Why the need for confidentiality on the content of Suspicious Transaction Reports?

December 1st, 2017
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By Nkateko Nkhwashu

The Financial Intelligence Centre (the Centre) was established by the Financial Intelligence Centre Act 38 of 2001 (the Act). The Centre’s key functions, among others, is to ‘process, analyse and interpret information disclosed to it, and obtained by it’ and to inform, advise and co-operate with investigating authorities, supervisory bodies, the South African Revenue Service (Sars) and intelligence services, in terms of the Act. One of the ways in which the Centre obtains the information (on potential or unlawful activities) to process, analyse and where necessary refer such information to any of the relevant investigating authorities for further investigations is through what is termed as a Suspicious Transaction Report (STR) in terms of s 29 of the Act.

Section 29 of the Act creates a duty for any person including ‘[a] person who carries on a business or is in charge of or manages a business or who is employed by a business’ to report certain suspicious and unusual transactions to the Centre. It is to be noted that from 2 October, when the Financial Intelligence Centre Amendment Act 1 of 2017 (Amendment Act) and relevant regulations came into effect, the scope of STRs would be expanded. This was evidenced by the insertion of reg 23A (information to be reported concerning a suspicious or unusual activity report), reg 23B (information to be reported concerning a terrorist financing transaction report) and reg 23C (information to be reported concerning a terrorist financing activity report), on the draft amendments to regulations and draft withdrawal notice of exemptions GNR909 GG41077/30-8-2017 published for comments by the Centre.

All the new regulations mentioned above set out all the information to be included in each of the relevant reports. Such information is private. It includes the information of the person or institution creating the report, as well as that of the person or institution being reported. Thus the Act justifiably places a responsibility, as well as an obligation on the Centre – as the custodian of such information – to ensure that it is protected in terms of the law (ie, Protection of Personal Information Act 4 of 2013 and the Constitution). The Act further sets out the roles and responsibilities for those who are entitled to access such information subject to satisfying certain prescribed criteria.

Subsequent to the preceding paragraph one would conclude that requesting and accessing STRs by those entitled to do so in terms of the Act was fairly simple and easy, the reason for this being that the Centre is also obliged to assist the requester of information to satisfying the requirements or setting the criteria for access to such information. However, in practice, this has not proven to be easy. For example, in October 2016 the then Minister of Finance, Pravin Gordhan made an application to the High Court for a declaratory order against the Oakbay Group of companies. The declaratory order sought was to the effect that the executive branch of government (Minister of Finance) is not entitled to interfere with or intervene in the relationship between the bank and its customer(s).

In support of his application, the minister attached a founding affidavit together with a certificate obtained from the Centre, which detailed certain transactions extracted from an STR. From thereon, the Centre alleged it started to receive numerous requests for the actual STR from some of the investigation authorities and private citizens alike. The Centre had to clarify to some of those requesting access to the actual STR that what was attached in the minister’s founding affidavit was not the actual STR but a certificate. Furthermore, the Centre had never shared an actual STR with anyone ‘including the Minister of Finance who is the Executive Authority responsible for [the Centre]’. The Centre also had to explain and clarify that it is not allowed to share such reports with private citizens.

Despite the Centre’s efforts, there were persistent suggestions in the media that the Centre was ‘not co-operating fully with its law enforcement and other competent authority partners’. Uncharacteristically, the Centre had to issue a media statement entitled ‘Co-operating fully with law enforcement and other competent authority partners’ on 11 November 2016 trying to clarify and refute the claims that it was not co-operating. In that media statement the Centre explained some of the following issues:

  • Its role and responsibilities as the custodian of the information.
  • The role and responsibilities of those seeking access to the information.
  • The need for privacy and confidentiality regarding the information contained in the actual reports.
  • The fact that the content of an STR is hearsay evidence and thus inadmissible in a court of law (see www.fic.gov.za/Documents, accessed 3-11-2017).

