Financial Intelligence Centre Act schedule amendments: public hearings

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Finance Standing Committee

16 August 2022
Chairperson: Mr J Maswanganyi (ANC) & Mr Y Carrim (ANC, KwaZulu-Natal)
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Meeting Summary

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Draft Amendments to Schedules 1, 2 and 3 Financial Intelligence Centre Act

Financial Intelligence Centre Act 2001 (Act No 38 of 2001)

In a virtual meeting, the Standing Committee on Finance and the Select Committee on Finance held a public hearing on the draft Amendment of Schedules 1, 2 and 3 to the Financial Intelligence Centre Act 2001(Act No 38 of 2001). They discussed the way forward for the Portfolio Committee on Finance.  The international Financial Action Task Force has found SA to be deficient and recommended that the scope of accountable institutions be broadened. Failure to do so could see the country grey-listed next year.

The South African Institute of Chartered Accountants (SAICA), OUTsurance and the Minerals Council South Africa (MINCOSA) presented their views and recommendations on the proposed amendments. There was agreement among the presenting bodies and the written submissions on the need for the draft amendments to the FIC Act, and that these proposed amendments had come about too late. The need for clear and concise definitions and terminology within the proposed amendments was also recommended.

Members asked about the implications of the proposed amendments on affected bodies' cost of compliance, the limitation to cash-only transactions, and protection of ordinary consumers from being affected by the draft amendments.

Treasury responded that a more detailed written response would be released in the coming days, and pointed out that specific exclusions made it harder to implement the FIC Act.

The FIC responded that in the life insurance or long-term insurance industry, the current situation was that no types of insurance business were excluded from the FIC Act. The proposed amendments would bring a change to this, by narrowing the scope of the FIC Act.

The type of product was not the only factor that affected risk in compliance with anti-money laundering legislation. It included who the customer was, features of the customers themselves, and the customer's geographic location.

The objective of including high-value goods dealers was not only to deal with cash transactions but also to deal with businesses with customers who had disposable income to buy expensive items. This would not prevent these transactions from happening, but would provide a record of such transactions.

The level of effort required by banks to comply with the anti-money laundering legislation was higher because people were creating more and more layers of transactions to deceive the banks. This was why the scope of the FIC Act needed to be widened. This would ensure that the burden was carried by other types of institutions which may be used as intermediaries in these transactions.

The FIC said small and medium enterprises would now have to comply with the FIC Act, as it was incorrect to assume that small businesses dealt only with low-risk customers. The burden the compliance institution would need to take on depends on the type of business area it was in, the type of products and services it provided, and the type of customers it chose to deal with. It was not necessarily dependent on the size of the business itself. Where an institution provided a multitude of services, and some of those were captured by the FIC Act, the institution's obligations would apply to the area of the business covered by the FIC Act.

 

The Committee was concerned that a narrative was created that the delay in passing the amendments was because of Parliament – it was made clear that the failure to process this Bill had nothing to do with the Committees. It had to do with problems with Treasury. The Finance Committees were ready to process the Bill expeditiously, given its importance.

 

The Committee would deliberate on the issues raised today by the stakeholders and look at the Bill itself, then compile a report and send it to Parliament. Parliament would hopefully adopt the report and it would be referred to the Select Committee on Finance. All the critical concerns raised by the stakeholders would be taken into consideration. The Committee needed to ensure that the regulations did not impact the insurance and banking sectors, nor create a burden for low- and middle-income individuals and SMEs

Meeting report

Amendment to Financial Intelligence Centre Act: Public Hearings

Chairperson Maswanganyi said that three stakeholders would be presenting:

The South African Institute of Chartered Accountants (SAICA);
OUTsurance; and
Minerals Council South Africa (MINCOSA).

South African Institute of Chartered Accountants (SAICA)

Ms Juanita Steenekamp, Project Director: Governance, SAICA, presented the draft amendment of Schedules 1, 2, and 3 to the FIC Act of 2001, including the Institute's support for amendments to curb money laundering, which SAICA felt had come too late.

She said there was a lack of clarity on who were accountable institutions, other regulators, when a person was carrying on a business, trust arrangements, and what was meant by "creation, operation or management of a business." She also expressed concern over the cost of compliance, and the lack of a transitional period.

(See presentation for more information)

OUTsurance

Mr Keigan Hart, Compliance Officer, OUTsurance, presented OUTsurance's submission on the proposed amendments, including the background to the FIC Act, OUTsurance's interpretation of the proposed amendments, and the inclusion of inherently low-risk products.

(See presentation for more information).

