South Africa has a commitment to combating money laundering and the financing of terrorism, having ratified the United Nations Convention Against Corruption (UNCAC) in 2004, and joining the multi-lateral Financial Action Task Force (FATF) in 2003. As a result, South Africa enacted the Financial Intelligence Centre Act, No 38 of 2001 (FIC Act), and other related Acts to assist in combating financial crimes. The FATF is an inter-governmental body which sets standards and develops and promotes policies to combat money laundering, the financing of terrorism and the production of weapons of mass destruction. These standards are used as benchmarks to test the validity of a country’s measures against these illegal activities, and the integrity of its financial systems.
South Africa reports to the FATF on a regular basis on which steps were taken to improve the South African system to combat money laundering and terrorism financing. The majority of the actions still remaining for South Africa to take in this process involve amendments to the FIC Act, which relate to the obligations placed on financial and other institutions. In order to show that South Africa is committed to continuous improvement of its processes, the country has to report that legislative changes are currently under way.
Improvements aim to simplify process for customers and promote innovation
The aim of the proposed amendments to legislation is to enable financial and other institutions to simplify the due diligence process for customers. In addition, the improvements seek to create opportunities for financial institutions to explore more innovative ways of offering financial services to a broader range of customers and promoting financial inclusion.
It is proposed that the deficiencies in the FIC Act be addressed in the following manner:
The draft amendments propose that;
- a definition of “beneficial owner” be inserted in the FIC Act, to define a beneficial owner, in respect of a juristic person, to mean the natural person who, independently or together with a connected person, owns or controls the juristic person directly or indirectly, including through bearer share
- the definition of “business relationship” be amended to include in the meaning of business relationship three or more single transactions that appear to be linked to the same person using the same product or service at regular This definition may be amended in order for accountable institutions not to be required to repeatedly identify and verify customers who regularly conclude single transactions with the same accountable institution.
- the definition of “non-compliance” is amended to make a distinction between what constitutes non- compliance resulting in an administrative sanction from non-compliance that is subject to a criminal sanction.
- New terms and definitions be inserted to define “domestic prominent influential person“, “executive officer” and “foreign prominent public official” – this will replace the term and meaning of “Politically Exposed Persons” (PEPs).
- A definition of “Risk Management and Compliance Programme” be inserted in the FIC Act, which is further detailed in Clause 25 (which amends section 42 of the FIC Act).
- A definition of “trust” be inserted in the FIC Act, meaning a trust as defined in the Trust Property Control Act, 1988 (Act No. 57 of 1988), but excludes trusts established,
(a) by virtue of a testamentary writing;
(b) by virtue of a court order;
(c) for persons under curatorship;
(d) by the trustees of a retirement fund in respect of benefits payable to the beneficiaries of that retirement fund.
- Identification of clients and other persons – Customer due diligence refers to the knowledge that an accountable institution has about its customer and the accountable institution’s understanding of the business that the customer is conducting with it.
- Customer due diligence is comprised of four basic elements. These are:
(a) Determining the customer’s identity: This entails obtaining information concerning the customer’s identity and verifying that information using reliable, independent information
(b)Identifying the beneficial owner: Establishing whether the customer has a beneficial owner. If so, obtaining information concerning the beneficial owner’s identity and taking reasonable measures to verify that information.
(c)Understanding the purpose and intended nature of the business relationship: Obtaining information from the customer about the intended purpose for which the customer wants to use the products or services in question
(d)Conducting ongoing due diligence: Accountable institutions must keep information relating to the business relationship up to date. They are also to scrutinise transactions conducted throughout the course of that relationship to ensure that transactions are consistent with the accountable institution’s knowledge of the customer and the customer’s business. This process will help to identify inconsistencies in transaction patterns.
The current South African legislation lacks elements such as express requirements for financial and other institutions to identify their customers’ beneficial owners, to apply on-going due diligence to their relationships with their customers and to determine if they are dealing with a prominent person in a given instance. The FIC Amendment Bill will assist in narrowing these gaps in the current legislation.