues raised, including obtaining a legal opinion from its Senior Counsel and making the provisions related to registrations and de-registrations explicit in the legislation. In response to a written submission by the Joshua Generation Church on the day before the Committee is to vote on the Bill, NT’s response included noting that: “The scope of nonprofit organisations that would be required to register in terms of the NPO Act has been significantly reduced in the amended version of the Bill. Only nonprofit organisations that send funds or perform activities or provide services outside of South Africa would be required to register. In response to concerns raised about the exercise of powers of the Directorate of Nonprofit Organisations in terms of the NPO Act regarding registration and cancellation of registration being exercised in a manner that potentially infringe on rights of freedom of association and freedom of religion and rights of cultural and religious organisations, wording has been included in the updated version of the Bill to clarify the limited scope of the powers. Registration can only be refused if requirements for registration have not been complied with, and after the applicant has been notified that there is not compliance with a requirement and the noncompliance has not been rectified after having been given an opportunity to do so. It is also explicitly stated that a nonprofit organisation may only be deregistered if it has not complied with a requirement in the Act or its constitution. It is also now explicitly specified that the director of nonprofit organisations may only require a nonprofit organisation to amend its constitution only if the constitution did not address the matters that are required to be addressed in terms of section 12. This also ensures that the powers or the director are clearly defined and limited. Failing to comply with specified provisions in the NPO Act now would not be offences, as was proposed in the tabled version of the Bill, they would now be subject to administrative sanctions, and would not be offences.”
7.13The Committee reiterates its dissatisfaction with the NT for its late introduction of the Bill to parliament. It also repeats that it utterly refutes the false allegations by some in the media that the Finance Committees in Parliament have been holding up the process of finalising this legislation.
7.14However, the Committee recognises that it was just slightly over a year ago – in October 2021 - when the FATF published the MER, that the NT began engaging with different departments, Cabinet, and conducted its participation process and it had a very onerous task to get the Bill introduced to Parliament in August 2022.
7.15The Committee believes that, ultimately, civil society stakeholders had more than enough time to participate in the processing of the Bill, and, in fact, did so until the very last meeting before the Member of Parliaments’ formal voting on the Bill. The Committee agreed to meet with stakeholders on a Saturday afternoon and most of a Sunday, but they felt it was not necessary. Among the issues raised on public participation were the following:
7.15.1While it is important to give the public adequate notice beforehand, of a public hearing, this alone does not determine the quality, value or effect of public participation. It is the extent of participation in the processing of a Bill after the formal date of a public hearing, how seriously a Committee takes the views of civil society stakeholders and the number of hours spent on a Bill, among other considerations, that also determine the quality of public participation.
7.15.2 Public participation in the Bill began with the National Assembly’s SCoF public hearings of 11 October 2022 and 25 October 2022, and through the SeCoF process from 23 November 2022 until 7 December 2022.
7.15.3 There is no evidence to suggest that the quality of the arguments presented by the stakeholders would have been any different had they had more time to submit their initial presentations to the Committee. When this was suggested to the stakeholders, none of them responded to say otherwise.
7.15.4 Most of the changes made to the Bill by SCoF emerged from submissions by civil society stakeholders. The stakeholders have, in any case, already significantly influenced the shape of the Bill through the SCoF process, even if not all of their proposals were accepted. The stakeholders agree that there have been significant improvements to the Bill since it was introduced to the National Assembly.
7.15.5 This is a section 75, not section 76, Bill and the SCoF plays the main role in processing it, and it is in that process that stakeholders mainly had to influence this Bill.
7.15.6 There are special circumstances that have required this Bill to be processed before Parliament ends this year and the time allocated for its processing has to take into account these special circumstances.
7.16A Copy of this report was also sent to civil society stakeholders for their comments.
7.17All the participating civil society stakeholders said that they were satisfied with the public participation process.
