Anti-money laundering: National Treasury’s proposal to establish and lead an inter-departmental committee

September 1st, 2018
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By Nkateko Nkhwashu

The Financial Action Task Force (FATF) is an inter-governmental body that sets policies to counter money laundering and terrorist financing. It implores its member countries to strive towards effective anti-money laundering and counter terrorism financing regimes, which are highly motivated to realise a set ‘high level’ objective. As such, the FATF entails a situation wherein ‘financial systems and the broader economy are protected from the threats of money laundering and the financing of terrorism … thereby strengthening financial sector integrity and contributing to safety and security’ (www.fati-gafi.org, accessed 3-8-2018). This can to be achieved ‘if the components of a country’s [anti-money laundering and counter terrorism financing] framework are operating well together’ (www.fati-gafi.org, accessed 3-8-2018).

In order to realise or strive towards this high-level objective the FATF has what it terms ‘intermediate outcomes’, which includes:

  • ‘Policy, coordination and cooperation [to] mitigate the money laundering and financing of terrorism risks;
  • proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors or are detected and reported by these sectors;
  • money laundering threats are detected and disrupted, and criminals are sanctioned and deprived of illicit proceeds; and
  • terrorist financing threats are detected and disrupted, terrorists are deprived of resources, and those who finance terrorism are sanctioned, thereby contributing to the prevention of terrorist acts’ (www.fati-gafi.org, accessed 3-8-2018).

In order to achieve the intermediate outcomes, the FATF has on their website (www.fati-gafi.org, accessed 3-8-2018) further identified 11 ‘immediate outcomes’. These are –

  • risk, policy and coordination;
  • international cooperation;
  • supervision;
  • preventive measures;
  • legal persons and arrangements;
  • financial intelligence;
  • money laundering investigation and prosecution;
  • confiscation;
  • terrorist financing investigation and prosecution;
  • terrorist financing preventative measures and financial sanctions; and
  • proliferation financing sanctions.

This article will not try to explain all 11 immediate outcomes save for the first outcome, namely, ‘risk, policy and coordination’, which is very relevant for present purposes. This outcome, inter alia, presupposes (partly) an effective regime wherein ‘[m]oney laundering and terrorist financing risks are understood and, where appropriate, actions [are] coordinated domestically to combat money laundering and the financing of terrorism and proliferation’ (www.fati-gafi.org, accessed 3-8-2018).

All the above is assessed and ascertained by the FATF during, inter alia, its mutual evaluation exercises. It is important to note that the FATF’s standards are deemed as best international practice and adopted by various countries, even by those who are not official members yet. South Africa (SA), on the other hand, has been the only official member in Africa since 2003, thus it is supposed to comply with all of the above in all of its areas of developments.

Furthermore, the above is for the purposes of clarifying some of the noted misconceptions surrounding various developments regarding SA’s anti-money laundering and counter terrorism financing regime, especially the recently proposed inter-departmental forum on anti-money laundering and the combating the financing of terrorism committee (inter-departmental committee).

Regarding the first outcome, in order to assess a country’s anti-money laundering and counter terrorism financing regime and pronounce its effectiveness or not, the first thing the FATF looks for, is whether there is a formal mechanism in place to ensure that there is proper cooperation, consultation and coordination with all relevant stakeholders in efforts to combat identified threats. In support of this statement one only needs to take a quick scan of one of the recently published mutual evaluation reports (or executive summaries) by the FATF under the fourth round of mutual evaluations, namely, Mexico, Singapore, Netherlands and the United States.

This formal mechanism comes in the form of an inter-departmental committee. More often than not, it culminates from parliamentary processes, and as a result, is very key in demonstrating political will by a particular country on its commitment to fight both money laundering and terrorist financing. Mindful of a country’s specific factors, which comes into play when constituting this committee, namely, the maturity of the regime, its set up, etcetera, the processes of setting up the same in SA has seen its fair share of challenges, for example, the reluctance by certain key stakeholders (see the reasons for this below) to sign a memorandum in Parliament sanctioning its Constitution and the impact this had on other key initiatives yet to be put in place in SA, for example, conducting a National Risk Assessment on money laundering and terrorism financing threats.

Why the need for an inter-departmental committee and who should be in charge of it?

It is important to note that the policy-maker on financial integrity is the National Treasury. National Treasury participates in various initiatives and plenary meetings of the FATF. Unfortunately, due to capacity constraints and limited expertise within the department, the Financial Intelligence Centre (FIC), the regulator, leads SA’s discussions and delegations (together with National Treasury) at these plenary meetings as they have capacity and expertise on anti-money laundering and counter terrorism financing work. In short, ideally the National Treasury is supposed to always be in charge with respect to any policy work on anti-money laundering and counter terrorism financing, but unfortunately due to some of the reasons noted herein this is not always the case and/or possible.

The background to the current discourse is that the 2009 FATF Mutual Evaluation Report of SA called for amendments to the Financial Intelligence Centre Act 38 of 2001 (FICA). One such amendment was the abolishing of the Counter Money Laundering Advisory Council. The Counter Money Laundering Advisory Council was meant to function as a consultative body or mechanism on various developments on FICA. It comprised of various stakeholders, including members of the government department’s Security Cluster. The challenge it had was the fact that it comprised of high level delegates who often had difficulties attending its yearly meetings, its only contribution was to the early drafting of FICA Regulations.

