Financial Intelligence Centre Amendment Bill [B33-2015]: deliberations

Meeting report

Chairperson's opening remarks on programming
The Chairperson noted that, despite very poor attendance by Members, the meeting should proceed.

He spoke firstly to some programming issues. He had indicated to National Treasury (NT) that the Committee would like the Financial Intelligence Centre (FIC) Amendment Bill (the Bill) finished by the following day. If not, he would suggest that a subcommittee meet and finish processing the Bill. The Committee needed to reorganise its programme, because if there are huge gaps between sessions of processing a bill, this was not productive. He would like to put the issue of the programme on the agenda for when more Members were present, because the present meeting was meant to discuss NT’s budget. He had thought in the circumstances that this would be condoned. The meetings with the Public Investment Corporation (PIC) and Government Employees Pension Fund (GEPF) could be rescheduled to the beginning of the next term. He was aware that the DA was very upset about the PIC and GEPF, which he would put to a vote later.

He recognised Mr D Maynier (DA), and said that he could speak to his concerns, but the matter would only be discussed when more Members were present.

Mr D Maynier (DA) said he would like the matter discussed presently, but since this was not going to happen, he asked to be informed when the Chairperson decided to raise the matter. The DA was not prepared to continue in this manner or participate in the present meeting.
The Chairperson said he noted the comment.

He asked for the National Treasury (NT) to proceed to take Members through the clauses of the Financial Intelligence Centre Amendment Bill, from clause 12.

Financial Intelligence Centre Amendment Bill [B33-2015]: Clause by Clause description by National Treasury, and deliberations

Clause 12: Proposed Section 21B
Mr Olano Makhubela, Chief Director Financial Investments and Savings, National Treasury, said the  Committee had been discussing the Bill previously, up to clause 12, which was the proposals for section 21C. However, NT would like to go back to the proposed section 21B.
Mr Pieter Smit, Senior Manager: Legal and Policy Financial Intelligence Centre, reminded Members that in the last briefing a redraft of section 21B was presented, which tried to make it clear that subsections 3, 4 and 5 would operate in a cascading manner.
The Chairperson said it became confusing if Members received updated documents at every meeting, as they kept their notes on previous versions. He suggested that NT should rather speak to the Addendum which was tabled at the previous meeting and not to the document that had been received at the meeting. He furthermore thought that this was rather unreasonable to raise matters now, because NT had had from 23 February to deal with the matter. This was not a reflection on the NT officials present, and he would take the matter up with the Director General, because NT cannot expect the Committee to process Bills swiftly if it was not delivering from its side.

Mr Smit repeated that at the last session a redraft of section 21B had been introduced to clarify the cascading effect. The Committee instructed the team to do a redrafting exercise, because the Committee did not think the clause was sufficiently clear to indicate the sequence of the three subsections. In the new draft, the original subsections 3, 4 and 5 had been collapsed into subsection (2), with new subparagraphs (i), (ii) and (iii).

The proposed section 21B(2) now indicates that when an Accountable Institution (AI) is dealing with a legal person, such as a company, it must identify the beneficial owner, by determining the natural person who owns a majority or controlling stake in the entity. If an AI is in doubt or no natural person owns a controlling interest, then subparagraph (ii) requires the AI to determine who, in terms of other arrangements, controls the entity. If neither (i) nor (ii) give the AI certainty about who the beneficial owner is, this would then revert to the default position set out in (iii), where the AI has to identify the senior management of the entity. Once the natural person is identified by one of these ways, the AI will have to take reasonable steps to verify that person’s identity. NT hoped that this amendment would remove the confusion, and make it clear that instead of there being three separate obligations, there is one obligation which can be met in three different ways.

The Chairperson asked if NT or the Financial Intelligence Centre (FIC) had conferred with any of the stakeholders about this amendment.

Mr Stuart Grobler, Senior General Manager, Banking Association of South Africa, said that the Banking Association (BASA) agrees with the formulation, but the only concern it had was the coordination and similarity in approach with regard to the South African Revenue Service (SARS), specifically, around its tax reporting obligations. What he had seen from SARS was that it would follow similar steps to identify as contained in subparagraphs (i) and (ii), but he was unsure what an AI would do if it defaulted to the senior management when trying to determine a foreign beneficial owner. BASA sought clarity on how the two parallel, but separate systems would interplay.

Mr Makhubela said NT had shared the text with SARS and it gathered that SARS was comfortable with the provision as it stands.

The Chairperson said the Committee was therefore also happy with this version of the new section 21B.

Clause 12: Proposed Section 21C
Mr Grobler said he did not have access to the latest text from NT, but BASA had concerns about 21C, which had been raised. Section 21C required on-going due diligence, but BASA was not sure how it would apply to existing clients.

The Chairperson asked if this was a new point or if it had been raised in the public hearings.

Mr Grobler replied that it had been raised in the meetings with NT since early February 2016, but BASA had no clarity as yet on its concerns.

