General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Bill: National Treasury response to further public submissions

Meeting report

National Treasury and Financial Intelligence Centre Presentation

Ms Jeannine Bednar-Giyose, Director: Fiscal and Intergovernmental Legislation, National Treasury, presented the responses to the submissions received on the Bill. Owing to the limited time given in the initial call for public submissions, the Committee extended the period to allow for additional input.

She indicated that 16 comments in total were received by 3pm on 25 October, and the majority of commentators were from the NGO sector specifically. 10 comments were received subsequent to 3pm on 25 October, and detailed responses to these comments will be provided to the Committee in the next Committee meeting, as it is desired to provide well considered responses to all of the submissions

Many of the comments received raised similar concerns as indicated in the first comment period.

The majority of the commentators support the Bill and its objectives in general bar specific comments highlighted in the presentation:
 

Definition of beneficial owner
The definition of “beneficial owner” in clause 1 in the proposed insertion of section 11A contains provisions which may open the door for premature vesting of certain rights on beneficiaries of the trust. This will encroach on the discretion afforded to trustees and severely limit existing rights of trustees and the founder of a trust. The proposed insertion of section 11A into the Act by clause 5 of the Bill refers to “beneficial ownership” (as opposed to beneficial owner), a term which is not defined in the Act or in the FIC Act.  The existing definition of “trust” is correctly reflecting the legal position in South African trust law. A trustee cannot be, by virtue only of the office of trustee, be a beneficial owner of the trust property. A trustee is not a beneficial owner of a trust and should not be included in the definition. There is no indication as to how far a trustee must go to “establish” the “beneficial ownership.

In light of the comments received, a proposed revised definition will be submitted to the
Committee for consideration.

Objection to compulsory registration of NPOs
The independence of civil society will be undermined. This provision is not aligned with FAFT's Recommendation 8 “focused and proportionate measures” when referring to a “risk-based approach”. The NPO Directorate doesn’t have any of the systems or the abilities to do the audit and the watchdog work. The R1-million per year organisations (and trusts) should be registered with CIPC as non-profit companies as the CIPC’s systems are better capacitated for collecting and finding data than those at the NPO Directorate. Onerous administration required of smaller NPOs. The Bill is not necessary to prohibit NPOs from engaging in money-laundering or the financing of terrorism because existing legislation already caters to this requirement. The proposed requirement, that no association may operate unless registered, would violate the fundamental right in the Bill of Rights of everyone to freedom of association.

In light of engagements with the NPO sector, not all NPOs would be required to register, the following NPOs would be required to register:

-Any NPO that makes donations to individuals or organisations domiciled in a foreign country, including when such individuals are physically in South Africa;

-Any NPO that provides humanitarian, charitable, religious, educational or cultural services outside of South Africa’s borders

Wording would be proposed to be included to make it explicitly clear that the Directorate does not have the discretion to refuse registration if the requirements of the Act are complied with. Currently, section 13(2) provides that if the applicant for registration complies with the requirements of the Act, then it must be registered.

Similarly, wording will be proposed to be included to make it explicitly clear that the grounds on which a non-profit organisation could be deregistered could not be exercised only in respect of non-compliance with requirements in the Act. Currently, the grounds for cancellation as set out in section 20 are non-compliance with requirements of the Act, or non-compliance with a provision of its constitution, which has not been rectified after receipt of a notice contemplated in that section. to ensure that the power of registration would not be able to be exercised in a manner that would potentially infringe on the rights to freedom of association and freedom of religion.

Inappropriateness for the DSD to accommodate the Non-Profit Directorate
The DSD is not the appropriate place for the Non-Profit Directorate to sit and would support a Registry or oversight body which serves and enables the full scope and ambit of non-profit work which should not be housed under a government department but should be established and given the status of an Independent statutory body reporting to Parliament. Treasury should consider adding a definition to the FIC Act of a cross-border non-profit entity as the reporting institution structure already exists in the FIC Act. Propose adding to Schedule 3 of the FICA this class of non-profits is an effective way of exercising oversight, empowering intervention. The new Companies Act does not include an easy mechanism for the conversion of Voluntary Associations to NPCs and suggest to include a mechanism allowing a voluntary association to easily convert to an NPC without losing its history.

