On 29 February 2024, the Financial Intelligence Accountable institution (FIC) issued public compliance communication 44A (PCC 44A) which further guides accountable institutions (AI) on the measures, obligations and risk-based approach in terms of asset freeze requirements of the United Nations Security Council (UNSC) resolutions and South Africa’s domestic requirements for targeted financial sanctions (TFS) against individuals and entities. This arises from the onus placed on accountable institutions and other persons in terms of the Financial Intelligence Centre Act 38 of 2001 (FIC Act) to freeze assets that are in the control of the Accountable Institution.
The draft PCC 44A was made public for consideration by Accountable institutions, advisory bodies and all other persons who were invited to provide comments from 23 November 2023 to 31 January 2024. These comments were collated, reviewed and examined to be incorporated in PCC 44A, where appropriate.
The final version of PCC 44A sets out guidance relating to the FIC Act, as amended by the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 (GLA Act), as well as the amendments found in the Protection of Constitutional Democracy Against Terrorist and Related Activities Act (POCDATARA Act). PCC 44A must be read together with Guidance Notice 6A.
PCC 44A provides a plain language approach on “how to” for Accountable institutions on their obligations to implement UNSC resolutions and domestic designations asset freezing requirements of TFS, which are aimed at combating the financing of terrorism (CFT) and combating proliferation financing (PF) of weapons of mass destruction (WMD). TFS obligations in terms of the FIC Act include scrutinising client information against the TFS list to identify designated persons and entities directly or indirectly linked to clients, freezing property of designated persons and entities, filing terrorist property reports, and suspicious and unusual transaction reports with the FIC, as well as obligations regarding de-listing and unfreezing of individuals and entities no longer designated by UNSC resolutions.
The PCC consists of four parts:
- Part A – Targeted financial sanctions aimed at combating TF and PF
- Part B – Risk-based approach to combating terrorist financing risks
- Part C – Risk-based approach to combating proliferation financing risks
- Part D – De-risking
Part A – Targeted financial sanctions aimed at combating TF and PF
It is strictly prohibited for any person to either directly, indirectly, in whole or in part enter or facilitate a transaction for persons or entities listed on the UNSC resolutions. The TFS prohibition also covers situations where clients are acting on behalf of another designated person or where a designated person is working on behalf of the client, in addition to the specific person or entity that has been designated by the UNSC, or if the client has a connection to a specific individual or organisation. According to the FIC Act, TFS is obligated to scrutinise, freeze, and submit a regulatory report to the Centre. There is no exception to the rule of scrutinising clients against the TFS list.
Accountable institutions must scrutinise their information concerning a client:
- At client onboarding;
- When conducting transactions; and
- When the TFS list is updated. All existing information concerning clients must be scrutinised against the TFS lists as and when the TFS list is updated.
Obligations relating to the freezing of TF and/or PF related property include:
- An automatic obligation to freeze in terms of section 26B of the FIC Act
- An automatic obligation to freeze in terms of section 4 of the POCDATARA Act, and
- An ex parte application for a freezing order in terms of section 23 of the POCDATARA Act.
Part B – Risk-based approach to combating terrorist financing risks
The Accountable Institution’s RMCP must provide the way it will comply with its TFS obligations, this includes a process to identify, assess, monitor, mitigate and manage TF risks in terms of Section 42 of the FIC Act. To identify and evaluate the risk of TF, Accountable institution must carry out business risk assessments, client level risk assessments, and risk assessments for new products and processes. They also need to put measures in place to monitor, mitigate, and manage the risk of TF.
When assessing TF, PF and money laundering risks, Accountable institutions are required to consider the factors noted in this PCC, as well as those of Guidance Note 7. It is critical for that the Accountable institution can demonstrate it has considered its own risks through a risk assessment and does not only focus on those noted in the guidance documentation provided by the FIC.
The PCC further contains details of risks that Accountable institutions must be aware of in terms of raising, moving, storing, and using property for terrorist activity, raising finance for terrorism and moving and storing terrorist finances through traditional methods such as banking, but also new methods like cryptocurrency, third-party payment providers, contactless cards and mobile money.
Part C – Risk-based approach to combating proliferation financing risks
To identify and evaluate the risk of PF, Accountable institutions should carry out business risk assessments, client-level risk assessments, as well as risk assessments for services, products and processes. They should also put measures in place to monitor, mitigate, and manage PF risk.
The PCC highlights the heightened PF risk related to the use of legal persons, the associated nature of certain products, goods or services and the provision of trade finance in facilitating international trade.
The PCC provides further information on client risk factors, geographic area risk factors, product risk factors, and other risk factors which Accountable institutions should consider when framing and implementing their RMCP.
Part D – De-risking
In addition to the guidelines outlined in Guidance Note 7, an institution’s decision to de-risk a client should not be based solely on a business relationship or one transaction posing a higher risk of PF or TF is not deemed to be effective or adequate risk management.
As far as the FIC guidance is concerned, a responsible institution will not be found to have not fulfilled its responsibility to adopt a risk-based approach if it de-risks only because there is a likelihood of increased risk.
In cases when an Accountable institution decides not to onboard a particular client, the Accountable institution must be able to show that a risk-based approach was applied and that risk concerns were considered. Accountable institutions are reminded of their duty to keep suspicious and unusual activities from being reported to a client unless necessary. Until due diligence is done all transactions with the client must be pended, and if there is an uncertainty independent legal advice may be considered.
If you are struggling to understand the do’s and don’ts of the FIC Act, TFS sanctions and screening or your RMCPs, feel free to contact the Masthead office closest to you.