The Chairperson said there had been on-going public hearings, and the Committee facilitated meetings between NT and various stakeholders and had now reached the final stages of the Bill. The Committee did not want a system “of non-Members co-legislating” so the aim was for the stakeholders to consult and seek consensus. BASA had vested interests in the Bill. However, so did the consumers or trade unions. Therefore, the Committee must be careful about how much latitude to give. NT should have its say on the original submissions made, then if it is relevant the Chairperson would then call upon the stakeholders.

Ms T Tobias (ANC) said NT and stakeholders had been given an additional opportunity to meet, so she did not know how it would help the discussion if the Committee were to revisit some of the clauses already discussed.

The Chairperson asked for an explanation of the change to the proposed section 21C (b).
Mr Smit said during the course of the discussion it was pointed out that the clause in the Bill only refers to subsection (1) and now additional information is being required under section 21B and others. Therefore, the proposal is to add references to all the requirements which speak about AIs keeping their information updated. The on-going due diligence clause, section 21C, covers two aspects of keeping up to date with a customer’s information. AIs must be able to identify when something in the customer’s business which needs to be reported to a regulatory supervisor such as the FIC. Under the proposed section 21C (a)(i) and (ii), if a customer’s behaviour is not explained by the information the AI has about the customer or where a customer’s transactions seem unusual, unnecessarily complex or without a business purpose, the AI should be able to pick this up. Further, it should trigger a thought process about whether the behaviour should be reported to a regulatory supervisor. The other aspect is to make sure that information about the customer stays up to date over time. A customer’s particulars might change and that is why the change being proposed around keeping up to date with beneficial ownership information.

 

He explained how this would apply to existing customers going into the future. The obligations of these amendments do not have retrospective effect and the AI will not have to go back and update every customer’s information from the effective date. However, because the existing customers will continue to have a business relationship to which the obligations will apply, the institution will have to update the information about its customers at some point. When this would be, and how frequently, will depend on how the AI classifies its risk and whether it classifies the customer as high risk customer.  The customer’s information will have to be managed in the future, but it will not have to be done retrospectively.

The Chairperson asked whether this had been discussed with stakeholders and what the outcome was.

Mr Smit said that there is no need to change anything in the legislation, because this is the way the Risk Management and Compliance Programme (RMCP) is phrased, as it already contains on-going obligations to manage the relationships with customers. There is no clause in the Bill which specifically has retroactive effect, which would have to be explicitly stated.

The Chairperson asked why BASA was concerned that it may be retroactive.

Mr Smit said there is a need for clarity on what is expected from supervisors and regulators in the implementation process of the legislation.

Mr Grobler said BASA accepted Mr Smit’s explanation and using the risk based approach and remediation over time made sense, and BASA would be happy if it was not expected that there must be instant compliance as soon as the law comes into effect.

Clause 10: Proposed sections 21D &21E
Mr Smit said sections 21D and 21E would work together and are new requirements which are not expressed in the Financial Intelligence Centre Act (FICA or the Act) at present. Section 21D would apply when doubts arise about the veracity of the information given by a customer when the relationship began. It requires the AI to go back to its identification due diligence processes, to either obtain new information or confirm information in order to remove the doubts about the customer’s identity. This needs to be determined by the AI in terms of its RMCP, for it would be looking to what extent the doubts might result in changes to the risk category of the customer change. Essentially it means that if an AI becomes doubtful about a customer’s identity or due diligence information provided, it cannot leave it uncertain, and has to confirm whether the information is sufficient or more is needed. Section 21E is the follow on from that, and is triggered if the doubts remain, where the AI still cannot say that it has the required information or can carry out the due diligence. In such a case the section says that the AI may then not do business with that customer. It must either end the relationship with the customer, or cannot start a new relationship.

The Chairperson said Members have no problem with what NT was doing and asked what the outcome was of discussion with stakeholders.

Mr Smit said the biggest challenge for industry was what to do when AIs reach the point where they have exhausted all options to confirm the customer’s information, and whether to terminate the relationship. This would happen particularly where the AI already has the customer on board and the doubts arise well into the relationship. The FIC would, from a policy perspective, want to have the exit from the relationship as the last resort, because it would not want to push people out of the financial system. However, it is difficult for the AIs to put enough pressure on the customer to bring forward the information where the customer may not be cooperating, and customer behaviour could force a situation where the AI's only choice is to exit the relationship. This especially relevant for the proposed section 21E(c)(ii) which states that in such an instance the AI may not continue transacting with the customer.  There may be some guidance necessary for AIs, because in the banking industry terminating a relationship with a customer may entail or constitute a transaction in itself – for money may need to be paid out of an account. Specifics need to be discussed with supervisors and the relevant industries, to figure out how to manage such scenarios. It must be clear that this would not apply where a surname is changed, because the identity of the person is not in doubt. It would apply where the  AI cannot know who it is doing business with, and it cannot continue doing business with an unknown customer.