Part of the plan underway by DSD is to enhance the NPO system. The benefits thereof is to ensure seamless integration with SARS, CIPC, and other regulators. Further, this will ease supervision of the targeted NPOs that fall within the FATF definition and also those that are deemed to be at high risk.

General Comments

As no SEIA accompanied the Amendment Bill’s publication – likely due to the urgency with which it was proposed – South Africans have little to go on when it comes to evaluating whether the legislation is beneficial or harmful. They and the IRR can only speculate, and regrettably, as far as the NPO provisions in the Amendment Bill are concerned, the consequences of this legislation’s adoption could be dire. A socio-economic impact assessment process must be followed on the totality of the Amendment. Bill.

An exemption from the SEIA requirement was granted due to the urgency of the Bill and the consequences of not proceeding with the Bill on an urgent basis

(See the presentation for more details).

Stakeholders’ responses to the presentation

Ms Caroline James, Independent Consultant, and Researcher representing amaBhungane and Corruption Watch, thanked National Treasury for the detailed presentation and expressed their appreciation for the efforts that have been put to responding to the concerns about compulsory registration of NPOs. They will examine the proposed amendments in more detail and compare them to their submissions and international practice. She appreciated Treasury’s willingness to amend the compulsory registration by creating a subset of NGOs that are required to register.

Ms Nicole Copley, Specialist Consultant, NGOLaw, said that she is very happy to hear the update on the trust laws that are on their way. The Justice Department is advised not to sidestep the non-profit sector and any consultation process that might be engaged in as NPOs will be impacted by the amendments. She looked forward to engaging with the detailed proposed amendments. Can they have more than 18 hours’ notice before the next meeting? This would be very useful in order to prepare. They maintain their view that the NPO directorate is not the appropriate body for the registration of the defined class of non-profits. Those who support this registration under the NPO directory are vastly underestimating the extent of the intervention, improvement, overall staffing and training systems transplant, funding, and time that will be required. They also maintain their view on the political, credibility and unacceptability of where the NPO directorate is currently located. She is making this clear because there are parts of the sector that will continue to vehemently protest this. There was a proposed suggestion that instead of placing non-profits under the NPO directorate, they add them to FICA’s schedule 3A list of at-risk non-profits. It is not a splitting of responsibility. It is a concentration of responsibility for a specific type of oversight under an appropriately focused and resourced authority. She knows that they did not have enough time to engage with this submission but she thinks it has merit. It might be a much simpler way to resolve the current situation. Contrary to the response given, the NPO Act currently does define office-bearer as a director, trustee or person holding an executive position. In this definition, it is referring to the board of a non-profit company by using the word ‘director’ and the trustees of a trust when it uses the word ‘trustee.’ There is no reference in that definition to the Committee members or profit governing body of the voluntary association. This means that if this definition is not amended, it will be a different and inappropriate set of people that will be held to account in voluntary associations when compared to those being held to account in non-profit companies and trusts. The governing body is the body that holds fiduciary ultimate responsibility who should be defined and who should be held accountable. This detail should be considered and paid attention to because it is critical that everything hinges on the right crowd of people. All provisions promoting good governance and fitness of office are supported and she looked forward to further engagement.