MINCOSA

Ms Ursula Brown, Legal Head, MINCOSA, said the Minerals Council and its members fully supported responsible initiatives that combat money laundering, organised crime and all aspects associated with illicit trade, including compliance with the Financial Action Task Force (FATF) standards. However, it felt that the scope and extent of the draft amendments were too wide, and suggested recommendations to provide greater clarity on the proposed amendments.

(See presentation for more information).

Discussion

Dr D George (DA) said that they all knew that FICA did not work -- because of the legislation and South Africa was about to be grey-listed. What was in place was not working. No matter what laws were made, if there were people who were not going to comply with it or were going to engage in illicit cash flows or finance terrorism, they were going to do so anyway. The law needed to do its best to counter that, without damaging the economy.

Obviously, there were international obligations. It was clear that FICA, as it currently stood, made it exceptionally difficult for the average person to transact with banks, which was usually the compliant section of the population. The perpetrators of the more sophisticated scams and schemes were not apprehended, and then the general public needed to pay the price of inconvenience. It was a bit of a conundrum that needed to be navigated, considering the cost.

OUTsurance had mentioned that it would not want to be as involved, as laid out in the FICA, because of the cost of compliance. This was high for banks and would increase OUTsurance's operating costs, which would be passed on to the consumers. Had OUTsurance done any calculations on the financial implications? What would it do to the consumers?

Mr D Ryder (DA, Gauteng) recalled that SAICA had made the point in their presentation, that this had come "quite late in the game." This had led to an interesting conundrum, because between October 2021, when the warnings had been received, and June 2022, they had not seen much activity. The Committee had not been taken on board with the issues of grey-listing and challenges that the proposed amendments would deal with. Treasury had to answer for what it had been busy with from October 2021 to June 2022.

The common thread in all three presentations was that this was a broad, heavy-handed overreaction. He did not think sufficient thought had gone into the proposed amendments and their impact. He welcomed the opportunity for public participation and stakeholder input.

SAICA, OUTsurance and MINCOSA's presentation, the National Clothing Retailers' Federation (NCRF) and the FEM Construction Industry Loan Fund, which had sent in written submissions, echoed a similar sentiment surrounding the importance of the definitions' clarity. This was important for Treasury to note.

Risk-weighting, or determining where risk actually lay, was important to clarify. MINCOSA had asked during their presentation what the actual intention behind the amendments was -- were they looking at all the cash transactions, or only the high-value transactions? The real intention behind the Bill needed to be clarified.

Mr Ryder was disappointed at the absence of the Banking Association. He had wanted them to unpack their "very technical" written submission. There was room to investigate that.

On cost of compliance, Dr George had covered him, but he noted that they had pushed for banks to establish Mzansi accounts to make banking more accessible to the "unbanked." Was the cost of compliance going to push financial transactional accounts out of the grasp of the people that they were trying to protect?

He said there seemed to be general acceptance that something needed to be done, and he supported this, but he felt there had not been enough consideration given to these regulations.

Ms P Abraham (ANC) commented that the stakeholders who had presented or sent written submissions seemed to agree on FICA. As Members of a multiparty Committee, they needed to appreciate that they were not alone in the fight against the illegal exodus of money from South Africa.

She recalled that OUTsurance had recommended a different arrangement for smaller companies, specifically about paying more and causing beneficiaries of OUTsurance to pay more. This area needed to be looked into, as the public should not be made to suffer unnecessarily.

Regarding the increased cost of compliance, the difference between bigger and smaller companies meant it was important that an alternative be provided. She asked OUTsurance what the alternative should be.

What was the reason for MINCOSA's recommendation that transactions be limited to cash only?

Responses

OUTsurance

Mr Hart responded to Dr George's question on the cost implications, and said he could not provide actual figures, but OUTsurance would not change its position. With the 2020 amendments, OUTsurance had thought that lower-risk products would not fall into the ambit of the FIC Act. OUTsurance had experienced massive costs in implementing a Politically Exposed Person (PEP) screening tool via a third-party vendor. In 2019, OUTsurance implemented an identity document (ID) verification tool that it used during onboarding, which was also very costly, as they were charged per verification check. The increased costs did not measure up, especially for low-risk products.

On Ms Abrahams' question, he said that for the original amendments for 2022, the long-term products that were purely of a risk nature did not fall under the ambit of the FIC. If there was a product that allowed for an investment component and a lump sum payment, that would be treated differently.