Mr Grobler said BASA had made extensive submissions on this point to NT and the concern is that it again ties in with existing customer remediation. BASA also thought that the new section 21C(1), which deals with new relationships, is covered elsewhere and should be deleted. The challenge is that when AIs are doing their existing customer remediation, customers ignore the requests. If AIs do not get information the section requires the AI to freeze the account. Currently, BASA members only freeze certain transactions, but will not freeze debit orders or insurance premiums. This new section requires the freezing of every single transaction. That means it is not possible to maintain an existing relationship, without disturbing the national payments system or insurance policies and the like. The wording here leaves no choice. The section reads “must terminate” and does not allow much space. Again looking at the entire client remediation, looking for beneficial owners in trust alone would be a major enterprise. This would not even allow the AIs space to freeze accounts for three months, to allow for compliance. It does not allow the necessary flexibility for existing customer remediation. New customer take on is not an issue. The question is how this will be applied to remediate the millions of existing customers. BASA accepts that it has to do this if the Bill comes into effect, and it will be done, but the problem is that it allows very little room for manoeuvring while maintaining existing customer relationships.

Ms Tobias said the principle is to try and force a client to disclose certain information. She wanted to know whether the word “terminate” was appropriate in this context, or if a different word could be used to avoid a cumbersome result where customers have not submitted information timeously.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said it must be remembered that the termination in section 21E(c) was done in line with the AI RMCP. It is critical that the RMCP will have to set out the steps pursuant to terminating a relationship in such situations. Further, the RMCP must be approved by a supervisor such as the FIC. Therefore, he was not very concerned about “terminate”, and did not think it should cause too many problems. Perhaps NT should look at the potentially unforeseen consequences of the new section 21E(c)(ii). It was the case that stopping transactions in an existing relationship may be a hard measure and he would suggest there should be room for manoeuvre if it is a good faith situation, but where clients have not been able to comply.
 
Mr Smit said that Adv Jenkins had made a good point on section 21E(c)(iii), and the process for managing the termination is up to the institution. It would depend on what type of customer is being dealt with, according to the AI's RMCP.

He wanted to emphasise, in relation to section 21E(c)(ii), that this is not where a particular piece of information is missing. It applies where an AI is unable to complete its due diligence and gets to the situation where it cannot confidently say who the customer is, who the beneficial owner is, or that the AI understands the relationship with the customer. This is more fundamental than a particular piece of information being missing, which does not affect whether the institution knows who it is dealing with. This general provision applies to AIs across the board, from banks to attorneys and estate agents. The types of transactions vary amongst the various types of AIs. He agreed with the point that in the banking scenario, not all transactions should be caught by this provision. That is a specific scenario within the banking industry, which must be dealt with through rules for the banking industry. As a general rule, however, the position is that the institution should stop transacting. The Bill will provide for instruments in issuing directives to specific industries on how to deal with particular scenarios.
He noted that this was the way that freezing of transactions was currently happening in the banking industry and particular sets of transactions were identified which banks could and should not freeze.

Ms Tobias said that this response did not actually answer her question. She wanted to find terminology which would not lead to a cumbersome result, and this applied both to the industry and to the client who might feel aggrieved at the way he was treated. She asked how different reasons provided be taken into account, where the client had failed to provide the required information. This is not intended to be a punitive provision, but one aimed at encouraging compliance.

The Chairperson said he did not think NT would give in on this point, but asked that NT, any available stakeholders and the Committee staff meet to discuss this after the meeting. If NT did not wish to concede on the point, there was no obligation on it to do so, and Parliament would decide on the point on the following day. The Committee recognised the need to not cripple the banking sector, but had to find the right balance. The Committee did not want to be punitive, but also did not want to buckle, and customers were also vulnerable. 

Clause 10: Proposed Section 21F and 21G
Mr Smit said these are the substantive sections which deal with domestic Prominent Influential Persons (PIPs) and foreign Prominent Public Officials (PPOs). The requirements for foreign PPOs do not presently exist in the Act. In future, the AI must do three things upon determining that a customer falls into that category. Firstly, it must obtain the approval of its senior management to take on the customer. Secondly, it must have reasonable information about the source of funds which the customer will use to transact. Lastly, it must conduct the on-going due diligence to ensure that the customer’s transaction behaviour correlates with the information the AI gets at the outset of the relationship. It places the customer in the category of high risk, meaning a customer who needs closer scrutiny in on-going due diligence. This automatically applies, given the international conventions on corruption, where public officials do business outside the country where they hold the post.

Section 21G deals with the converse, for if this is a South African PIP the customer is not necessarily considered to be of a particular risk. This is a determination which the AI must make when it takes on the customer and the information on the type of relationship it has with the customer. If the type of product used by the customer is inherently low risk, such as life insurance, no matter who or what the person is, the product can only lend itself to certain functions. If there is anything which points to the person falling into the high risk category, then the same requirements will apply as for the foreign PPO apply. These are hard-coded into the international standards and the Bill applies the three steps mentioned above.

