Financial Intelligence Centre Strategic Plan 2011, SA Reserve Bank March Quarterly Bulletin, Committee Report on StatsSA budget

Meeting report

Financial Intelligence Centre (FIC) Strategic Plan 2011 briefing
Mr Murray Michell, Director, Financial Intelligence Centre, noted that the mandate of the Financial Intelligence Centre (FIC) was to receive information for analysis from accountable institutions, and, where necessary, then to refer this information to law enforcement authorities, such as the South African Police Service (SAPS) or the Hawks. It also exchanged information with equivalent bodies in other jurisdictions and countries. It coordinated South Africa’s policy on Anti-Money Laundering and Combating of the Financing of Terrorism (AML/CFT) and administered the Financial Intelligence Centre Act (the Act). In this regard it liaised closely with the National Treasury (NT), other Government departments and all relevant stakeholders in both the public and private sectors as well as internationally.

The functions of FIC included giving guidance to supervisory bodies and accountable institutions. It also monitored and inspected for compliance in cases where no supervisory body existed (such as parastatals, Post Bank and other institutions). It also participated in international forums such as the East Southern Africa Anti-Money Laundering Group (ESAAMLG) and Egmont. It also maintained efficient data systems, with integrity, and operated as a sustainable organ of State.

Mr Michell noted that the FIC currently employed in the region of 160 people. It would, however, need to increase this staff complement.

In relation to issues impacting on its delivery, the FIC found that, locally, the impact of its success had resulted in an increased demand for further collaboration, which, in turn, demanded a more agile use of FIC’s capacity and systems. There was also a need for FIC to be more forward-looking not only in crime prevention but also in assisting with the apprehension and prosecution of criminals. The amendment to the FIC Act conferred greater powers upon FIC and the supervisory bodies to raise compliance and ensure visible enforcement.

International issues that impacting on its delivery included the fact the money laundering, the financing of terrorism and the movement of criminal money was borderless. This necessitated collaboration and interaction between FIC and regional and international bodies. Through FIC, South Africa was providing leadership in the region. FIC was also a member of the Egmont group, whose 121 members focussed on an exchange of information around best practice, technical practice and technical skills and information.

Mr Michell outlined the strategic outcomes for the 2009 – 2012 cycle, which included improving the consumption of the FIC’s products and services (for which it allocated R21.2 million), improving compliance of accountable institutions and society (with an allocation of R16.6 million), improving the AML/CFT capacity in the Eastern and Southern Africa region (for which R5.3 million was allocated), improving the AML/CFT framework in South Africa (with an allocation of R6.5 million), developing and commissioning the Centre’s ICT system (at an estimated cost of R22 million) and ensuring that FIC remained a sustainable and capable institution (for which R9.5 million was allocated).
In relation to improving the consumption of its products and services, FIC had seen a 10% increase on the previous financial year and had responded to 90% of the requests it had received within the agreed response time. As part of its efforts to improve compliance, it had implemented a risk-based approach to AML/CFT supervision, and also approved a review of the functioning of various reporting streams. In relation to improving the AML/CFT framework in South Africa, it had approved an action plan for the implementation of amendments to the FIC Act and was to submit proposed legislation to the Minister of Finance. In order to develop and commission its ICT system, it had reviewed plans for newly identified and additional business systems. In order to ensure that it was a sustainable and capable institution, it was looking to increase its staff capacity by 14% year-on-year.

Mr Michell outlined the split in the budget allocations for 2011-2012, noting that this included 8% dedicated to legal matters, 19% for IT and 47% for support systems. Its main focus areas ahead included developing a new operating model with relevant strategies, ensuring more effective supervision of accountable institutions and implementing visible compliance enforcement actions. It would increase collaboration with national bodies so as to support the strategy to combat money laundering and terrorist financing. It would also expand the national footprint for the FIC, facilitate the regional development of AML/CFT frameworks, review the legislative framework and continue to develop integrated ICT infrastructure.

Discussion
Mr N Koornhof (COPE) asked whether FIC was planning to ensure that Financial Intelligence Centre Act (FICA) numbers could be obtained electronically by individuals.

Mr Michell answered that this was not part of the current strategic plan, which had been drawn up some years previously. However, the next strategic plan would look at this as a concrete issue, and was hoping to make compliance with legislature easier.

Dr D George (DA) asked whether, in relation to staff- debt, FIC’s staff were not financially compromised as a result of being given advances on their salaries.

Mr Michell answered that the FIC had an ongoing process which exposed individuals to budgeting and the management of their finances. Lifestyle audits were also conducted on employees.