Ms Daniella Ellerbeck, Legal Advisor, FOR SA, said that it is concerning that the proposal for those NPOs that would have to register with the Department would still include most religious organisations, as per their submission in the previous week’s meeting. Many religious organisations support other religious organisations or individuals, such as missionaries, in other countries. For example, many churches set up Covid relief funds for humanitarian work in other countries. Saying that an organisation has to register with the Department of Social Development (DSD) if they make donations or provide services internationally is still too wide. At-risk NPOs cannot be defined as simply as they are suggesting for this reason. It is so wide that it is going to capture almost all religious organisations in the country, of which there are thousands. FOR SA would support a definition of, for example, NPOs that provide services to specific entities that have to register, such as the entities that were highlighted by the United Nations Security Council resolution. It is exceptionally hard to send money overseas. The South African Reserve Bank blocks it unless you make an application to your bank, which costs a few thousand rands. Even for individuals, there are specific limits to how much money can be sent overseas. It is unclear how these proposals are actually going to help combat terrorism financing. To avoid interference with religious organisations, please can the Committee look at narrowing down which NPOs need to register. FOR SA’s proposal is that registration should be for entities that provide services to specifically-identified identities, such as those identified in United Nations Security Council resolutions in terms of the Protection of Constitutional Democracy Against Terrorism and Related Activities Act. 

Ms Liesl Pretorious, Legal Advisor, Cause for Justice, said that they are encouraged at the move away from blanket compulsory registration. However, she needs to study the proposed amendments in more detail. She looks forward to receiving further details that were alluded to in the presentation and comparing them against their submission. They are also concerned that all religious institutions will be caught by the registration requirement as many work overseas or make donations overseas. They are not satisfied that religious freedom is protected explicitly and strongly enough. They support FOR SA’s proposal that entities that should register should be narrowed down. They also shared concerns about the NPO directorate and its ability to properly perform oversight. They would also appreciate a longer notice before meetings.

Ms Karabo Rajuili, Director: Country Programmes, Open Ownership, said that she will need more time to engage with the proposed amendments.

Ms Anne Clayton, Head of Public Policy & Regulatory Affairs, JSE, said that the JSE has engaged in constructive discussions with Treasury, FIC and the CIPC concerning its submission. It will continue to offer its assistance where required. She expressed her thankfulness for the manner and quality of engagement. They are encouraged that they are moving in a direction that will achieve the legislative objectives and legislation that can be effectively implemented by both the regulatory authorities and listed companies.

Mr Louis van Vuren, CEO and Attorney, Fiduciary Institute of Southern Africa (FISA), said that FISA is thankful that the definition of beneficial owner will be re-drafted. FISA has offered multiple times to assist in the drafting of legislation in relation to this. They were surprised when they saw that there was a Bill at an advanced stage and they had not been asked to assist. They could have benefitted this process. They are not opposed to duties of disclosure, but their view is that it is cumbersome and it could make fiduciary practice unprofitable. There is a real danger that this could happen. Some duties must not duplicate the duties of other entities and do the job of investigative authorities for them. Balance is needed. The concept of beneficial ownership is totally foreign to South African property law and trust law. It stems from Anglo-American common law systems. South Africa has a hybrid legal system of common law as well as civil law. Our property and trust law recognises functionally undivided ownership. The concept that functional ownership can be divided into legal ownership and beneficial ownership is totally foreign to South African law. The definition of beneficial ownership is in conflict with the definition of trust in the Trust Property Control Act. National Treasury said that they did not understand how section 9 of the Trust Property Control Act conflicts with fiduciary duty. This comment is built on the conflict between the definition of beneficial ownership and the definition of trust. He looked forward to seeing a revised draft including an amendment of this definition.

Discussion
Dr D George (DA) said that they are moving in the right direction. He is also very concerned about the registration of NPOs. Why would they have to register with the DSD? If there is concern about a specific category of NPOs that may present more of a risk, then surely they can be watched in another way. Such as via an institution like a bank. He does not understand why registration is necessary.