The one amendment being proposed to the two clauses in the Bill as tabled, is to remove the reference to single transactions. It may have been a step too far in the initial draft, because these provisions are not easily applied to single transactions and are designed to deal with on-going relationships. It does not add a lot of value to apply these types or requirements to single transactions.
Clause 10: Proposed Section 21H
Mr Smit said this is another new provision and extends the above provisions to family members and known close associates. This clause received a lot of submissions, because there is usually a lot of information about who fills public or prominent positions, but little on who their close associates or family members are. NT and the FIC understand that there is little information available. The extent to which the AI attempted to establish whether people fall into this category becomes part of what the AIs need to demonstrate to the supervisors, in proving compliance with this provision. The fact remains that these are part and parcel of the international obligations and is not something which South Africa could opt out of implementing. The burden will be alleviated slightly by the amendment to the Bill to remove reference to previous spouses and life partners. That removes one category of persons AIs will have to identify, but the obligation to others will remain in the bigger scheme. It was acknowledged that it is an onerous obligation, and from the regulator’s point of view it means it is incumbent on authorities to point AIs in the direction of information, although that will not necessarily amount to publishing lists.  The obligation remains on the AI to demonstrate that it has taken the steps necessary to get to the point where it can say whether the customer falls in the category.

Ms Tobias said NT may be taken to task if it requires the AIs to know who has “a joint beneficial relationship” and she was asking this question to ensure that the text was legally sound. She thought that the word “known” limited the provision, because if something was not known, this was no proof that the relationship did not exist nonetheless.

Mr Smit said the requirement that it be “known” does bring a measure of subjectivity into the consideration of whether an AI could have been expected to identify whether a person is a “known” close associate or family member of a PIP. It does qualify the expectations which could be placed on an AI. If this word was not included, then it would imply that the AI would be expected to know something which is not generally known or could not have been known to an AI. NT and the FIC believed that would go to far, and did not think that it could compel an AI. Without that word the provisions may be so onerous as to be unenforceable.

Mr Grobler said he accepted it is an international standard, but made the point that no country in the world actually knew how to implement this, and South Africa would also struggle.

The Chairperson said if there is an international norm which is not unreasonable, it should be implemented. He questioned whether everyone else was really unable to implement this requirement.

Mr Grobler said industry all over the world had been struggling and the private sector has been opposing the requirement from the outset, because it does not know how to do this. The definition in the Bill includes members of royal families and traditional leadership. How can the private sector be expected to determine all the family members and known close associates? There are no records of this, especially with life partners. The “known” only applies to known close associates. The problem lies in the default - that if someone is high risk then their family becomes high risk by association. This is where the regulatory compliance becomes a problem.

Dr Dumisani Jantjies, Finance Analyst, Parliamentary Budget Office, said the issue of the previous spouse came up previously. NT tried to deal with it in the updated amendments.  The known aspect was being raised for the first time. He asked whether there were any guidelines from the Financial Action Task Force (FATF) on the point.

The Chairperson said he would like the Committee to finish the Bill informally and when the Committee returned it could vote on that matter quickly. It would not reopen closed issues.

The Chairperson said that he personally had no problem with a previous spouse being included. He heard what people were concerned about, but he wanted to know what the international norm was.

Mr Smit said the international norm required the category of family members and known close associates to be included in the framework of prominent persons, and puts them in the same “basket” of risk as either the domestic or foreign prominent persons.

The Chairperson asked for NT’s and the FIC’s view.

Mr Smit said the suggestion had been made that former spouses should be removed, because the information which is publicly available about people in that category is not readily available to the AIs.

The Chairperson said he was not happy about the removal of previous spouse, but he would not press the point if others disagreed.

Ms Tobias said that in some African cultures, a first wife, even if legally divorced, will still owe loyalty to the family she married into. If South Africa legislated by international norms, this meant that African customs and circumstances may not necessarily be taken into account.

The Chairperson said that is a novel point, because there are indeed customs and traditions specific to this part of the world. There are provisions in the Bill which are difficult to implement, but the agreement was that the phasing in and transitional provisions could deal with this. The Committee would have to discuss what comes when and this could be looked into. He did not think it should be dropped, but if others felt strongly he would concede.
 
Adv Jenkins agreed and said perhaps the Committee should look at the Bill in its entirety, because some provisions may require a phasing-in approach due to the difficulties. Eventually there will be a body which comes forward with a solution once the challenge is put out, and a way of getting that information will no doubt be found. He said that the legislation should not present insurmountable hurdles and if it becomes clear that there is a provision that is not workable, it should not be in the law in any case.
Ms Tobias asked what would happen if a woman divorced her husband in order to pursue business interests and disassociate herself from him. How would her being a beneficial owner in a venture with her ex-husband be picked up?

Mr Smit said the question illustrated two things. Even if the woman were to be divorced from a prominent person, she may still remain a known close associate, and therefore may not fall completely outside of the category of people the AI will have to watch. Secondly, there might be media reports or company report showing that people are still doing business, so that despite ending their previous relationship, they are still known to be close associates with a PIP. If there was no information anywhere in the public domain, and the AIs could not be reasonably expected to know that the people had a relationship, then that was not expected of them. If the clause does not specifically refer to former spouses there is still the potential that they may remain a known close associate.

Mr Makhubela reiterated that NT would continuously review the legislation and assess what is happening internationally. It is not only a challenge for South Africa, it is an international problem. NT would monitor updates and would provide guidance.

The Chairperson said the Committee would prefer this to be done in regulations wherever possible, particularly seeing how far Members had come along in the debate. This Committee should be decisive and indicate how it feels, pending new information. The Committee would return after the constituency period to vote on the Bill.