Key developments including amendments to FICA had to first be brought before the Counter Money Laundering Advisory Council and the committee had to agree before anything could be done. Unfortunately (disregarding some of the political dynamics, which surrounded the amendment processes) the policy-maker and the regulator took a decision to repeal the entire chapter of FICA, which made provision for the Counter Money Laundering Advisory Council without first consulting all its stakeholders, including the Security Cluster. This was raised by the Security Cluster in various parliamentary processes and even by various stakeholders during the commentary period on the FICA Bill, whereby they also questioned the decision taken to abolish the Counter Money Laundering Advisory Council and not replace it with another structure. The policy-maker and regulator’s responses were to the effect that SA’s anti-money laundering and counter terrorism financing regime matured to such an extent that there was no need to maintain inflexible statutorily-based consultation structures and these (structures) would be established outside legislation as and when necessary (and for specific purposes).

Thus, the crux of the Security Cluster’s argument on the potentially unconstitutionality of the Financial Intelligence Centre Amendment Bill [B33A-2015] was the fact that they had no say, nor were they consulted when the decision to abolish the Counter Money Laundering Advisory Council was taken. It would not come as a surprise if this argument was raised in one of their legal opinions, which was never made public when Parliament called for such during deliberations on the ‘warrantless searches’ provision. Another argument raised relates to the fact that the FIC initially, owing to its statutory mandate, only reacted to information sent to it without being the initiator of such a process, but this was about to change owing to some of the new amendments, for example amendment to s 4.

All these had an impact on the swift signing of a cabinet memorandum formally establishing the inter-departmental committee. Such had been stuck in the parliamentary processes for close to three years. However, in mid-2017 the Security Cluster and intelligence community, finally gave its support for the establishment of this anti-money laundering and counter terrorism financing committee to be chaired by the Director-General of National Treasury and or its representatives working together with members of the Security Cluster, among others (Linda Ensor ‘Treasury panel set up to steer battle on laundering’ www.businesslive.co.za, accessed 6-8-2018).

The above developments were followed by various reactions from various stakeholders. Overwhelmingly these were good. There were, however, some reactions, which seemed to be out of context or motivated by other reasons, politics being one of them. Such were to the effect that, somehow, by the way in which the entire inter-departmental committee was to be set up, especially who was to be its head, suggested or demonstrated the fact that the Security Cluster had been ‘snookered’ in its bid to gain control of the FIC (Ensor (op cit)). Regardless of the credibility of these allegations, viewed within context, the configuration of the inter-departmental committee is rooted in international best practice and those who had been involved during the entire amendment processes will attest to the fact that the Security Cluster was not difficult throughout the same. It also proposed and held various meetings with the National Treasury in an attempt to engage and discuss some of these issues in a productive manner.

The functions of the inter-departmental committee, in order of importance are going to be as follows –

‘i) to coordinate South Africa’s response to the Financial Action Task Force (FATF), including preparing for the Mutual Evaluation and the National Risk Assessment to facilitate compliance with international obligations;

ii) to inform discussions on potential changes to the country’s measures against money laundering and terror financing, including changes to laws, regulations and other measures;

iii) to assist in the allocation and prioritisation of resources by competent authorities to combat money laundering and terror financing;

iv) to harmonise and align approaches to financial investigations, prosecutions, convictions and asset forfeitures in money laundering and terrorist financing matters;

v) to assess the effectiveness of anti-money laundering and combating of financing of terrorism policies and practices and whether the key objectives of the South African institutional framework against these phenomena are being met in practice;

vi) to assess progress made in South Africa with implementing the [anti-money laundering and counter terrorism financing legal framework] against the benchmark of the international standards and making recommendation for improvement; and

vii) assist in preparing the relevant departments and agencies for regular country assessments, peer reviews to measure South Africa’s compliance with international standards on combating money laundering and the financing of terrorism.’

The above is taken from a written reply by the Minister of Finance to some of the questions raised in the National Assembly. Part to this response was the fact that other separate consultative structures to facilitate engagements with the private sector will be established. It was highlighted that one such structure had already been established for the banking sector. Presumably this refers to the anti-money laundering and combating the financing of terrorism steering committee established within the South African Reserve Bank. Having formed part of those responsible for its establishment, I can say that it has not been without its fair share of challenges either, namely, some of its members do not necessarily understand its mandate or functions, for example, whether it is geared towards affording the sector an opportunity to influence content of the Guidance Notes applicable to it within the new risk based framework or to create Guidance Notes for the bits and pieces, which are not catered for within the generic guidance notes issued by the FIC. Regardless of these challenges, the proposed and established structures, will surely help and ensure that SA fares well during the upcoming 2019 FATF mutual evaluation exercise and other domestic future developments.

Conclusion

In short, the proposed inter-departmental committee is motivated by and in line with international best practices and standards rather than presumptuous political motives aimed at, among others, snubbing certain key stakeholders on the relevant processes or at least this is what the context indicates. Finally, this committee is the ‘flywheel’ of any effective anti-money laundering and counter terrorism financing regime.

Nkateko Nkhwashu LLB (University of Venda) LLM (UJ) Cert in Legislative Drafting (UP) Cert in Compliance Management (UJ) Cert in Money Laundering Controls (UJ) Cert in Policy Development (Pro Active College) is an advocate at Empowerment Dynamics Consulting in Centurion.

Mr Nkhwashu writes in his personal capacity.

This article was first published in De Rebus in 2018 (Sept) DR 24.

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