Adv S Swart (ACDP) said that Treasury needs to consider the Constitutional issues relating to religious organisations, in addition to the Constitutional issues relating to other NPOs. There is a distinct legal separation. While it is clear that they are heading in the right direction, thousands of religious organisations will be impacted. They have the Constitutional right of association, as well as religious rights and the doctrine of entanglement. This relates to any proposed amendments to the Constitution. This goes directly against what is being proposed, where there is a possibility of Constitutional amendments. This is a great concern. Secondly, he did not understand why the registration has to be done with the DSD. He is not satisfied with the answer that there will be additional capacity. He has been in Parliament long enough to know that departments, and specifically this Department, had to be taken to the Constitutional Court to provide basic social grants. To say that they will be given additional capacity is not persuasive. He is afraid that they already have severe constraints when it comes to dealing with grants. Now, they will be giving them an additional burden that they will not be able to implement. Members of Parliament need to ensure that when they pass laws, they need to be constitutionally compliant and they can be implemented cost-effectively. He is not sure that this Bill meets either of those criteria. This is a severe issue. He does not think that the DSD will be able to do what is required when it comes to the additional thousands of NPOs. He strongly encourages Treasury to look at the proposed amendments, such as bringing the NPOs under the schedule of FICA. Why must an NPO, as a registered non-profit company under the CIPC or as a registered public benefit organisation under SARS, register again? The last time he asked this question, the answer was that not all NPOs are covered by this Act. This is the case. But National Treasury should still consider the proposal that if an NPO is already registered, then they do not need to be registered again. Unless he is persuaded that there is a need for dual registration, there is no point to this. He appreciated the engagement from Treasury and he understands the pressure that they are under.

Ms P Abraham (ANC) said that time was a burning issue when they last met with the stakeholders. The Department is looking at using regulations to accept public comment without extending the time. Is this sufficient, considering that stakeholders were complaining about the timing? Is there a necessity for the Justice Department to also run an awareness campaign or a public participation programme that will ensure that the public, especially the stakeholders, are informed? There have been concerns about the registration falling under the DSD and that it is inappropriate. What is Treasury’s response to these concerns?

Mr J De Villiers (DA) said that the concerns about registrations at the DSD are real and genuine. It is not good enough to say that there will be additional capacity. It is not within their core function to do this job. Under what department is similar work being done? The correct department can be discussed, but it is certainly not the DSD. The Committee is speaking in one voice on this issue. The DSD is not the right Department for this function.

Mr Vukile Davidson, Chief Director: Financial Sector Policy, National Treasury, appreciated the comments from the stakeholders and the committee members. He noted the wide range of comments and indicated that his colleague will assist in responding to them. He indicated that there have been additional bilateral engagements between stakeholders and Treasury. They have tried very hard to bridge the distance. Significant improvements have been made. They are very close to a place where everyone will be happy. On the recurring issue about the role of the DSD, notwithstanding some of the comments that have been made, it would be appropriate at the outset to underscore the commitment articulated in the Minister’s medium-term budget that there will be additional resources specifically aimed at helping the fight against corruption including the response to the mutual evaluation and the recommendations to the state capture report. Specific allocations have been made to specific departments and agencies to help with this process. If there is any scepticism towards the Executive being able to adequately resource these entities, people can rest assured because these additional resources will be made available. They will take on the comments about the effectiveness and make sure that they have a streamlined approach. They will consider the specific requests and recommendations made about the location of the registry. There is a stated commitment that departments are adequately resourced to meet the objectives of the bill.

Ms Bednar-Giyose said that FISA’s submission is one that they have not fully responded to in the presentation. Some submissions were made later than others and they could not be included in this specific presentation. They will provide a full response in the next meeting.

Mr Pieter Smit, Executive Manager, Financial Intelligence Centre, said that the natural persons who are associated with the trust, either as a founder or beneficiary, should all be identifiable. The information about these individuals should be held by the trustee. In the future, the information that is held by the trustee would also be shared with a central repository or database. They take note of the advice and recommendations from FISA. He did not disagree with the perspective and they are aware of the conundrum. In the law, a trust is not an entity, it is the result of an agreement or a will. It will be difficult to fit the concept into this law. A trust is not susceptible to being owned in the same way that a company can be owned. FISA understands these concepts fully. They will see how the defined terms of trusts in the Property Control Act can be adjusted to better take account of the realities of trust law. The intention of the definition is not to imply any additional ownership in terms of legal concepts for any particular entities where that would be inappropriate. It is simply to find a correct term that can be linked to the transparency required of natural persons associated with trusts.