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, NT, said the FATF Recommendations have guidance documents, which are not too prescriptive. The guidance document, for example, indicates that recommendation 12, on PIPs, should apply to close associates and family members. It reads “the recommendation does not define the scope of close associates and family members, as this will depend to some extent on the social, economic and cultural status of the PIP or PPO. Identifying such persons is challenging, since the number of persons who fall within the category is fluid and may change significantly over time”. Examples of known close associates in the guidance document are sexual partners outside the family unit, prominent members of the same political party, civil organisation or labour union. He was trying to indicate that the scope can be vast, but at the end of the day it was for the AI to determine whether there was a risk and their systems need to take local factors into account. How much to put into the Bill and how much discretion to give is a difficult question, because there needed to be a balance also to ensure that AIs do not adopt a “tick box” approach. He encouraged Members to read the guidance notes on the FATF standards.

The Chairperson said NT should summarise it for Members, because this Committee did not have a Committee Researcher or Content Advisor.

Mr Grobler said BASA accepts that it is an international standard, but if the customer says “no” when asked whether they are connected to a PIP or PPO, then what must the AI do? If the Department of Home Affairs was asked to update everyone’s family history with this information, then it would be immediately implementable. Not getting reliable information from customers will be a frustration to implementation, but there is scope for fine tuning to local circumstances. Further, Mr Smit was correct in that “known close associate” would be the catch all for difficult situations.

Ms Tobias said there are risk managers in all institutions and the target here is prominent officials, not every run-of-the-mill person. Part of the risk based approach is to ensure that undesirable individuals are not transacting with important financial institutions in a way that could threaten the integrity of the system. The aim is to just get basic information. Direct questions alone will not help AIs to get information. Part of this would be to work with institutions, such as the FIC and any other entity which could be able to assist. The intention was not to give AIs extra work, but she did want to stress that the whole verification procedures must go beyond simply the person’s name and residence, especially if large transactions are contemplated. There are many ways to get the information needed, and it should be secured in the best interest of the country.

Mr Smit agreed and said AIs have to include the information of the customer in this regard, because it is required. If the customer simply says that he or she is not related to any PIP or PPO and there is no reason to suspect any differently, he would not think there should be an expectation that the AI go further. It depends on what information is generally available in the public domain. If there is anything which points to the need to ask more questions, the institution would be expected to go further. This will vary from case to case. 90% of customers will fall within the first category and there will be no reason to suspect anything further. There are various ways to approach this, as Ms Tobias said. It does remain a difficult obligation for institutions, but the point of departure is that the AI at least needs to be able to explain itself when tested on how its policy works.

Dr Jantjies said he was having difficulty finding a strong argument for removing the “previous spouse” requirement. It is clear that NT had a reason for putting it there, but NT had then backed down on that issue following input from the industry. The Committee needs to give direction in that regard, because the discussion did not raise a strong position either way.

The Chairperson said that was also his recollection, the Committee had indicated that the stakeholders should be engaged. NT had backed down, but he said that the Committee would not. Sometimes “NT is opportunistic and pretends to wilt, knowing the Committee would disagree”. The Committee was not agreeing to the withdrawal of the provision, because while AIs may not be able to do everything required by the law there will be cases where previous spouses need to be categorised still as high risk.

Clause 11 and 12
Mr Smit said clauses 11 and 12 go together and deal with the record keeping obligations contained in the current Act. The current record keeping provision is section 22 of FICA, which lumps together all the information on which AIs must keep records. These include customer identification information, transaction information and others. The FIC has found, in practice, that when compliance is checked this creates a problem, because it mixes up certain things which do not necessarily belong together. The proposal in this Bill is therefore to split the record keeping obligations.

Clause 11, amending section 22, deals with customer due diligence information only. Clause 12, which inserts a new section 22A, deals more with the transactional records. There are a few new items with record keeping obligations, mainly dealing with correspondence with customers, aside from the actual account information. By and large, the record keeping obligations remain the same, but where there is a new obligation to obtain more information, such as beneficial ownership or the on-going due diligence, there is a correlated record keeping requirement.

Mr Grobler said BASA has a concern about the proposed section 22A(2)(e), dealing with business correspondence. It is impossible to keep records of all the SMSs sent to customers about transactions. There is a standard form letter and a system which picks up names in a database, but there is no copy of each letter, because banks do not keep a record of the 6 million letters sent out to customers daily. How the provisions will be interpreted and implemented remains to be seen. If an AI is dealing with a customer and doing a major transaction, that can be filed and kept. However, it will not be possible to keep all records of all the correspondence sent electronically.

The Chairperson asked whether BASA thought that was really expected under the provision. BASA was quibbling in a way which almost reduced the value of what was being said. Presumably no one would be jailed because they had not kept six million copies of a generic letter sent out indicating that people’s interest rates would go up. He thought that the regulations would set out what is expected from AIs and NT would listen to the industries before these regulations are finalised. He then asked what is meant by “business correspondence”.

Mr Smit said the requirement is informed by subsection (1) of the proposed new section 22A, so it is information which is useful to reconstruct the behaviour of the customer. This relates more to the transactions reflected on a bank statement. It would not include notifications about interest rate increases, because this will have nothing to do with the behaviour of the customer. Where there is a request from the customer to change features of a product or service, those kinds of things will be relevant to an investigator trying to reconstruct their behaviour after the fact.

