Do trust account advocates need a mind shift to deal with FICA?

October 1st, 2019
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Generally, legal practitioners operate within a given set of specified rules and procedures. With these, come certainty. Thus, the preference for legislation to be captured in writing, as well as gaps in law to be settled in court, in judgment form. This obsession of having everything spelled out in writing or captured in ‘black and white’, shapes and reinforces a certain mind shift in every legal practitioner. Although, there are benefits to it, it is not always the case. There are developments underway within the legal field, which are going to require legal practitioners to tweak or shift their minds with regard to certain things or how they conduct and run their practices.

One such key notable development is the Legal Practice Act 28 of 2014 (LPA), which came into effect last year. The LPA brings with it, various changes, some stemming from its key overriding objectives. One such objective is to ensure transformation, as well as ‘greater access’ to the legal profession. Greater access refers to those seeking admission into the legal profession and practise, as well as the accessing of legal services by the general public. In relation to the former (access by prospective legal practitioners), and taking into account some of the known barriers to enter the legal profession, the LPA seeks to unite attorneys and advocates. Provision has now been made for advocates with trust accounts, who are allowed to accept instructions directly from the general public. This is in contrast to the previous regime where advocates could only be engaged on a referral basis through the services of an attorney. This ‘new’ type of advocate will have to operate a trust accounts on behalf of their client and, as a result will have to be in possession of a Fidelity Fund Certificate. Additionally, the advocate will have to have completed, among others, Practice Management Training. Again, as the advocate will be looking after their clients’ funds and operating accounts they will have to comply with some of the legislative requirements, which are now within the purview of attorneys.

Other than complying with the aforementioned legislative requirements these legal practitioners will have to do administrative work as well, which was previously never carried out by the traditional advocate. One of the key legislative requirements, which will need to be complied with, is the Financial Intelligence Centre Act 38 of 2001 (FICA). In terms of FICA, attorneys (or legal practitioners, as they are now called, including advocates with trust accounts) are deemed or called accountable institutions and will have to discharge certain responsibilities in terms of FICA in order to, among others –

  • assist in combating money laundering and terrorist financing activities by for example carrying out customer due diligence;
  • have internal controls; and
  • train staff and others to address vulnerabilities in their systems or firms.

Thus, often at times they are referred to as gatekeepers in this regard and held to a high standard.

Previously it was easy for attorneys to comply. This was largely due to the fact that the provincial law societies and other relevant stakeholders, traditionally issued what was termed a ‘FICA Manual’. This manual discussed each relevant provision of FICA, which legal practitioners had to comply with. This was largely a tick-box exercise, which arguably and perfectly suited the mind set of traditional legal practitioners. The Financial Intelligence Centre Amendment Act 1 of 2017 (Amendment Act) has significantly changed the regulatory landscape and will require a mind shift by all legal practitioners with trust accounts and the Legal Practice Council (LPC), among others. One of the key reasons for this, is the new regulatory framework envisaged within the FIC Amendment Act, namely the risk-based approach system.

Under a risk-based approach system threats and vulnerabilities are dealt with and addressed based on assessed risks, because the way one legal practitioner or firm deals with its own assessed risk/s or vulnerabilities will differ from the next. It is for that reason why a ‘one-size-fits-all’ approach, which used to be the norm under the previous FICA Manual will no longer suffice going forward. There is no doubt that this is going to be challenging for some legal practitioners. Under the previous rules-based system, there were legal practitioners and/or law firms that never really understood their obligations under FICA. With the advent of the current amendments, I was engaged by one of the top ten boutique law firms as to how they could better position themselves in future under the new framework. From some of the engagements with their FICA Officer, it was established that not much attention was given to their FICA obligations. Some directors in the firm readily admitted that they knew nothing about FICA matters and that all queries had to be directed to the FICA Officer.

Legal practitioners should move away from the tick box mentality to one, which will, among others, require risk management skills. Directors of law firms will no longer have the luxury of hiding behind their staff or FICA Officers when it comes to complying. The Amendment Act makes provision of what is termed the Risk Management and Compliance Programme. This programme is very instrumental in successfully implementing a risk-based approach system by accountable institutions. It also calls for a hands-on approach by the directors of a law firm, for instance, in approving much of its content and relevant policies. In terms of the new requirements within the Amendment Act, it is the responsibility of directors or top management to ensure compliance with the Amendment Act and failure to do so will result in directors or top management being held personally liable.