MINCOSA

Ms Brown responded to Ms Abrahams' question on the amendments being limited to cash transactions. She said the objective was for South African money laundering and counterterrorism legal framework to be brought in line with global and Financial Accounting Foundation (FAF) standards. Looking at the FAF standards, and specifically the anti-money laundering Directive 4 and the UK regulations, the challenge lay in cash transactions. The global standards were limited to payments in cash -- they did not include all transactions. Based on that, they were making the recommendation to deal with the challenges directly and limit them to cash transactions, in line with global standards. Unlike electronic transactions, it was hard to trace the money trail with cash transactions.

SAICA

Chairperson Maswanganyi asked SAICA about the impact the proposed regulations would have on small and medium enterprises (SMEs).

Ms Steenekamp responded that SAICA had mentioned accountants that practised in small practices. In the past, this had not been applicable to them. Regarding the compliance costs, when one registered with the FIC as an accountable institution, there were certain compliance obligations that one would have to complete, similar to OUTsurance's onboarding process. SAICA's accountants would now have to spend money on this onboarding process, registration with FIC, and reporting certain transactions. SAICA members, as accountants, already had a code of professional conduct, non-compliance laws and regulations, and had to report any non-compliance. The proposed amendments to the FIC Act would be new, however, and would cost money and take time to implement.

Further discussion

Mr Ryder asked whether the onboarding process required checks and information verification. He recalled that Mr Hart had mentioned OUTsurance being charged per check of identity documents. Who was charging OUTsurance each time it verified an ID? Who was OUTsurance checking it with? Who was initiating that charge?

Mr Hart responded that it was not an ID check. The ID number provided by the client was checked via the third-party system, which had access to the South African Home Affairs database. Either the ID number was valid and the person was alive, or the ID number was not valid, or the person was listed as deceased.

Mr Ryder asked who OUTsurance was paying.

Mr Hart responded that it was a third-party vendor, called Astute.

Chairperson Carrim said that he had contacted the Acting Director-General (DG), and had explained to him that some sections of the media had been reporting that the delay in passing the amendments was because of Parliament. This had been covered with Treasury by the Select Committee -- that the Committee had received the Bill on the last day of the second term of Parliament and had not been given any information about where these proposed amendments had come from. There was a proposed report adopting the Bill which, in his experience, had never happened since 1994 – that amendments were proposed on a Bill, and voted on the same day.

He wanted to make it clear that the failure to process this Bill had nothing to do with the Committees. It had to do with problems with Treasury. The Acting DG had said that he was aware of this, and had said that Treasury took responsibility for it.

On behalf of the National Council of Provinces (NCOP) Committee, he said that as soon as the National Assembly -- this was the Standing Committee's public hearing with the Select Committee present --processed the amendments clause-by-clause, and then voted in the National Assembly and referred the Bill through the Speaker to the House chair on the Select Committee's side, he assured Chairperson Maswanganyi that the NCOP would process the Bill expeditiously, given its importance.

He said that the NCOP Finance Committee had received a briefing from Treasury the week before about the pending processes and the omnibus Bill, which would involve many departments and many committees, that were in the process of being considered. Parliament was ready to act on this Bill.

Some of the proposals made by the stakeholders needed to be considered very seriously, which he hoped the Standing Committee would address.

Chairperson Maswanganyi said that whenever there was a delay in processing, it was not because of Parliament. Treasury had taken responsibility, and had been sitting with this matter since 2017. He wanted to make it clear to the public that the Committee had not been presented with the proposed amendments previously. This matter had come to the Committee for the first time now. Parliament did not take shortcuts when it came to processing matters. This was a matter of public interest, so they had to ensure they went through the public hearings, as they were now doing, and then process the report in Parliament.

Treasury's response
Mr Vukile Davidson, Chief Director: Financial Sector Policy, National Treasury, apologised on behalf of the DG for his absence, but said he would be joining the meeting soon.

The Financial Intelligence Centre would provide a broad initial response to today's presentations and the written submissions, but would respond in more detail by the end of the week.

It was important to note that a significant number of submissions had been received through the Minister's consultation process, during which Treasury had addressed the substance and tried to accommodate some of the concerns raised. Treasury had a risk-based and proportional approach to the issues raised by the stakeholders.

FIC Responses
Mr Pieter Smit, Legal and Policy Head, FIC, said that many of the comments in the written submissions, and in the presentations today, had referred to arguments for excluding certain categories of certain businesses/types of transactions/types of products in the scope of the FIC Act, by finding ways to narrow down how items in Schedule 1 were defined, creating carve-outs from the scope of the FIC Act. The FIC's general approach during the formulation of the proposed amendments had been to avoid creating carve-outs from the scope of the FIC Act. Then a patchwork of schedule items had to be woven together to establish the scope of the FIC ACT. This made it difficult to determine when an institution was accountable and when it was not, as all the exceptions and specific arrangements carved out had to be consulted to determine this. No one would be certain whether a certain business needed to comply with the FIC Act until enforcement actions were taken.