Ms Tobias said Mr Grobler perhaps did not realise that the clause limits the records to be kept. If the clauses are read together the provision is fairly basic.

The Chairperson asked for an explanation of why BASA was raising this concern.

Mr Grobler said it is based on 15 years of implementation of the existing FICA, which “already drives the customers crazy”.

The Chairperson said he agreed that there had been some problems, but it was clear that NT did not mean that the clause must be interpreted absolutely literally. There are also directives and regulations which will deal with specifics. He hoped that it was recognised that there would be costs involved, ultimately borne by NT. He asked what purpose, apart from countering money-laundering and terror finance, the proposed section 22A would serve. Presumably the aim of the requirement to keep records was to reduce the prospects of criminal activity. He asked if there was a further purpose towards avoiding the types of problems which led to the financial crisis in 2008?

Mr Smit said there are additional benefits, in the banking context, to having a proper transactional record and record of the customer base and how they behave, and this was already in place in the sophisticated banks, but having this information at a centralised level within the AI enables the institution to manage other risks relating to their customer base.
 
The Chairperson said presumably it would not be in the customers’ interests alone, but asked if, in the longer term, it would also serve their own business interests.

Mr Smit said that being able to properly analyse customer transaction history and behaviour better enables AIs to target their marketing to their customer base. This is even more true for industries outside the banking sector, such as the casino industry.
 
Mr Momoniat said there was a challenge here in how much detail should be asked. He had less of a problem with the major listed banks, because they go beyond these standards already. The issue is for the regulator to not adopt a tick-box approach, just as the AI should not do so. He would submit that these provisions and details are necessary with casinos, because he felt there was a lot of money laundering happening there. On the other hand, even if a major bank did not implement this in some form, the banks would face major fines from foreign regulators and that is a risk to their business. The way forward should be that if the AIs already have higher standards, their regulators should be able to avoid a tick box approach, knowing of their higher standards. He had some sympathy for what Mr Grobler was saying, because he felt some regulators had merely adopted a tick box approach in the past. There had been a problem with coordination between the regulators. Banking is highly regulated, and with the Twin Peaks legislation even higher standards will be required. Some of these requirements will be deemed to have been complied with, because of the higher standards. However, it was important still to keep this requirement, because if it is not in the Bill, it would be easy for criminals to use small companies with little reputational risk and whose systems may be shoddy. NT would have to write the provision as “one size fits all”, but would also be looking further towards the role which the present regulators have and that future regulators such as the Prudential Regulator will play. The legislation has to be written for the industries which will likely not have standards in compliance, although it is aware of higher standards elsewhere.

The Chairperson said the Casino Association of South Africa (CASA) had commented saying that they do not keep records of single transaction business correspondence, and this would be difficult to implement without an exemption. NT had indicated that it did not agree that an exemption was required. He asked whether this was fair. CASA seemed to have a case, although to be fair the Chairperson did not know what was going on in the casino industry. NT was saying it did not agree and NT should justify its stance and whether casinos were expected to do that elsewhere in the world?

Mr Momoniat said his view was that South Africa was not being tough enough on the gambling industry. When money laundering legislation was proposed, there was a lot of resistance to it, from not only industry but also from the banking sector regulator, which felt this was not its job. Today a banking regulator would be irresponsible to not look at money laundering, which is the biggest risk to banking’s stability. The notion of “Know Your Customer” needs to be brought into the casino industry. This is about changing the culture of the gambling industry, where there is tick-box compliance. He did not think the casinos even attempted to know their customers and he would not be too sympathetic, but NT had considered the point.

The Chairperson said NT must have indicated their position, and asked how CASA had reacted.

Mr Smit said that CASA's main concern was that this Bill would change the approach to the way FICA applies to transactions in the casino industry. This is not in fact the case, and the identification obligation arises where money changes hands. Therefore, identification must be done at the point where the customer buys the chips. The identification does not arise every time a bet is placed, but where the money is brought in or cashed out at the beginning of a gambling session. CASA was more comfortable when it recognised this. CASA does not have to keep records of every bet, but needs to keep records whenever a person buys more chips or cashes out winnings. The casino industry is included internationally and locally, because there has been experience with people saying that money acquired is gambling proceeds. There is very little opportunity to argue with that after the fact, unless the casino is required to keep a record and a supervisor can see whether the person won or lost. When a person comes to a bank with a cheque with a casino’s name on it, they do not question whether it is winnings or actually constitutes a loss. The bank assumes, by the fact that the cheque comes from the casino, that this is winnings, making it easy for customers to use that explanation even if it is not true. This can only be controlled if the obligation is on casinos to keep records of transactions and engagements with customers. In the casino industry, sections 22 and the new 22A will apply where money is exchanged, and not when bets are placed. CASA had accepted that.

The Chairperson said he was concerned when people did not understand what the Bill meant, for it had been well drafted. For example, the proposed section 26B was very long, but very clear and he commended the drafters.