The media statement focused on the need for confidentiality in order to protect the rights of all involved. It, however, left out or did not explicitly explain the concerns around ‘tipping-off’ and how confidentiality ensures the effectiveness of the entire reporting regime. These are, however, captured in the Act. Recently in the Draft Guidance for Private Sector Information Sharing (www.fatf-gafi.org/media, accessed 6-11-2017), the Financial Action Task Force (FATF) also acknowledged the need for confidentiality for similar reasons or purposes as follows:

‘Ensuring the confidentiality of STRs is critical to an effective function of the reporting regime. Confidentiality of STRs is needed so that the subject of STR and third parties are not tipped-off, as this can adversely affect intelligence gathering and investigation, and can enable persons to abscond or dispose of assets.’

The rule against tipping-off essentially prohibits disclosure of the ‘fact or any information regarding the contents of any such report to any other person, including the person in respect of whom the report is or must be made’ subject to certain prescribed exceptions. Determining whether there is tipping-off in a particular case or circumstance is sometimes not easy. A case in point is the matter involving the Chief Officer at Sars, Jonas Makwakwa.

Suspicious and unusual transactions reports were filed with the Centre against Mr Makwakwa by some banks. After analysing and processing the reports the Centre passed the information to Sars.

Regardless of the way in which the Commissioner approached Mr Makwakwa, a question remains whether such amounted to ‘tipping-off’ as prohibited in the Act. Similar concerns were raised by Corruption Watch in 2016 when pressing charges against Mr Makwakwa and his co-accused (Corruption Watch’s Affidavit of 8 November 2016 deposed to by Mr Nhlamulo Mvelase marked Annexure L_2, www.corruptionwatch.org.za, accessed 3-11-2017). This case is still under investigation and it will be interesting to see how it is resolved, especially how the relevant sections of the Act will be interpreted.

The complexity around the determination of ‘tipping-off’ is not new. For example, in 2003 when the Act, was about to come into effect the Cape Law Society issued Guidelines in order to assist its members in complying with the Act. In those Guidelines it was noted that there will be instances where an attorney’s duty to report certain information to the Centre will clash with an attorney’s professional duty of disclosure to their clients. In such circumstances the guidelines advised attorneys to give full effect to their professional duties towards their clients, namely, report as required by the Act, but also disclose such information to their client or alternatively first withdraw as the client’s attorney of record and then report whatever information required in terms of the Act. It should be noted that this was during the early days of the Act and the regulations, as well as the exemptions were not in effect yet. The Guidelines were, however, well-crafted and informative as they also drew a distinction between the concept of ‘confidentiality’ and ‘privilege’ within the context of the Act. I submit that with the introduction of the Risk-Based Approach ushered in by the Amendment Act will be helpful for the attorney’s profession to have similar guidelines issued by the Law Society of South Africa. In the United States (US), for example, the American Bar Association has done so – since 2010 – with the support and endorsement of US Treasury Department (see American Bar Association ‘Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing’ 23-4-2010, www.americanbar.org, accessed 3-11-2017).

Conclusion

In a nutshell, the sensitivity of the information contained in STRs necessitates that they be dealt with in a confidential manner in order to protect the interests and rights of all involved and thus ensure the effectiveness of the entire reporting regime. As already alluded to above, the scope of STRs is set to be expanded with the Amendment Act and relevant regulations coming into effect. This, however, does not mean that the need for confidentiality will fall away and that access be afforded to everyone other than those designated in the Act. The Centre will also continue to execute its mandate of analysing, processing and distributing information to all its partners in the same way as it used to. It is imperative to note that the Centre does not share the actual STR filed, but only a certificate, which contains some of the information extracted from the actual report. The confidentiality of the report also ensures that those suspected of unlawful activities are not tipped-off and as a result abscond or dispose of their assets. Lastly, and as noted by the FATF recently, where STRs are not treated with confidentiality ‘concerns … exist regarding … potential misuse for unrelated purposes, leakage to media for political gains, and sharing without due process of law’ (www.fatf-gafi.org, accessed 7-11-2017). The Makwakwa case is one, which perfectly illustrates this point as some of the information extracted from the STRs was splashed through-out the pages of various newspaper articles.

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

This article was first published in De Rebus in 2017 (Dec) DR 28.

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