Ignorance of FICA obligations is not seen as an acceptable excuse for non-compliance.
The Financial Intelligence Centre (FIC) recently published the Decision of the Appeal Board – Harlyn Trading International (Pty) Ltd and the High Court Judgement – Harlyn Trading International (Pty) Ltd v FIC and Another.
Motor vehicle dealers are listed as Reporting Institutions under Schedule 3 of FICA and have two compliance obligations; namely to register with the Financial Intelligence Centre (FIC), and to file regulatory reports for suspicious transactions and cash threshold reports.
In November 2018, the FIC conducted an inspection at the premises of Harlyn Trading International (Pty) Ltd (Harlyn), which is a Motor Vehicle Dealer. It was found that Harlyn failed to comply with certain provisions of FICA and accordingly was issued with a notice of intention to impose an administrative sanction for its failure to (1) register with the FIC, and (2) report 75 cash threshold reports amounting to R12,789,481.66 within two business days of each transaction having taken place. Harlyn was invited to make representations to the FIC by 10 July 2019, however it did not submit its submissions within the deadline and was granted three extensions by the FIC to do so.
Harlyn made its representations on 18 October 2019, where it maintained that it was unaware of its obligations to register and/or its reporting duties in terms of FICA. It also raised several mitigating factors, such as that it started the process of reporting the outstanding cash transactions. However, according to the FIC’s goAML system, Harlyn only started remediating these transactions between 13 and 19 October 2019, almost a year after the initial inspection report.
The FIC, in considering an appropriate financial penalty, recommended it at 10% of the value of the unreported transactions. The “mathematical tool” used to quantify the sanction, has its origins in a manual and guidelines compiled by the FIC for its supervisory bodies. Ultimately, the FIC imposed a financial penalty of R1,278,948.00, which was 10% of the unreported cash transactions. Half of the penalty was suspended for three years, which reduced Harlyn’s penalty to R644,474.00, payable in six equal monthly instalments. The sanction also included a penalty of R5,000.00 for failing to register with the FIC.
Harlyn appealed to the FIC Appeal Board and challenged the following:
- The fact that its representations were not considered by the FIC since it was a foregone conclusion that it would impose a financial penalty calculated at 10% of the value of the reportable transactions.
- The final penalty had no regard to any of the reported transactions, which was in the amount of R 9,404,965.00, as these were not discounted against the total amount found to be unreported during the first inspection.
- The fact that FICA makes no provision for the “mathematical tool” used by the FIC in its computation of the financial penalty and is therefore unlawful.
Harlyn challenged the FIC’s utilisation of the “mathematical tool” in the computation of the financial penalty imposed and contended that certain of the mitigating circumstances that it had raised were ignored by the FIC. The Appeal Board dismissed Harlyn’s appeal and confirmed the order that Harlyn must pay the financial penalty.
Harlyn then challenged the Appeal Board’s decision and escalated the matter to the High Court.
Harlyn disagreed with the “mathematical tool” used by the FIC as a method of calculating the sanction and submitted that the policy, which imposes a 10% sanction in respect of each unreported cash transaction as a starting point, does so regardless of the circumstances of the case and that this approach ignores the provisions of section 45C (2) of the Act which states that when determining an appropriate administrative sanction, the FIC or the supervisory body must:
- consider the nature, duration, seriousness and extent of the relevant non-compliance;
- whether the institution or person has previously failed to comply with any law;
- any remedial steps taken by the institution or person to prevent a recurrence of the non-compliance;
- any steps taken or to be taken against the institution or person by another supervisory body or a voluntary association of which the institution or person is a member; and
- any other relevant factor, including mitigating factors.
Harlyn submitted that the FIC “paid lip service” to the important mitigating factors such as that it was Harlyn’s first inspection, the fact that Harlyn was not aware of its reporting duties, it gave its full co-operation and it experienced difficulties with the registration process.
Furthermore, Harlyn argued that the Appeal Board should not have imposed such an excessive sanction particularly because the FIC was not hindered in their duties, nor was there an injustice caused or an increased risk in respect of terrorist activities or money laundering.
In determining the matter before it, the ultimate question before the High Court was whether the FIC and the Appeal Board took a decision in circumstances where there was (i) an error of fact, (ii) an error of law or (iii) the discretion was not judicially exercised”. The court pointed out that the fact that there is a guideline which sets a baseline 10% penalty in respect of unreported cash threshold reports is not in itself unlawful and it was not persuaded that the FIC committed an error of fact or law, nor that it exercised its discretion injudiciously. Furthermore, it stated that it was unable to find that the imposition of the administrative sanction was inappropriate and there were no grounds for the court to interfere with the discretion of the FIC and the Appeal Board. The application to the High Court was dismissed with costs.
Throughout the proceedings, Harlyn maintained that it was not aware of its obligation to register and or/reporting obligations. Harlyn only introduced internal procedures and had its employees undergo training after it was alerted to the application of FICA, and only managed to register with the FIC on 20 June 2019 after various failed attempts. Harlyn further endeavoured as far as it could, to file the unreported cash transactions identified by the FIC from its bank account.
It is evident that even though the Motor Vehicle Dealer was able to take remedial actions and report the majority of the unreported cash transactions, it was their first inspection, and it gave its full co-operation, administrative sanctions were still imposed. Furthermore, it is important to note the potential reputational damage in addition to the administrative sanctions imposed.
It is therefore imperative that Motor Vehicle Dealers are aware of and continuously comply with the provisions of FICA.
Click here to read our previous article on the proposed amendments to FICA and what it means for Motor Vehicle Dealers.