Ms Tobias said she disagreed with the Chairperson’s position, because she thought that people might be able to coerce people working in casinos to sign cheques, with the aim of laundering money. If the casino cannot provide records of the transactions, how will investigators determine whether the money is being laundered, especially if casinos are not subjected to the same requirements that banks are? She asked what the reason would be to absolve casinos from taking the same responsibility as all other financial institutions, particularly when there are similar risks in the sector. The law should be made to cover all, and casinos should not be immune. Money launderers look for gaps in the law to engage in illicit activities and if a gap is left with casinos they will go there. A balance should be struck to ensure that the banks are not exposed to claims that they have not been able to do their due diligence properly when receiving cheques for casino winnings.
 
The Chairperson said the effect of what she said was that government should be tougher. The ANC caucus was very divided about whether the casino industry should be legalised in a democracy. Some were opposed to it on moral grounds and there were others who argued its economic benefits. He believed that the final arguments involved economics and right to trade. In principle, he had no problem with what was being said by Ms Tobias, but he was concerned with the practicalities. He said she had raised a most interesting point that if the casino industry is not managed more vigorously the banks are being exposed to risks.

Mr Momoniat said that in the same debate there were other concerns such as whether there are too many casinos and whether they were badly situated. NT is still working on a gambling tax, and from a market conduct perspective he hoped the market conduct regulator would ensure that there were not ATMs close to a gambling den. He questioned whether casinos are being tough enough on people who loan money to others for gambling purposes. Casinos have cameras and can see the transactions taking place. Is the industry doing enough to ensure that people who have already lost money should not borrow more? Much more can be done by the regulators, to make things less easy, as is done elsewhere. It is not just the cashing out or buying chips which are of concerns. There are concerns about people lending money in casinos ,and whether these people are registered. One of the problems with a gambling tax is how to deal with online gambling, with so many entities off-shore. While you cannot get rid of it,the question is how to regulate and deal with curbing the negative effects of gambling. He felt the discussion on casinos need to be broader and should cover how to deal with the gambling industry generally.

The Chairperson asked whether there is some substance to the point about putting the banks at risk, if the casinos are not regulated properly.
 
Mr Momoniat said it does introduce a risk, because the casino is a customer whom the banks need to know. Perhaps Mr Grobler could answer that question better, but banks can decide if they want a person to be a customer if they feel there are associated risks.

Mr Smit said the point went specifically to the records and information which casinos keep on their customers, and whether they were being compliant. The intention of an investigator or prosecutor following the money would not be to prosecute the bank for something that the casino was supposed to know. The investigators' objective is to find the customer who was moving the money around through the AIs. If the trail had to be broken off because a particular AI was not compliant, then that was where a regulator must step in. That is why there is a need to keep an even playing field between different institutions which perform in the financial arena. At the level of individual customers, he did not feel there was a risk of a bank being prosecuted because a casino did not keep records. The frustration of the system would happen when the necessary information was not available. The FIC is more concerned about retaining the level playing field, so that law enforcement agencies can do their jobs.

Mr Grobler said banks keep records of every financial transaction on an account, so it is not a problem for them. Where the casino is the customer of a bank, it fits into the “know your customer” concept and the measures required there about things such as source of funds. Furthermore, physical casinos are AIs, and are responsible for their own customers.

The Chairperson suggested that it seemed to be that the wording of the Bill was fine, but in the Committee’s report to Parliament the issues noted by Mr Momoniat and Ms Tobias should be noted. He suggested that this could be wording such as:  “The majority in the Committee feel that while this may be seen as onerous on the casino industry, the Committee feels that there is a case to be made for more effective or stringent regulation. In this regard it applies to not only casinos, but the gambling industry generally.” It is reasonable to say that, in tight economic times, many people may tend to attempt gambling, and, although he did not know this for a fact, it may be a possibility that those with lower incomes may turn to gambling during financially hard times.

Clause 13
Mr Smit said clause 13 deals with the period for which records must be kept. There are two amendments, one following the split effected by clauses 11 and 12 separating customer information and transaction records. The second added a requirement, where information about a transaction is reported to the FIC, that the record must be kept for a period of five years from the date of report. This will allow the information to be readily accessible upon investigation.

Clauses 14, 15 & 16
Mr Smit said the Bill as tabled had a proposed section 24(5) that required the records to be kept within the Republic. As seen in the comments, NT was proposing that the Committee delete that clause from the Bill, and as an alternative have the minimum standards of having the information accessible and protected.

The Chairperson asked what the reason was for the wording of this clause initially.

Mr Smit said this was something which was put by the law enforcement agencies, who often struggle with accessing information that is kept outside of the country, or where they suspect that others are looking into information about South Africans.

The Chairperson asked whether the law enforcement agencies would then be happy with removing the reference to documents kept in the country.

Mr Smit said they would be less concerned if there is a substitute, so that the same objective could be achieved in a different form, which was in fact proposed.

The Chairperson noted that no concerns had been raised about clause 15.

He then asked why clause 16 repeals section 26.

Mr Smit said the provision in section 26 was moved to a different place in the Act and is reintroduced through a corresponding clause. 