Many comments have been made about the location of the NPO registration. A suggestion has been made to put this category of NPOs under schedule one of the FIC Act, either as an accountable or reporting institution. If an institution is included in schedule one of the Act, it is an accountable institution. There is a significant range of obligations that come with this. To understand the risks of abuse, and to manage these risks, there is a compliance programme in place. This is monitored by the management of the institution. They have to provide staff training, conduct customer due diligence and identify politically exposed customers. These obligations do not fit well with the concept of an NPO, which does not do business and does not have customers. NPOs do not fit well within this category of institutions. The second category is schedule three, which requires reporting institutions to report cash transactions over a certain threshold. This threshold is R25 000 in cash and will soon be raised to R50 000. It does not suit the purpose. The purpose is not to require NPOs to report to the FIC each time they receive or pay a cash amount over the threshold. It does not fit with international standards of the monitoring of NPOs. They are not convinced that the burden on NPOs to report cash transactions to the FIC is useful. It does not actually help NPOs to monitor when they might be subject to exploitation. The objective of the registration requirement is to apply the conditions of the NPO Act, such as the requirement of governance principles. These are not obligations that sit within the FIC Act. Registering an NPO as an organisation under the FIC Act will not actually achieve the objective of ensuring that governance principles are in place, that it abides by its own constitution, etc. Supervision by the FIC cannot address these obligations outlined in the NPO Act, only the FIC Act. It is not an efficient approach to the registration of NPOs. The type of supervision that the FIC can exercise is not appropriate and does not suit the objective of the registration. He understands the practical concerns with the DSD’s capacity, but the core legal function of the DSD suits the task. Thousands of NPOs have voluntarily registered with the DSD. They are not proposing adding any further requirements for NPOs. The objective is to ensure that the requirements that the NPO Act already provides are applied to a particular subset of NPOs.

Comments have been made about automatic registration under the Companies Act and the recognition of public benefit organisations for tax purposes. This is a solution that can work if the consequence of the registration of an NPO is that the NPO is registered under the NPO Act automatically. Currently, the registration of an NPO does not automatically bring about the consequence of applying the provisions of the NPO Act. This suggestion still does not bring them to this objective, unless there is automatic registration. They are not currently exploring this, but it is something that can be explored. This would mean that NPOs that had no intention to register could become automatically registered. They are not 100% sure whether this is a good objective to pursue, but it is a feasible option.

Ms Bednar-Giyose said that they note the concerns about the placement of the register and the capacity of the DSD. They will deliberate on this and provide a more in-depth response at the next meeting. They also note the concerns about religious organisations. They have tried to ensure that the powers of the directorate, in relation to registration or de-registration, are extremely limited. There would not be any scope for prejudice against certain organisations. The rights of religious freedom and association would not be infringed upon. NPOs need to be treated in a fair and consistent manner. It is important that the requirements that they set are applicable across the board, whether it be a religious organisation or any other type of organisation. The legislation needs to be consistent and neutral with regard to which organisations are included.

Mr Smit said that the category of definition which determines whether NPOs will have to register or not can not depend on the purpose of the organisation. That is unfair discrimination. NPOs that perform certain activities for different purposes will have to register. Selecting which NPOs will have to register based on a purpose would qualify as unfair discrimination.

Mr Smit shared a short presentation detailing how certain NPOs and trusts can be used for terrorism funding purposes.

Ms Bednar-Giyose said that they note the concerns raised by Adv Swart about the Constitutional aspect of this issue and they will give it further consideration. The legislation will make it clear that the powers of registration, deregistration and amending constitution requirements are very clearly limited and cannot infringe on freedom of religion or association.

Adv Swart said that while he appreciates the presentation on the abuses of NPOs and trusts, these situations are probably very limited. Can these documents be made available to Members? He is aware that the religious sector can be used for abuse. These NPOs were traced through tracing the financial flows. Does this not indicate that the existing provisions are already sufficient? Treasury has said that the amendments would allow them to have access to the constitutions and the financial statements of the registered organisations. If an NPO is going to be involved in illicit situations, they are not going to give the government the correct information and financial statements. They will give fake documents and the DSD’s ability to verify these will be very limited. This would mean that verification would fall back on tracing financial flows, which is already being done. These situations of abuse are very important, but they are also very limited in the scope of thousands of NPOs that would need to be registered. It seems like the systems that they already have in place are sufficient. The likelihood of involved NPOs registering false documents is high.

