A cart before the horse or the other way round?

May 1st, 2017

Amendment of the schedules of the Financial Intelligence Centre Act

By Nkateko Nkhwashu

The Financial Action Task Force (FATF) is an independent intergovernmental body that promotes policies to protect the global financial system against money laundering and terrorist financing. FATF’s 40 Recommendations are recognised as international best practices and standards. Various countries subscribe to these recommendations. As a result their financial institutions and other businesses are attractive to the international markets (thus leading to flourishing international trade).

FATF analyses the level of compliance with its 40 Recommendations through peer review mutual evaluation exercises (MEs). Currently the ME methodology also assesses the level of effectiveness of a particular country’s Anti-Money Laundering and Counter Terrorist Financing regime (AML/CFT).

Recently FATF have published various MEs of member countries, which were assessed under the new methodology and revised standards. The United State of America (US) is one such country. The US has a clear understanding of its AML/CFT risks. Their systems is said to be ‘well-developed and robust’ (www.fatf-gafi.org, accessed 30-3-2017). All these are ‘supported by a variety of ongoing and complementary risk assessment processes’ (www.fatf-gafi.org, accessed 30-3-2017), which include key steps such as the 2015 National Money Laundering Risk Assessment, National Terrorist Financing Risk Assessment (and other initiatives, ie, National AML/CFT strategy, action plans, key priorities). Irrespective of all these elaborate efforts the US was recently found to be still wanting on some of the 40 Recommendations namely, minimal coverage of certain institutions and businesses.

Take note that no jurisdiction, to date, has ever been found or assessed as fully compliant with FATF’s Recommendations. The comparison or argument made here is solely for the purposes of trying to answer or probe the question, if a well-developed and robust system informed by a national risk assessment, as well as some elaborate efforts is still found to be non-compliant with some of FATF’s Recommendations then what of a jurisdiction, in a developing world, with no such national risk assessment and/or elaborate efforts?

The above is a detour to arrive at the current South African scenario (or context) whereby the Financial Intelligence Centre (FIC) ‘has begun a process of reviewing the current legislative framework against money laundering and terrorist financing with the view to improve South Africa’s [SA] measures to combat money laundering and terrorist financing’ (www.saica.co.za, accessed 30-3-2017). Before delving deeper into the discussion it is important to note certain facts. First, FATF advocates for a Risk-Based Approach (RBA) to customer identification and verification by banks and other businesses. Secondly, FATF advocates for a National Risk Assessment (NRA) to ensure effective implementation of the RBA.

The NRA, ideally, precedes any attempt at implementing an RBA. South Africa has not yet done an NRA, yet is it attempting to implement an RBA through the Financial Intelligence Centre Amendment Bill B 33 of 2015? Of course a counter-argument can be made to the effect that this was necessitated by the 2009 ME on SA. A further argument can also be made, based on some of the recommendations made by the World Bank through its Financial Sector Assessment Programme Report, which states that although SA does not yet have an NRA in place it ‘seem[s] to have a reasonable understanding of its [AML/CFT] risks’ (www.imf.org, accessed 5-4-2017). However, one cannot help but question the logic or sequence behind some of the current developments or processes.

For instances through one of its recent notices the FIC says ‘Based on its experience in implementing the provisions of the FIC Act and supporting efforts of law enforcement and other agencies in combating money laundering and terrorist financing, the Centre has identified a number of activities that should be brought within the scope of the FIC Act, with a view of improving the transparency of the financial system. The proposal to include certain businesses or institutions is based, in part, on the Centre’s view that these businesses or institutions may present a higher risk of being used to carry out money laundering or terrorist financing’ (my italics) (www.associatedcompliance.co.za, accessed 30-3-2017).

The above efforts are laudable but should this process not be preceded by both a NRA, as well as industry-based assessments and how did the FIC get to select these specific institutions? Logic would dictate that before one can deem certain sectors as higher risk in need of urgent intervention, one would then deem it prudent to conduct or do a risk assessment. The reasoning behind these concerns or points seeking clarity are:

  • SA has yet to do an NRA (this will be done prior to 2019).
  • SA does not have a national strategy, action plan or organised processes in place that relates to AML/CFT.
  • SA will be undergoing another ME by FATF in 2019 (the deficiencies noted in 2009 might change so are the outcomes and priorities).
  • Is SA seeking to comply with FATF for the sake of compliance or should there be impact in practice or achieving defined outcomes or objectives?
  • Some of the institutions that are to be incorporated within the proposed schedules are regulated (professionals).

For completeness-sake some of the institutions, which are to be added are: Professional accountants; co-operatives, which provide financial services, as defined in the Co-operatives Bank Act 40 of 2007; persons who provide trust and/or company services; short-term insurance as defined in the Short-Term Insurance Act 53 of 1998; credit providers who are required to register as contemplated in s 40 of the National Credit Act 34 of 2005; and others.

Nkateko Nkhwashu LLB (University of Venda) LLM (UJ) Certificate in Legislative Drafting (UP) Certificate in Compliance Management (UJ) Certificate in Money Laundering Controls (UJ) is an advocate at the Banking Association South Africa. Mr Nkhwashu writes in his personal capacity.

This article was first published in De Rebus in 2017 (May) DR 27.