Clause 17: Proposed Section 26A
Mr Smit said this clause introduces a new part into FICA, to give effect to the sanctions which are imposed by the United Nations Security Council (UNSC) under chapter 7 of the UN Charter. In recent years the UNSC had effectively required governments to impose financial sanctions on financial institutions. These sanctions covered two aspects. Firstly where a person had been designated as under UNSC sanction, current financial activity with that person must cease. Secondly, no new financial resources may be made available to such a person. Currently, South Africa only had provisions to give effect to this under the terrorism legislation, so the objective of this part of the Bill was to provide for enabling legislation here. The new section 26A provides for the administration of the sanctions through a mechanism which requires the publication, by the Minister, of a notice in the Gazette, whenever a new resolution that contains a financial sanction is taken by the UNSC, to give that sanction legal force also in South Africa. Subsequent designations of people by the UNSC under that resolution will be published by the FIC through more accessible means than the Government Gazette, such as its website, on an on-going basis.

Ms Tobias said this clause was important as South Africa had to actively ensure that information was provided on resolutions of the UNSC. Countries had followed the prescripts of the UNSC, although the UNSC members itself may not; she cited an example of the ban that South Africa was pressurised by the UNSC to legislate, forbidding use of cluster munitions, but some of these countries did not do so. She wanted to prevent AIs in South Africa being exposed, and said that when decisions were taken, the information should not only be published in the Government Gazette but perhaps more active steps should be taken so that South African AIs should not run the risk of being penalised for non-compliance. She wished the Security Cluster to give its opinion on this point.

The Chairperson said that presumably there would be engagement by the security cluster Ministers in Cabinet. He agreed that sometimes established democracies do not abide by the rules and standards of the UN, but expect developing countries to do so. This point had been raised previously by government, and he asked NT to comment.

Mr Momoniat said certainly South Africa only recognised UN decisions, as there were often non-UN related, or single-country sanctions. There is a lot of extra territoriality by the USA, which some European countries had complained about. For business reasons, although banks are not compelled to follow non-UN sanctions they would generally do so, because there could be consequences if they did not. NT looked into where South Africa had legal obligations since it had signed up to provisions of the UN Charter. He assured the Committee that the Bill went through the Security Clusters and certainly went through Cabinet.
 
Mr Smit said Mr Momoniat is correct, because there is a much more complex world of sanctions, especially with extra-territorial sanctions. The UN itself is a political body and that sometimes makes it difficult to give effect to its decisions. Currently, South Africa has a complete vacuum in its legislation to give effect to these obligations and could not do so even if it wanted to. This was an increasing problem, because of the way the UN monitors compliance with sanction as issued by the UNSC. The UNSC sets up subcommittees to monitor each sanction. If they pick up that a country is not implementing sanctions, a report is published and tabled in the UNSC. These subcommittees have increasingly subjected South Africa to scrutiny because they have picked up on the legal vacuum in the financial context. Whether South Africa, politically, chooses to implement a sanction in a given case must be decided upon but these amendments look to whether if, having chosen to do so, it is then able to comply. The general premise is that if a country is part of the UN, and the UNSC invokes this Chapter of the UN Charter, it would be very difficult politically for a country to distance itself from that decision. South Africa at least needed the tools in its domestic law to give effect to the sanctions. That was what this clause was trying to address.

The Chairperson said Ms Tobias was correct to raise the issue, but NT has replied adequately. The proposed new section 26A(3)(a) indicates that following a sanction, the information on the affected entities should be published. He asked if the clause should not read “further persons”, or whether they were already defined in subsection (1).

Mr Smit said it could be both, depending on how the UNSC words the resolutions. Often, when the resolution is passed, it does not contain a list of names, although that sometimes comes later.

Clause 17: Proposed Section 26B
The Chairperson asked NT to take the Committee through the proposed section 26B. He thought that the industry no longer had the concerns that were expressed earlier.

Mr Grobler agreed that the revised wording of “or reasonably ought to have known” was fine.

Clause 17: Proposed new Section 26C
The Chairperson was concerned that the Minister may delegate any power conferred under this section to “the Director”. He wondered whether it was appropriate for this to happen in this context, and asked whether it happens in practice and if there is a similar provision in FICA.
 

Mr Smit said “the Director” refers to the Director of the FIC. The function being delegated is determining whether a portion of an impugned person's assets should be unfrozen to sustain the person’s basic living requirements. Depending on how frequently the resolutions are passed and how many individuals affected by the resolution are physically within, or have assets frozen in, South Africa,this could be a fairly large burden of work, involving consideration of the applications and making decisions how much money is reasonably required. For that reason, the delegation to the Director was considered necessary, although if there are few resolutions, the Minister may be able to deal with them.

The Chairperson asked if the delegated person was merely effecting the decisions, or making the decision about who qualifies for the exemption. The section was worded as “delegate any power conferred under the section, but surely the Minister should decide who should be exempted, unless it was intended to imply that at present the Director should be making that decision.

Mr Smit agreed that the Director could make that decision.

The Chairperson asked if NT was happy with the section, as the matter is quite sensitive. He urged Members, NT and FIC to look into the matter.

The meeting was adjourned.