The second reason was that it was very difficult to argue that each and every such exclusion was in an area with no money laundering risk. One could not exclude areas of business from this type of legislation if there was any -- even low -- risk, money laundering, or financial terrorism. As authorities in an assessment scenario, they would have to argue that that area that had been excluded was subject to no risk and would not be subject to the Act. If there was any risk, then the legislation should be applied on a risk-sensitive basis. This was important, especially considering the difference between the substantive obligations contained in the Act and the schedules which determine the scope of the Act. An institution being accountable was not a "one-size-fits-all" concerning how it should comply with the FIC Act. This came through in FIC's response to some of the comments on today's presentations.

In the life insurance or long-term insurance industry, the status quo was that no types of insurance businesses were excluded from the FIC Act. The proposed amendments would bring a change to this, by narrowing the scope of the FIC Act. It would have to be argued that there was no money-laundering risk in this area. For instance, with funeral products, the insurer would have to know the client in the same way they complied with their usual obligations. There was a difference in determining the scope of the FIC Act based on risk and determining the level to which an institution complied in different risk-level scenarios.

The type of product was not the only factor that affected risk in compliance with anti-money laundering legislation. It included who the customer was, features of the customers themselves, and the customer's geographic location. Products were not the only feature to determine which area of business to exclude from the legislation.

The written submissions and presentations questioned the objectives of the amendments, particularly surrounding cash transactions and high-value goods dealers. It was important to bear in mind that the objective of including high-value goods dealers was not only to deal with cash transactions but also to deal with businesses they conducted with customers who had disposable income to buy expensive items. Whether these customers paid in hard cash or electronically was irrelevant to this discussion. The point was that those who were otherwise ordinary people, who worked for a salary, could finance it over a number of years and mobilise a significant amount of funds to purchase items.

This was also emerging in global debates. If one looked at the international Financial Action Task Force recommendations, there were no limitations on transactions, such as precious stones and metals, to cash transactions only. Those categories had to be included generally in the scope of money laundering legislation. With the FIC Act, precious stones and metals had not been mentioned specifically by name, but were included in the broader category of high-value goods' dealers. In South Africa, when criminals wanted to fund their lifestyles from proceeds of crime, they were not only going to spend it on precious metals and stones, but also other expensive items such as cars and houses.

The objective was not to prevent these transactions from happening, but to have some reasonable assurance that when such a transaction was taking place, there would be a record of the transaction's details, and the customer's identity, to create an order trail that could be followed.

People have often referred to the 'burden on the banking sector,' particularly the level of effort required by banks to comply with the anti-money laundering legislation. This was true. On an 80-20 principle, in the South African financial set-up, the majority of funds eventually flowed into the bank. Banks struggled to comply with their obligations and cost them so much because people were creating more and more layers of transactions to deceive the banks and avoid being identified by them, manipulating their relationship with the bank. They included business transactions in these layers. This was why the scope of the FIC Act needed to be widened. This would ensure that the burden was carried by other types of institutions which may be used as intermediaries in these transactions.

On SMEs that would now have to comply with the FIC Act, Mr Smit said that the Act had already included a large number of small businesses, including legal practitioners -- from very large firms, to firms with one or two partners. They all needed to comply with the Act, but dependent on how they were affected by the risk and the type of business they engaged in. It was incorrect to assume that small businesses dealt only with low-risk customers. The burden the compliance institution would need to take on depends on the type of business area it was in, the type of products and services it provided, and the type of customers it chose to deal with. It was not necessarily dependent on the size of the business itself.

Where an institution provided a multitude of services, and some of those were captured by the FIC Act, the institution's obligations would apply to the area of the business covered by the FIC Act. This was what schedule 1 was for. It would be applied to all businesses that provided services and products for profit, covered by the Act.

A more detailed written response will be provided in the coming days.

Closing remarks
Chairperson Maswanganyi discussed the next steps the Portfolio Committee would take. It would deliberate on the issues raised today by the stakeholders and look at the Bill itself, then compile a report and send it to Parliament. Parliament would hopefully adopt the report and it would be referred to their colleagues in the Select Committee on Finance. All the critical concerns raised by the stakeholders would be taken into consideration, so public hearings would not be called for the sake of compliance. As much as the stakeholders agreed with the proposed amendments, they had raised important concerns about the costs involved, which could not be ignored. The Committee needed to ensure that the regulations did not impact the insurance and banking sectors, nor create a burden for low- and middle-income individuals and SMEs.

He thanked everyone for attending, as well as those who had presented.

The meeting was adjourned.

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