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This is the first time that substantive amendments are being made to Schedule 1 – the list of accountable institutions – since the inception of the FIC Act in 2001. The amendments serve as the next phase in reviewing the legislative framework against money laundering and terrorist financing aimed at enhancing South Africa’s system to combat financial crime. The enactment of the Financial Intelligence Centre Amendment Act, 2017 (Act 1 of 2017) was one initiative in the review process while the amendments to Schedules 1, 2 and 3 to the FIC Act are another initiative. The Schedule changes have been in the pipeline since 2017 when consultations with industry bodies and institutions, businesses and regulators commenced and concluded in 2019. The Minister of Finance approved that the amendments be published for comment in June 2020.
The FIC has identified a number of activities that should be brought within the scope of the FIC Act, with a view to improving transparency in the financial system. Broadening the scope of businesses or institutions in the FIC Act is based, in part, on the FIC’s view that these businesses or institutions may present a higher risk of being abused for money laundering or terrorist financing activities. Including these sectors will widen the application of the FIC Act and will enrich the FIC’s information for interpretation and analysis. In turn, this will further enhance and supplement the outputs, which include financial intelligence reports, evidence development by law enforcement, applications for asset forfeiture and prosecution. The overall intended impact of these changes is to tighten the net against options for criminals to penetrate and abuse the financial system to ensure that criminal assets are returned, and more criminals are brought to justice. In addition, these amendments address the deficiencies identified by the FATF when South Africa’s AML/CFT regime was assessed in 2009 and 2019.
The FIC will take over the responsibility for overseeing and enforcing FIC Act compliance among non-financial sectors including trust and company services providers, legal practitioners, high-value goods dealers, SA Mint Company, crypto asset service providers, and the financial sector in respect of credit providers. The FIC already voluntarily assumed the responsibility to supervise the legal practitioners’ sector on behalf of the Legal Practice Council and the gambling sector within the Limpopo Gambling Board and the KwaZulu-Natal Gambling Board before the Schedule changes. The FIC also conducts inspections and enforces compliance where no supervisory body exists, or where a supervisory body does not enforce compliance despite the FIC’s recommendations. The FIC therefore has the experience and the ability to meet the demands of an expanded oversight role.
Supervisory bodies that handled the supervision of non-financial accountable institutions have demonstrated little or no significant improvement in the level of supervision and enforcement of the FIC Act. Very few administrative sanctions have been issued against non-compliant institutions by supervisory bodies in the non-financial sector. The FIC will have the responsibility to oversee and enforce compliance with the FIC Act in respect of those categories of accountable institutions. The low level of compliance in especially the designated non-financial businesses and professions (DNFBPs) sectors and the absence of robust supervisory powers for enforcement to address non-compliance has been identified as a weakness in the AML/CFT system. The supervisory bodies will be expected to play a supportive role as they lack the resources, and the FIC has to play the role of supervisor.
The changes have been in the pipeline since 2017 when consultations commenced with the relevant industries/sectors and the need for amendments was reinforced in the 2019 evaluation. These changes are important as part of South Africa's AML/CFT/PF legislative framework. The mutual evaluation of South Africa identified significant weaknesses in parts of the country’s AML/CFT/CPF system including sectorial gaps particularly in the potential high-risk DNFBPs and crypto asset service providers sectors. The amendments will significantly increase the number of accountable institutions included in the FIC Act. This increased sectorial coverage will enhance supervision and monitoring, thereby addressing some of the weaknesses identified in the mutual evaluation of South Africa.
Over and above the changes directly impacting the businesses and sectors as per the amendments, there are wide-reaching implications to making sure that the financial system is as robust and crime averse as possible. Perceptions, economic growth, and investment decisions are based on decision matrices which include the robustness, commitment, and ability of a country to identify and address money laundering and other financial crimes. By implementing these changes, South Africa is making headway in this fight against financial crime.
