No two accountable institutions are the same: The Financial Intelligence Centre Amendment Act 2017’s risk-based approach for the legal profession

September 1st, 2017
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By Nkateko Nkhwashu

Practicing attorneys, as defined in terms of s 1 of the Attorneys Act 53 of 1979, form part of a list of institutions which are termed ‘accountable institutions’ (AIs) under sch 1 of the Financial Intelligence Centre Act 38 of 2001 (the Act). The Act places an obligation on AIs to comply with its provisions when carrying out daily business activities or transactions. Some AIs – due to circumstances peculiar to the sectors within which they operate – are exempted from having to comply with all the provisions (but some) of the Act. The attorneys’ profession is one such distinct profession to have been exempted from some of the provisions of the Act, namely, identification, verification and record-keeping of all business and single transactions, subject to exceptions, namely, listed categories of transactions.

Brief background

Just to take a step back, South Africa (SA) prides itself on being (or striving to be) compliant with international best practices and standards. Thus its financial regulatory framework draws much from the recommendations of the Financial Action Task Force (FATF). FATF sets policies and standards aimed at, among others, curbing money laundering and terrorist financing. Pretty much all that is within the Act, as well as the recent Financial Intelligence Centre Amendment Act 1 of 2017 is a 99% resemblance of the FATF Recommendations (www.fatf-gafi.org, accessed 28-7-2017).

For instance, Recommendation 22 (rec 22) deals with customer due diligence for designated non-financial businesses and professions (including attorneys) specifically prescribe for a list of situations (not all situations) wherein designated non-financial businesses and professions are required to go through the entire customer due diligence process, namely, customer identification, verification and record-keeping. For attorneys, rec 22 specifically requires a full customer due diligence process when doing the following:

  • Buying and selling of real estate.
  • Managing of client money, securities or other assets.
  • Management of bank, savings or securities accounts.
  • Organisation of contributions for the creation, operation or management of companies.
  • Creation, operation or management of legal persons or arrangements, and buying and selling of business entities.

All the above is captured very well under Exemption 10(1) of the Act, as it provides that attorneys are exempted ‘from compliance with the client identification and record-keeping provisions of FICA in respect of every business relationship or single transaction, except for a business relationship or single transaction in terms of which:

(a) a client is assisted in the planning or execution of –

  • the buying or selling of immovable property;
  • the buying or selling of any business undertaking;
  • the opening or management of a bank, investment or securities account;
  • the organisation of contributions necessary for the creation, operation or management of a company or close corporation or of a similar structure outside South Africa’ (see Louis de Koker South African Money Laundering and Terrorist Financing Law (Durban: LexisNexis 2016) at 264 to 265); and
  • others (as listed in the Exemption).

The current Amendment Act seeks to, inter alia, introduce a risk-based approach (RBA) to customer identification and verification. Exemption 10(1) is to be withdrawn as was recently evidenced by the publication of ‘Draft withdrawal notice of exemptions in terms of Financial Intelligence Centre Act, 2001’ (www.fic.gov.za, accessed 28-7-2017). The implications of this is that ‘services performed by an attorney that had previously fallen outside the scope of the FIC Act will now be included in the scope of the Act. This implies that an attorney would have to determine for itself which services pose a lower or higher risk for money laundering and apply the necessary [customer due diligence] requirements in accordance with its [Risk Management and Compliance Programme].’

What now?

The question for the Law Society of South Africa (LSSA) is whether this is a welcomed development for the profession or not, bearing in mind that 70% or more of the legal firms in SA are run by one or two attorneys. Furthermore, very few of these firms will have resources to perform risk assessments and also document the same within the new risk management and compliance programmes and still be able to comply with what the Financial Intelligence Centre calls the ‘7 pillars of compliance’ (www.fic.gov.za, accessed 28-7-2017). The ‘7 pillars of compliance’ includes the following, among others:

  • Registering with the centre (s 43B of the Act).
  • Identification and verification of clients (s 21 of the Act).
  • Hiring a senior person as a compliance officer (s 43 of the Act).
  • Continuous training of staff (s 43 of the Act).
  • Record-keeping (s 22 of the Act).
  • Setting of internal rules (s 42 of the Act).
  • Submitting of reports to the FIC (ss 28, 28A and 29 of the Act).

Furthermore, in terms of an RBA having assessed a particular product or service to be low, risk does not mean that you do not have to do anything or put in some mitigating controls in place. Lastly, a key question for the LSSA, is whether the withdrawal of Exemption 10(1) and thus as a result the inclusion of all services offered by attorneys within the purview of the regulatory framework (Amendment Act) a proper interpretation or transposition of the FATF recommendations?

Conclusion

During the consultation period of the Amendment Act, the National Treasury and the Financial Intelligence Centre agreed that an RBA may not best cater for all AIs. The  LSSA made submissions to the same effect and also requested that even under the RBA regime some of the exemptions should be kept intact as ‘no two accountable institutions are the same’ even within the same sector or industry due to size, structure and services offered (www.fic.gov.za, accessed 28-7-2017). The question then is whether Exemption 10(1) is one of those, and furthermore, will the LSSA in the spirit of or as a matter of principle ‘jealously’ protects the interests of its members and ensure that the status quo remains? There is mention of a future industry specific guidance for the profession, but how ‘industry specific’ and useful is that guidance going to be compared to the recently generic issued draft guidance note issued by the National Treasury and the Financial Intelligence Centre?

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 (Sept) DR 23.

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