By Nkateko Nkhwashu

Gaps have been noted within the Financial Intelligence Centre Act 38 of 2001 (FICA). This was through a peer review exercise or mutual evaluation done by the Financial Action Task Force (FATF) on South African’s anti-money laundering combating the financing of terrorism (AML/CFT). FATF is an inter-governmental body, which sets international standards, policies and procedures to counter money laundering and terrorist financing. Most of what is in FICA currently is derived from these standards, policies and procedures.

FICA is applicable to ‘accountable’ and ‘reporting’ institutions as noted in some of its schedules, which includes legal practitioners. Thus the relevance and importance of this article to attorneys. The Financial Intelligence Centre Amendment Bill B33A 2015 (the Bill), has recently been passed by Parliament and awaits presidential signature. According to the Financial Intelligence Centre, the Bill is but one step in the process of strengthen South Africa’s (SA) AML/CFT regime. The schedules to FICA will soon be revisited and consequently incorporate new institutions, which are currently not on them.

The Bill and the strengthening process has not been without challenge. Thus the focus of this article is to look at some of these challenges and drawing some comparison with other jurisdictions. The Criminal Finances Bill of the United Kingdom (UK) will be looked at against the Bill. The Bill is currently ‘stuck’ in the President’s office, as there are some objections that it is unconstitutional, too onerous and goes too far compared to international best practices and standards.

These objections seem to be stemming out of one provision in the Bill, which deals with politically exposed persons (PEPs) or what is termed, in the Bill, prominent influential persons (PIPs). PEPs covers people entrusted with prominent public functions, both internationally and domestically. PIPs on the other hand also extends to people in the private sector doing business with the state ‘if the company provides goods or services to an organ of state and the annual transactional value of the goods or services … exceeds an amount determined by the Minister by notice in the Gazzette’.

The wording of the international best practices and standards does not prohibit the expansion of the PEP regime or definition. The wording thereof encourages member countries or jurisdictions to look at their domestic circumstances when implementing the international standards. For example, the European Union’s Fourth Anti-Money Laundering Directive endorses expansion of the PEP regime or definition where necessary. Domestically, in SA, corruption has been rife within the tender procurement space. This is one reason advanced for enhancing the PEP definition as is in the Bill.

As already stated this provision has been marred in controversy and recently led to various court applications. For example, the application of Minister of Finance v Oakbay (Pty) Ltd Investments and Others (GP) (unreported case no /2016, 16-10-2016) and the one by Council for the Advancement of the South African Constitution v President of the Republic of South Africa (CC) (unreported case no /2016, 4-11-2016).

The PEP/PIP provision is key to have in terms of best international practice and standards, the implications of not having it are dire to any economic interests of any country. Especially SA, which is the only permanent member of FATF within the African region.

In simple terms, PEP/PIP provision within the Bill differentiates between foreign and domestic officials. The former must automatically be deemed high risk by financial institutions and other business. While the latter is not automatically deemed high risk. With respect to the latter, the customer or PIP is treated as any ordinary customer of the institution thus the application of your normal due diligence or ‘know-your-customer’ requirements. However, the situation will change where a determination has been made by the relevant institution that the customer or PIP is high risk through what is termed, in the Bill, Risk Management and Compliance Programme. In short, a PIP is not automatically deemed high risk but may be so deemed after certain risk factors have been considered. Thus an argument can be made that this provision is not automatically ‘intrusive’ as alleged.

The UK regime on the other hand proposes to go much further than that of SA. The UK regime is much matured and various steps have been initiated to fight both money laundering and terrorist financing. The UK has already done its National Risk Assessment of both threats. One can, then persuasively, argue that the UK understands its domestic circumstances very well in terms of threats and risks.

The Criminal Finances Bill introduces, among others, a provision dealing with unexplained wealth orders (UWO). UWO ‘will enable a court … to require an individual or organisation who is suspected of direct involvement in or associated with serious criminality to explain the origin of assets, where their income appear to be disproportionate to their known income. A failure to provide a response would give rise to a presumption that the property [is] recoverable, in order to assist any subsequent civil recovery action’ (www.parliament.uk, accessed 9-1-2017).

UWOs will apply to PEPs. In SA they may be equated to the ‘infamous’ life-style audits. The Criminal Finances Bill then goes on further to make provision for ‘re-visit’ orders. Here the Bill allows for law enforcement, after civil forfeiture of assets, to revisit the perpetrator later on and ascertain if he or she is not deriving any benefits from the proceeds of the forfeited proceeds. If found to be then such benefits derived can then be confiscated again.

From the above analysis of the respective Bills and also if international experience is something (or a precedent) to go by, then there is nothing intrusive about the PEP/PIP regime of SA. Risk analysis is an essential function that seats with the financial institutions and cannot be taken away. Further a Risk Management and Compliance Programme is the only essential tool or route to an efficient and effective risk-based approach to customer due diligence.

Nkateko Nkhwashu LLB (University of Venda), LLM (UJ) and Certificate in Legislative Drafting (UP) is an advocate in the Directorate: Financial Integrity at the Department of National Treasury.

This article was first published in De Rebus in 2017 (Jan/Feb) DR 56.