The FIC consulted widely with regulators as well as the private sector in the lead up to the amendments. Consultations have been held since March 2017 with the sectors, with industry bodies, supervisory bodies and in some cases with individual businesses. Following the consultations, the Minister of Finance published the amendments for comment in June 2020 – this allowed affected stakeholders to comment on the draft amendments. In some instances, further consultations were held with industry and supervisory bodies, including regulators, and the amendments were re-drafted before they were sent in September 2021 to National Treasury for the Minister to approve that it be tabled in Parliament. It was tabled in Parliament in May 2022.
The new sectors have been carefully identified with AML/CFT/PF in mind, against the backdrop of international standards (FATF), backed by research and home-grown knowledge that they are exploited for money laundering and terrorist financing. With new sectors meeting their FIC Act compliance obligations, this will widen the scope of information being made available to the FIC. This will enrich the research, analysis and financial intelligence the organisation is able to develop and provide to law enforcement and other competent authorities – ultimately working towards bringing to justice criminals and a stemming of crime. New sectors under the umbrella of the FIC Act will allow for a wider source of data and information flow and enrich the FIC’s reporting capability. All accountable institutions must adopt a risk-based approach to customer due diligence and understanding and taking ownership of their risks in relation to money laundering and terrorist financing. Using this approach, accountable institutions must identify, assess, monitor, mitigate and manage the risk that their products or services may be abused by criminals for money laundering or terrorist financing. The measures in place to prevent such criminal activities are in direct proportion with the risks identified. A risk-based approach means that accountable institutions must understand the money laundering and terrorist financing risk to which they are exposed and take the appropriate mitigation measures in accordance with the level of risk.
The compliance obligations requirements need to be understood and embedded with the new items on Schedule 1. Some businesses such as the crypto asset service providers, for example, came on board voluntarily before the amendments were approved and we commend them for that. We will assist the new sectors to get on board as quickly and as smoothly as possible and look forward to them filing regulatory reports, in addition to suspicious transaction reports, with us. In the first 18 months from the date of commencement of the amendments, the FIC and supervisory bodies will focus on entrenching the FIC Act compliance provisions and implementation among the sectors listed in Schedule 1. Supervisory bodies will conduct inspections and where warranted issue remedial administrative sanctions, based on a risk-based approach, to correct identified areas of non-compliance. The FIC and supervisory bodies do not envisage issuing financial penalties for non-compliance with the FIC Act during the transitional 18-month period.
The Schedule amendments made in this round and previous regulatory changes to the FIC Act, which were promulgated in 2017, are together strengthening the fight against money laundering, terrorist financing and proliferation financing for the country. They have broadened the scope of information available to the FIC and thereby allow the FIC to provide enhanced information to law enforcement and other competent authorities to do their work with more efficiency and effectiveness. The FIC Act works in tandem with the Prevention of Organised Crime Act (POC Act) and the Protection of Constitutional Democracy Against Terrorist and Related Activities Act (POCDATARA Act). The POC Act is geared to address gang-related crime, racketeering and organised crime. The POCDATARA Act addresses crimes related to terrorism and terrorist related activities. In support of this, the FIC looks at the money flows related to money laundering and terrorism financing. So, the measures and steps the FIC Act puts in place at the ‘input’ side i.e. ensuring registration and compliance by identified business, is critical. In this way, the information and data provided by these businesses and sectors is of immense value for the analysis and research at the FIC, who distil this into financial intelligence reports for law enforcement, intelligence services and other competent authorities. The country is committed to enhancing the level of effectiveness of its system for anti-money laundering, countering terrorist financing and proliferation financing, and the amendments to the FIC Act are a tangible measure of this commitment.
In preparation for the changes to the Schedules, the FIC’s registration and reporting system has been taken through its paces. The system has been piloted with representatives of some of the new items to the Schedules to test the system. We are confident that the system is sufficiently robust for what awaits us. If there are problems along the way, we will fix those.
With respect to having the financial institutions, DNFBPs and CASPs under the scope of the AML/CFT regime – the FIC Act – we meet the standards of the FATF with respect to the scope issue. However, we need to ensure effective supervision of these sectors. In addition, with respect to CASPs, the licensing aspect has yet to be attended to. This is being dealt with by the Financial Sector Conduct Authority. ​