New Fica bill finds its teeth

After an extended delay, President Zuma signed the Financial Intelligence Centre Amendment Bill (Fica) into effect over the weekend. It will provide for more scrutiny and ease of reporting of individuals and transactions related to money laundering. It will also greatly enhance the ability of the Financial Intelligence Centre (FIC) to perform its watchdog role.

The original bill, enacted in 2001 to combat money laundering and the financing of terror, created a one-size-fits-all approach to managing the risks posed by different clients, and imbued a “tick-box” mentality to compliance. There was no incentive on the part of financial institutions to do anything more than what was required by the law.

Money laundering was defined in the original act as “an activity which has or is likely to have the effect of concealing or disguising the nature, source, location, disposition or movement of the proceeds of unlawful activities”.

The amendments now signed into law by the president have broadened the scope to include people associated with juristic entities like trusts and companies through the inclusion of the term “beneficial owner”, which is defined as anyone related to an entity that “owns” or individually or jointly “exercises effective control” over the legal person. The idea of a client has also been enlarged, and now includes anyone who conducts even a single transaction with a financial institution.

Then there is the inclusion of a range of public officials, executives of government agencies and state-owned entities as well as private executives that have been included under the definition of “domestic prominent influential persons” which earmarks them for greater scrutiny (see table below).

The bill requires client-facing employees to obtain senior management approval to engage these individuals in any business relationship. They also need to take “reasonable measures” to establish the source of wealth (profile) and the source of funds (per transaction) of the client and conduct “enhanced” ongoing monitoring of the relationship. These changes were welcomed by the FIC, which said in its release: “Change[s] in the customer due diligence measures, will require that institutions understand their relationships with their customers rather than only identifying their customers, as is required currently.”

The definition of “non-compliance”, which pertains to the financial institutions that are responsible in large part for implementing the controls the bill relies on to monitor and record suspicious transactions, has also been broadened. In addition to being a “failure to comply” with the provisions of the act, it also includes any failure to act on any “order, determination or directive” made in terms of the act. Institutions are also expressly forbidden from undertaking any dealing with an anonymous client or one using a fictitious name.

There is now the responsibility to vet clients and prospective clients in accordance with the requirements of the act, but also within the context of the institution’s own risk and compliance framework. “This is significant,” says Intellidex chairman, Stuart Theobald. “The key issue is that it introduces a risk-based approach to combatting money laundering and the financing of terrorism. This means the banks can create their own risk and compliance framework and apply different levels of oversight depending on the client they are dealing with. So low-risk clients, who receive smaller amounts and make regular payments, will likely face a lighter compliance burden because the banks will be able to apply a lighter touch. The contrary will be true for high-risk clients that will experience enhanced oversight.”

Listen to the interview with Banking Association of South Africa Cas Coovadia and Moneyweb Editor Ryk van Niekerk:

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Theobald believes this development will also allow banks to innovate. “For a low-risk client, using the capability of geo-location that smartphones provide may be a better option to determine proof of residence than something like an arbitrary rates bill.”

The purpose of the FIC has also been recalibrated. In addition to identifying the proceeds of unlawful activities and combatting money laundering activities, it will now also expressly implement financial sanctions pursuant to directives from the UN Security Council. This may require the freezing of property and transactions. The centre now has the ability to freeze transactions for a period of ten days (it was previously five).

The centre is also required to be much more pro-active in its duties, by being required to initiate analysis by information in its possession or received by other means. It is not clear what information by other means may represent – but it may very well extend to media reports or reports produced by government agencies like the Public Protector. “This makes them more of a law enforcement agency than just a records office. They can use the information they have, and where it used to be very cumbersome for investigative agencies to access information, it should be much easier now,” says Theobald. 

The FIC added: “The amendments will make significant improvements to the Financial Intelligence Centre Act, 2001 (FIC Act). They will strengthen the FIC’s ability to produce high-quality financial intelligence and to share this with a wider range of government departments and agencies in the pursuit of combating financial crimes such as money laundering and terrorist financing while protecting the confidentiality of personal information.”

From the perspective of implementation, Moneyweb understands much of the work has already been done. The South African Reserve Bank has oversight to monitor and approve the risk and compliance frameworks of the banks, so the industry will now be waiting for the green light in the form of minister Gigaba’s stated date for implementation.

The minister’s spokesperson could not be reached for comment at the time of writing.

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