Dr George asked why FIC had it listed nil expenditure around the 2010 World Cup, when it apparently not spent in that regard.

Mr Michell explained that this was listed in response to a request by the Auditor-General to do so.

Dr George asked for more information around irregular expenditure in relation to tenders.

Ms Maleshini Naidoo, Acting Chief Financial Officer, Financial Intelligence Centre, added that there had been irregular expenditure as a result of improper tender processes being followed by the previous Chief Financial Officer, who has subsequently been dismissed.

Dr George asked why the cost of consultants had increased so significantly.

Mr Michelle added that the majority of the expenditure on consultants was connected with the building of its IT process. This approach had, however, since been changed.

Dr George asked if there was a fund into which monies confiscated from criminal activities would be paid, and, if so, what FIC’s involvement was in such a fund.

Mr Nischal Mewalall, Senior Manager: Monitoring, Financial Intelligence Centre, added that the FIC was not a beneficiary of the Criminal Assets Recovery Account (CARA), which was made available largely for law enforcement and additional resources, but played a direct role in identifying the assets that could be attached and transferred to that fund.

Ms Z Dlamini-Dubazana (ANC) asked whether the organisation was short-staffed. She also commented that there needed to be a clearer distinction between its strategic objectives and outcomes, as this lack of clarity made it difficult for the Committee to gauge its success or failures.

Mr Z Luyenge (ANC) was also concerned if FIC had sufficient capacity to fulfil its mandate.

Mr Michell answered that, given the constantly changing environment in which FIC functioned, it would constantly need to increase its staff. The FIC was committed to filling these positions.

Ms N Sibhidla (ANC) asked how FIC measured the 10% increase in the consumption of its products and services.

Ms Sibhidla also asked if the response time was part of FIC policy or whether it was set by the other stakeholder.

Mr Mewallal answered that the FIC would like to increase the consumption to 50% over a three-year period. This was also not only concerned with the supply of products but also with increasing their usability. The year-on-year growth had, at 26%, in fact exceeded that the targeted 10%. A service level agreement was entered into with the relevant agency which also looked at the timeframe.

Mr Luyenge asked whether FIC utilised the information in the Auditor-General’s report, particularly in relation to provinces, and whether it was working together with the Auditor-General and the SAPS in order to stem corruption by civil servants.

Mr Mewallal answered that the FIC had identified working with the Auditor-General as part of its outputs, and it also worked with and assisted law enforcement agencies. It was actively involved in numerous investigations that were currently under way.
 
Ms P Adams (ANC) asked how FIC intended to implement visible enforcement and expand its national footprint.

Mr Michell answered that the new regime, which commenced in December 2010, allowed for the FIC to impose penalties in cases of non-compliance. It could also now issue directives and areas of determination. There were many interventions it could now impose and it wanted to be seen as taking people to task where this was needed.

Ms Adams queried why only 13% of FIC’s bursary budget allocation had been spent.

Ms Grace Madilonga, Human Resources Manager, FIC, said that the money disbursed was to a large extent dependent on interest obtained. Most of FIC’s training budget had been spent.

 
Ms Adams asked how many women were in management positions in FIC. 
 
Ms Madilonga replied that 13 of the 22 management positions were held by women.

The Chairperson said that the strategic plans FIC presented needed to be more than mere information-sharing sessions. Clear outcomes and measurable targets needed to be included. FIC also needed to share its revised framework with the Committee in order to empower Members in turn to be able to assist the organisation in the fulfilling of its mandate.
  
Mr Michell responded that it would gladly work with the Committee. He reiterated that the strategic plans drawn up and presented now were drawn in the context of a different landscape, and the new strategic plans would certainly look to the issues raised, and assess their impacts more fully.

South African Reserve Bank (SARB) Presentation on March Quarterly Bulletin
Mr Stephan Walters, Head of Research: National Economy Unit, South African Reserve Bank, said that the fairly robust performance of the South African economy in the final quarter of 2010 partly reflected the normalisation of production of the manufacturing sector and government services.  The positive growth in the economy was evident in the three main sectors of the economy. The primary sector had, in terms of real value added, moderated somewhat from the third to the fourth quarter. Here, slower growth had been reported in both mining and manufacturing. The secondary sector had seen a fairly strong rebound from a rate of contraction, as a  result of stronger performance in the manufacturing sector. Domestic demand had continued to grow at a steady pace, with household consumption expenditure continuing to play a role in underpinning the growth momentum of the South African economy. This was largely driven by an environment of rising income levels and a fairly low interest rate. Government expenditure had also seen an increase, due to higher salaries and wages paid to government employees. While household debt had increased, the debt service cost per households, relative to disposable income, had receded. The pace of employment in the formal non-agricultural sector of the economy had picked up moderately (showing 3.6% increase in the fourth quarter of 2010). Nominal remuneration increases continued to exceed consumer price index inflation, with wage settlement rates decreasing. Consumer goods price inflation and producer price inflation had recently accelerated, at 3% and 5.5% respectively. Underlying inflation pressures remained subdued in the final twelve months to February 2011, with inflation moderating to 3.4% in February 2011.

