Let’s recap. The origin and development of our financial intelligence laws comes about as a result of South Africa’s membership of the Financial Action Task Force. This is an intergovernmental organization founded in 1989, on the initiative of the G7 group of countries, to develop policies to combat money laundering and the financing of terrorism.
There are now 35 member countries in the Financial Action Task Force. This Task Force monitors countries’ progress in implementing the Financial Action Task Force Recommendations by ‘peer reviews’ (‘mutual evaluations’) of member countries. If countries do not cooperate, they can be blacklisted, and they can be placed under severe financial pressure by the other members of the group. Needless to say, all the first world countries are members of the group.
So it is important to understand that it is in the furtherance of this objective that the Financial Intelligence Centre does its’ work. The FIC assists law enforcement agencies by providing information to them to enable them to prevent and detect MONEY-LAUNDERING AND THE FINANCING OF TERRORISM. To enable them to do this, they rely on our assistance. How we are obliged to assist them is set out in the Financial Intelligence Centre Act, which came into force in July 2003.
This original Act is now in the process of being amended to bring it in line with directives issued by the Financial Action Task Force.
THE AMENDMENT ACT
The amendment Act was approved by our National Assembly in May 2016. For various (sinister?) reasons our president delayed signing the Act into law until 13 June 2017. That is when the first parts of the amendment Act came into force.
It was impossible to bring the whole amendment Act into force at one time because the current regulations had to be amended to apply to the amendment Act. If this was not done, Accountable Institutions would have had difficulty in implementing the new laws. Certain portions of the amendment Act came into force on 13 June 2017. Other sections will become effective on 2 October 2017. This is just around the corner. It is these sections of the Act that will have the greatest impact on us as estate agents and lawyers.
Other sections of the amendment Act relating to United Nations Security Council Resolutions will come into force at an even later date.
WHO DOES THE FIC ACT APPLY TO?
Before getting into the meat of the changes, I think it is important to establish who the FIC Act actually applies to. I’ve already mentioned, the term “Accountable Institutions”, and it is to Accountable Institutions that the Act applies. Accountable Institutions are:
- ESTATE AGENTS
- PEOPLE WHO MANAGE OR ADMINISTER MONEY IN TRUST
- UNIT TRUST COMPANIES
We are all therefore directly in the firing line as far as FICA is concerned.
KEY CHANGES TO THE ACT
From my point of view, the most important changes to the Act relates to the move from a “rules-based” approach to a “risk based” approach to the issue of client identification and verification. In terms of the old Act, there were certain procedures that were mandatory, and we could follow them blindly, even if we knew they were ineffective in our sphere of business.
This is no longer the case.
The application of a risk based approach means that Accountable Institutions should identify, assess and understand its money laundering & terrorist financing risks in respect of the products and services it offers to clients.
An Accountable Institution should then apply its knowledge and understanding of its money laundering/terrorist financing risks when developing control measures to manage and mitigate the identified risks.
Where higher risks are identified, Accountable Institutions are to take enhanced measures to manage and mitigate the risks. simplified measures may be applied where lower risks have been identified.
All of the above must be documented in the Accountable Institution’s “Risk Management and Compliance Programme”.
At this stage it is relevant to ask what a Risk Management and Compliance Programme is? This is defined in Section 42 of the Act.
In terms of this section, each Accountable Institution must develop, document, maintain and implement a programme to identify, prevent and manage the risk of their business being used as part of a scheme to launder money or finance terrorism. This program must enable the Accountable Institution to identify, assess, mitigate, monitor and manage the risk of this happening.
The program must set out how the Accountable Institution will comply with its obligations in terms of the amendment Act. The requirements are quite specific and each of the legal obligations are dealt with separately, right down to how the programme is to be implemented in branches of the company. If any of the specific obligations set out in the Act are not applicable to the Accountable Institution, this must be documented and explained.
The Risk Management and Compliance Program has to be approved by the highest level of management in the company. The programme also has to be reviewed at regular intervals to ensure that it remains relevant.
I am hoping the regulations to the amendment Act will assist us in preparing our Risk Management and Compliance Programme, or maybe the EAAB will draft an industry standard, as they did after the original FIC Act was promulgated. This will ensure we all have the same levels of compliance and that we will not lose clients to agencies who adopt a less rigorous approach. If our existing FICA procedures are onerous to our clients, the new ones will be even more onerous, especially in situations where the risks are high. As soon as the Regulations are out, we will need to act quickly to prepare a Risk Management and Compliance Programme for our individual businesses.
The amendment Act does however set out certain requirements that we will need to fulfil, and am going to go through these now. These are contained in the new sections from section 20A to section 21H of the amendment Act. Here is a summary of the relevant sections:
Anonymous clients and clients acting under false or fictitious names
You are not entitled to establish a business relationship or conclude a single transaction with an anonymous client or a client with an apparent false or fictitious name.
Identification of clients and other persons
You’ve got to do the basics. Identify the person you’re dealing with and verify their identity. If that person is acting on behalf of another person, do the same for the other person. Also obtain a copy of the document in which the client gave authority to his representative to act on his behalf. This will be a resolution or a Power of Attorney. This is mandatory.