Does existing registration provide insufficient information, such as the constitution-founding documents, which are requirements for such registration? This would be the only argument for why they couldn’t use this information. His understanding is that all required documentation has to be given. He does not understand why there needs to be an automatic registration if this is the case. This would back up the argument for a provision that states that if an NPO is already registered under the NPO Act, it does not have to register again.

Mr Smit said that they do not claim that there are many instances of this type of abuse. They have been able to identify a few, which means that it is something to be concerned about. The ability to abuse NPOs in South Africa for this purpose has not been acknowledged. It has emerged in other parts of the world and it was assumed that it did not happen here. That was wrong. These abuses have been linked to ISIS and Al Qaeda. It is not a prevalent occurrence, but it is certainly an occurrence that will continue. They found this out not because they had access to the NPO. They were able to find this out because they had access to transactional information from other sources. Because of this, the investigation work is difficult and no prosecutions have been brought forward yet. It is impossible for the investigating authorities to build a case that can be taken to court. No NPO has ever been charged for terrorism funding. Registration does give authorities another source of information. If there is something that prevents investigating authorities from building a case, it is an issue to consider. A solution needs to be found if it is possible. They are trying to solve the problem before it reaches the stage of an investigation. They aim to create an environment in which this sort of abuse can be prevented from happening in the first place. Requirements and obligations will be put into place which will make it difficult for terrorism financing to occur. The provisions of the NPO Act contain these safeguards. If an NPO is set up to meet the requirements of the Act, they are certain that its constitution will meet those particular clauses, and there will be a standard for its office bearers. These cannot be ensured under the tax registration or Property Control Act. The CIPC cannot supervise whether, for instance, an office-bearer meets those standards. To add these amendments at the preventive level is a good thing. It does not take away from the fact that more work needs to be done on the investigative side, as that process struggles with issues like capacity and the correct skills. To change things at a preventative level means starting off with good governance, which the amended framework will ensure. Listed entities that are involved with ISIS or Al Qaeda are already identified at the international level by the UN Security Council. This is specific to two organisations and not general terrorism activities. When an NPO is linked with these organisations, it is South Africa’s responsibility to prosecute the NPO and inform the UN so that they can list that entity. However, on the African continent, there are wider terrorism organisations than just these two groups.

Adv Swart said that there is a real danger of the false registration of NPOs. Many NPOs are already non-compliant. The DSD does not have the capacity. He understands that there will be additional capacity, but the Minister has said that this capacity will mainly be given to the Hawks and the SIU. If the DSD gets money, they will want to empower social workers. The funds directed towards these preventative measures will be very limited. There is a danger in entrusting a very necessary and important issue to a department that is incapacitated and will not be able to do the job properly. There are an estimated 150 000 NPOs that would have to be registered and monitored. This monitoring would not be of financial flows, but of whether they are working according to their constitutions, etc. This would be the role of the directorate. He has great doubts as to whether this directorate will actually be able to help prevent terrorism financing and money laundering. During the Covid lockdown, the DSD was taken to court for refusing to allow NPOs to distribute food parcels. A High Court judgement had to be obtained to enable them to give out food parcels. This is ridiculous. This highlights the incapacity and the unsuitability of the DSD. He appreciates Treasury’s and the FIC’s genuineness in tackling this issue. However, this seems like a tick-box exercise which will not be able to be practically implemented, given the severe constraints facing the DSD. The questions that he has raised are difficult but it is his job to raise them as an MP and to assist Treasury.

The Chairperson thanked the stakeholders for their submissions. Treasury and the FIC have thoroughly responded to them. The Committee will consider the points made by Treasury in the next meeting. The public participation process is important and meaningful and the Committee takes it seriously.

The meeting was adjourned.