After the promulgation of the Amendment Act the Law Society of South Africa recognised the importance of the Risk Management and Compliance Programme for legal practitioners and published the specific section on their website (www.LSSA.org.za). Although this did not go into much detail to provide guidance or analysis, it did, however, note some of the fundamentals of the Risk Management and Compliance Programme, which are:

  • governance architecture;
  • risk assessments;
  • customer due diligence;
  • reporting; and
  • monitoring, etcetera.

Due to these developments and other on-going engagements between the Financial Intelligence Centre (FIC) and the legal profession there appears to be a consensus among them that the legal profession stands in a unique position compared to other accountable institutions when it comes to, among others, discharging their legislative duties and thus being FICA complaint. This was also acknowledged and noted within the FIC issued Guidance Note 7, which was followed by the FIC’s invitation to the legal profession for public consultation in relation to the new requirements. A proposed solution being discussed in this regard is to issue a separate guidance note in order to assist legal practitioners in carrying out their legal duties. I would like to submit and caution, however, that such a guidance note will not prove to be a silver-bullet for all compliance challenges. One reason for this is the various services offered by legal practitioners, as well as the size of their law firms. It is also important to note that even under the united profession it is not all legal services or legal practitioners who will fall within the purview of FICA.

Internationally the legal profession has been thrown into the spotlight as being ineffective, as well as aiding criminals launder ill-gotten gains. Take the Paradise and Panama Papers as examples. Recently the G20 has recognised this fact and pleaded with the legal profession to play its part in this regard. The International Bar Association and the Secretariat of the Organisation for Economic Co-operation and Development has issued an interesting report titled: ‘Report of the Task Force on the Role of Lawyers and International Commercial Structures’. Partly this report urges self-regulatory bodies (like the LPC) to take their regulatory duties seriously or else run the risk of the government taking over. The Financial Action Task Force (FATF) (under the presidency of Argentina) took a very important initiative to educate and capacitate prosecutors and judges in relation to anti-money laundering and counter terrorist financing efforts. This is an important initiative as more often than not, criminals get away with various deeds owning to the fact that the prosecutor or magistrate in question did not really understand how to deal with such. Finally, and important to note for the LPC was the recently issued FATF ‘Guidance for a Risk-Based Approach – Legal Professionals’. I submit that as this guide is aimed at appealing to smaller law firms. It could also be instrumental in assisting the LPC to come up with its own guide.

Conclusion

In short, the message sought to be conveyed by this article is that all legal practitioners who fall within the purview of FICA will need a mind shift in order to meaningfully comply with the new risk-based approach system requirements. The regulator – being the LPC – will need to be well-capacitated on the new monitoring requirements as they are more demanding as opposed to the previous tick-box regime. Under the previous regime it seems regulation was lax as noted by the FATF. The new breed of advocates with trust accounts must also be up to the challenge and comply meaningfully. They also need to be cautioned that compliance failures carry with them dire consequences. Ignorance of the law or one’s obligation is not an excuse. Their customer due diligence must be up to scratch and where they cosy up to the political elite they need to be cautioned that the full might of the law reaches even that far. Besides, there are new mandatory requirements for dealing with politically exposed persons. The courts, recently by various judgments or ongoing cases, have shown that they are not shy to punish those who aid and abet criminals to launder illicit money. For example, the case of John Block case (Scholtz and Others v S [2018] 4 All SA 14 (SCA)) or that involving the previous head of the Independent Communications Authority of South Africa. What is shockingly interesting about the latter case ((Specialised Commercial Crimes Court, Pretoria) (unreported case no 111/86/2012)), which is being taken on appeal is (justifiably or not) the sentence given to the legal practitioner involved. There are various factors other than deterring someone when it comes to sentencing. Be that as it may, let that sound caution to the new breed of advocates that where the LPC may be lenient the courts are willing to look at the framework, which comprises of FICA, the Prevention of Organised Crime Act 121 of 1998, the Protection of Constitutional Democracy against Terrorist and Related Activities Act 33 of 2004, etcetera, in order to ensure that those who are found to be guilty will be held to account. This is especially bad for legal practitioners as they are held to a high standard.

Nkateko Nkhwashu LLB (Univen) LLM (UJ) Cert in Legislative Drafting (UP) Cert in Compliance Management (UJ) Cert in Money Laundering Control (UJ) Cert in Policy Development (ProActive College) is an analyst at the Financial Sector Conduct Authority in Pretoria.

This article was first published in De Rebus in 2019 (Oct) DR 13.