7.18The ability of participating civil society stakeholders to win support for their proposals on policy and legislation processed by parliament does not only depend on the quality and value of their presentations to Parliament; but the social weight they carry and the extent to which they create public awareness of their causes. There are a variety of ways they can do this, including through using the established media, social media, petitions, pickets and mass demonstrations. The Committee encourages them to also use these other means as part of strengthening our democracy.
7.19While Parliamentary Committees need to take public submissions on policies and legislation seriously and create every space for the public to participate in parliamentary processes, civil society stakeholders need to appreciate that ultimately it is the elected public representatives who make the final decisions. While playing an active and influential part in shaping policies and legislation before parliament, they cannot co-legislate or co-govern.
7.20The Committee is acutely aware of the urgency of the amendments and the severe implications of the country’s failure to comply with the FATF requirements, including the devastating impact that greylisting will have economically and financially on the country, especially in these extremely challenging times. The Committee believes that it has had enough time to consider the Bill and has found the active participation of the civil society stakeholders very helpful, and expresses its fullest appreciation to them. Even if the Committee had spent even more time on the Bill, it would not have come to any different outcomes to what it has come to, as expressed in this report.
8.1The Committee recommends that the NT engages further with civil society stakeholders on the effective implementation of the Bill, should there be a need for their assistance.
8.2The Committee reiterates its recommendation that, while the policy issues in the Bills may be clear, there is an obligation on the executive to draft Bills plainly and clearly.
8.3The Committee recommends that the NT should ensure that the issues raised are addressed; the DSD is capacitated to adequately monitor the NPO sector; the public has reasonable access to beneficial ownership information; and the FIC mandate is properly clarified to enable it to produce forensic evidence, improve its supervision and is fully empowered to access information in registers kept by all organs of the state.
8.4The Committee recommends that the NT and the DSD ensures that the GLAB and the NPO Amendment Bills are aligned and reconciled; and that they are transparent in this process.
8.5The majority of the Committee does not agree with the stakeholder’s recommendation that the FIC should supervise and monitor NPOs, rather than the DSD. The Committee agrees that the FIC does not have the legislative authority to do so, nor the capacity, and that the FIC will face the same capacity challenges as the DSD if it is given the additional responsibilities. The Committee recommends that the responsibilities remain with the DSD, but it should be adequately resourced to fulfil them.
8.6The Committee recommends that the NPO registration process should be simplified; and that NT in consultation with the DSD should consider the recommendation made by the stakeholders that a registration regulation mechanism that would work for the NPO sector and achieve the intended objectives of the Bill, be developed.
8.7The Committee will refer the NPO working Group’s submission to the Parliamentary Committee on Social Development in the NCOP and to the Director General of the DSD.
8.8The Committee understands that the proposed amendments in the GLAB 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. Having considered the legal advice received from Parliament and the legal opinion from the Senior Counsel received from the NT, the Committee believes that the proposed amendments are constitutionally sound and approves of them.
8.9The Committee believes that to effectively implement the Bill, and this is crucially important, the DSD needs to be better capacitated and resourced and recommends that since NT has taken responsibility for processing this Bill and introducing it to Parliament and moreover it ultimately decides on allocating funds from the national budget to the different departments and relevant public entities, NT ensures that DSD is given the necessary funds and other support to effectively implement its responsibilities in terms of this Bill.
8.10The Committee recommends that NT also ensures the necessary funding and other support for the other departments and entities that also have responsibilities in terms of this Bill.
8.11It is utterly crucial that this Bill be effectively implemented. The Committee will review progress on this twice a year and invite civil society stakeholders to participate in the meetings. NT must review progress until it is satisfied that implementation runs smoothly.
The Select Committee on Finance, having considered and examined the General Laws Amendment Bill [B18B - 2022] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.
The Democratic Alliance (DA), Economic Freedom Fighters (EFF) and Freedom Front Plus (FF+) reserve their position.
Report to be considered