This is very similar to our existing law and requires you to establish and verify the identity of the client or the prospective client to be carried out before the “single transaction” is concluded or before the “business relationship” is established. This maintains the current position which allows you to carry out your FICA obligations after the mandate has been taken, but before the sale has been concluded.
Additional due diligence measures relating to legal persons, trusts and partnerships
In this section, the Act spells out additional requirements for FICA compliance if you are dealing with a juristic person. You have to establish
- the nature of the business that the juristic person carries out; and
- the ownership and control structure of the juristic person.
You also have to conduct the basic identification and verification of a whole lot of people involved in the juristic person, including that of the representative you are dealing with.
Ongoing due diligence
In terms of this section, you have to continue to monitor the business which you do with the client to make sure that the transactions are all consistent with your knowledge of the client and if there are unusual transactions you must make further enquiries.
You also have to keep all the information obtained in establishing and verifying the identities of clients up-to-date.
Doubts about veracity of previously obtained information
If you have any doubts about the veracity or adequacy of previously obtained information, you must repeat the verification steps until these doubts are removed.
Inability to conduct customer due diligence
In the event that you cannot establish and verify identities or obtain other information that is required, you cannot proceed to do business with the client and you must terminate the business relationship. You must also consider making a report to the Financial Intelligence Centre.
Foreign prominent public official
The amendment Act contains a definition of a “Foreign Prominent Public Official” in Schedule 3B to the Act. This is a person who is royalty; or a senior government official; or a senior politician; or a senior executive of a state owned entity; or a high-ranking member of the military.
Before doing business with such a person, you need to obtain senior management approval. You also have to establish where this person is getting their money from and conduct “enhanced ongoing monitoring” of the business relationship.
Domestic prominent influential person
The amendment Act contains a definition of a “Domestic Prominent Influential Person” in Schedule 3A to the Act. This definition includes all senior government officials and politicians, royals and traditional leaders, senior civil servants, judges, ambassadors and high-ranking officers in the military. It also includes senior officials in companies who are doing business with government.
The FICA requirements that have to be met before doing business with these people are identical to the requirements for foreign prominent public officials.
Family members and known close associates
This section expands the FICA requirements in respect of Foreign Public Officials and Domestic Prominent Influential People to their immediate family members and their known close associates.
The act also obliges us to keep proper records of all the information that we have obtained for a period of five years from the date upon which the business relationship is terminated, or, if the client only carried out one transaction, five years from the date that that transaction is concluded. In the event that you have lodged a report with the FIC about a client, you must keep all your records about this client for a period of five years from the time that you made the report. Thankfully, you are entitled to keep these records in electronic format.
OUR DUTY TO REPORT
We have a duty to report suspicious and unusual transactions. These might relate to money-laundering, the financing of terrorist activities, tax evasion, or any transaction which has no apparent business purpose or lawful purpose. These are not only transactions which we know about, they are also transactions that we ought to have known about. We therefore can’t bury our heads in the sand and ignore what is going on around us.
If you are going to report someone you cannot tell them that you’re going to make a report. This information has to remain a secret, so as not to tip off the perpetrator of the unlawful activity.
In addition, despite the fact that you have reported the incident, you are entitled to continue to carry out the transaction in respect of which the report was made, unless the FIC instructs you otherwise.
No duty of secrecy or confidentiality which you have to the client, whatever the basis, will excuse you from failing to make a report to the FIC. Only attorneys are excused from making reports if the information given to them falls within the scope of legal professional privilege. This would mean that the information would have to be disclosed to the attorney for the purposes of obtaining legal advice, or for the purposes of assisting the client in litigation.
PROTECTION OF WHISTLEBLOWERS
Section 38 of the Act provides protection for people who make reports to the FIC. They are immune from any type of legal action, be it civil or criminal. They are also not able to be compelled to give evidence in criminal proceedings arising from the report. In addition, should they so require it, their identity can be kept a secret in court proceedings.
COMPLIANCE AND ENFORCEMENT
The FIC will exercise supervisory powers, through INSPECTORS who have the power to enter the business premises of an Accountable Institution and carry out inspections to ensure that the act is being complied with. This inspection can be carried out WITHOUT A WARRANT. In the event that the inspector wishes to enter a private residence, a warrant is required, and this will only be issued on probable cause.
Non-compliance with the FIC act can result in severe punishments being handed out. The maximum fine is R10 million for natural persons and R50 million in respect of legal persons. These findings can be handed out by the FIC itself. These punishments are called “administrative sanctions”. In addition to being sanctioned by the FIC, if the conduct amounts to a criminal offence, the perpetrator can also be charged in the criminal court.
There is a right of appeal against an administrative sanction to an appeals board which is established in terms of the Act.
This summary of various parts of the FIC act and the FIC amendment Act is brief and does not include any reference to the regulations. Because we are on the brink of receiving new regulations I intend rather to expand on this summary when I can refer to the new regulations. This information will most probably be shared with you by way of news flashes and during the course of the Miltons forums that we intend to hold during October. We look forward to seeing you there.
Article by: DEON WELZ & QUINTIN COMBRINK