He noted that South Africa’s current account deficit narrowed significantly in the final quarter of 2011, mostly reflecting a larger trade surplus. This, in turn, was assisted by a surge in international commodity prices. The net inward movement of foreign capital had shrunk notably in the fourth quarter of 2010, from R29.5 billion in the third quarter to R1.7 billion in the fourth quarter. This was mainly attributable to a turnaround in portfolio investments to South Africa, from the inflow of R45.8 billion in the third quarter, to an outflow of R10.4 billion in the fourth quarter. The nominal effective exchange rate of the Rand declined somewhat in January and February 2011, before strengthening again in March 2011.

Mr Vukani Mamba, Head: Financial Analysis Unit, South African Reserve Bank, added that the growth in money supply had gained some momentum during the second half of 2010, with the M3 deposit holdings of the corporate sector having picked up noticeably in 2010, while those of the household sector remained subdued. Banks’ loans and advances started a modest recovery during the second half of 2010. Other loans and advances and instalment sale credit and leasing finance recovered in the course of 2010. The repo rate had remained unchanged since November 2010, and market participants were expecting an increase in short-term interest rates by late 2011.From October 2011, non-South African residents had consistently been the net sellers of RSA bonds. In relation to house prices, there was still no sign of a quick recovery. Retail bonds had grown in popularity, with people of pensionable and near-pensionable age constituting the largest category of investors. The latest budget projected that the public sector borrowing requirement would narrow over the medium term.
 
Discussion
Mr Koornhof asked whether the growing number of public servants would prove to be of concern in the future outlook.

Mr Koornhof also asked if the growing gap between the real and nominal exchange rates was a good or bad development.
 
Mr Johann van den Heever, Deputy Chief Economist, South African Reserve Bank, answered that this was a concern. However, as a result of the reduction in Government’s debt levels, there was room for fiscal policy to allow for expansion in this regard, although he did caution that it was not a sustainable option in the long-term. As the real exchange rate was strong it favoured importers. The Bank had been building up its reserves in order to ensure that if the tide were to turn it could still ensure that confidence was supported by stronger exchange holdings than previously.

Dr George asked what impact levy increases would have on the model of the Reserve Bank. He also asked whether the Reserve Bank, in light of the recovering economy, would be revising its projections for Gross Domestic Product (GDP) growth.

A Reserve Bank official answered that the disaggregated model would show any increases and incorporate these into the main model.

Mr van den Heever added that these projections were revised during each sitting of the Monetary Policy Committee. It was looking at a stronger growth rate (in the region of 3% and 4%) for the current year.

Ms Dlamini-Dubazana asked what the current figures were in relation to the rate of contraction of the primary sector. 

Mr van den Heever added that this was a concern which the Reserve Bank was looking into addressing. In order to compile accurate statistics, a lag of one quarter had to be allowed.
 
Mr Walters added that the manufacturing sector had performed better than market expectations. Vehicle sales were also looking positive.

Committee Report on budget vote of Statistics South Africa
The Chairperson asked whether the Members wished to raise any issues under the “Recommendations” section of the draft Committee Report on the budget vote of Statistics South Africa (the Report).

Ms Sibhidla proposed that the Committee needed to be provided with answers as to why certain items had been budgeted for, despite the fact that Statistics South Africa (Stats SA) was apparently aware that these funds would only be spent in the following financial year. The Committee also needed clarity around why expenditure on the compensation of employees had decreased, while amounts spent on compensation of consultants had increased. In addition, she felt that explanations around the revitalisation of Stats SA information technology systems also needed to be provided. Stats SA also needed to try to ensure that census results were released more quickly.

Dr George proposed that a recommendation be included around the need for appropriate steps to be taken to avoid under-counting. Census packs also needed to be made available to Members prior to the up-coming census.

Ms Dlamini-Dubazana proposed a recommendation that Stats SA should report back to the Committee on its utilisation of funds.

Members then proposed, seconded and adopted the Report, with amendments.

The meeting was adjourned.