Bill infringes on the rights of citizens

Closer scrutiny must be made of the FIC Amendment Bill before it is passed, writes Sello Mashao Rasethaba

ON SEPTEMBER 24, 2016, the Black Business Council (BBC) wrote to President Jacob Zuma formally objecting to the Financial Intelligence Centre (FIC) Amendment Bill and requesting that he not sign it into law as per the powers conferred upon him by the constitution.

The letter indicated that the BBC is not oblivious or rather dismissive of attempts by the government to implement international standards as set out by the Financial Action Task Force (FATF) to fight against terrorist financing and money laundering. However the BBC argues that the bill:

• “Is a dangerous piece of legislation in terms of its potential impacts on the rule of law and on constitutionally protected rights, and on the health of South Africa’s democracy and sovereignty. Money laundering and terrorism financing must be countered in ways that are fully consistent with the Republic’s core constitutional values (that include liberty, non-discrimination, and the rule of law), that are evidence-based, and that are likely to be effective,” and

• “Is ineffective in countering money laundering and financing of terrorism activities by virtue of what is omitted from the Bill, and will actually be counter-productive in that it could easily get in the way of effective policing, intelligence-gathering and prosecutorial activity.”

The Registrar of Banks and Deputy Governor of the South African Reserve Bank, Kuben Naidoo, clearly does not agree with the BBC and has, according to press reports, penned an affidavit barely nine months after his appointment, stating that the referral by Zuma of the FIC Amendment Bill “sets the country back in fulfilling its international obligations to the Financial Action Task Force”.

He goes further to say SA’s failure to bring the FIC Amendment Bill into operation will likely result in a negative statement from the FATF that our country’s framework for addressing money laundering and combating financing of terrorism does not meet international standards.

If this is true, Naidoo has total disregard for the BBC and in the process ignores reasons we advanced. He is quoted as saying that Zuma’s actions will cause “other FATF member countries to re-evaluate the risk of dealing with SA’s financial institutions given their non-adherence to international standards”.

South Africa is not the only country grappling with this issue. For example, an analysis by Know Your Country, an online library that produces country anti-money laundering (AML) reports, country tax rates, international sanctions and geographical anti-money laundering reports, notes that the US has a mature legal and institutional AML/combating of financing of terrorism (CFT) framework, having first criminalised money laundering in 1986.

The framework covers most requirements of the FATF recommendations. There are many agencies involved in combating money laundering and financing of terrorism at both federal and state levels encompassing regulatory, law enforcement, prosecutorial and other roles. The US is a founding member of the FATF, and has undergone three assessments against the FATF recommendations.

The FATF assessment in 2006 found the US had implemented an AML/CFT system that was broadly in line with international standards.

Like South Africa, it has significantly strengthened its AML/CFT regime since the previous mutual evaluations, including through enhanced legislation, subjecting most deposit-taking institutions to the full range of AML/CFT requirements, aggressive law enforcement action, and good co-operation domestically and internationally.

Shortcomings in the US were identified, notably in relation to some specific requirements for undertaking customer due diligence (CDD), the availability of corporate ownership information, and the requirements applicable to certain designated non-financial businesses and professions (DNFBPs).

In relation to CDD, the evaluators determined that not all requirements were imposed on financial institutions (FIs) using instruments that complied technically with the FATF standard and also concluded there were no requirements for FIs to look beyond a customer to establish the identity of the beneficial owners in all cases.

Clearly, this is not an easy matter because the evaluators found the US’s compliance with the two recommendations dealing with the transparency of legal persons and arrangements was very weak and rated both as non-compliant.

In relation to DNFBPs, the US was found to be non-compliant with the FATF recommendations relating to CDD, recordkeeping, suspicious transaction reporting, and internal controls and partially compliant with the recommendation on regulation and supervision.

The US Mutual Evaluation Report adopted by the FATF at its plenary meeting in October 2016 and produced in December concluded that while the US was largely compliant, “lawyers, accountants, high-end real estate agents and trust and company service providers (other than trust companies) who establish or otherwise facilitate access to financial services for legal persons and arrangements are not subject to comprehensive AML/CFT requirements, and are not systematically applying basic or enhanced due diligence processes and other preventive measures, as needed; and this is further exacerbated by the deficiencies in the Beneficial Ownership (BO) requirements”.

These facts are ignored by the likes of Naidoo, whose appointment by Zuma in March 2015 was hailed as a milestone by journalist Hillary Joffe, who proclaimed that Naidoo is not a political deployee. According to Joffe, Naidoo “comes from a family with deep roots in the ANC (and many years, collectively, spent in prison). He began his political career at the age of 11 as a founder member of the United Democratic Front-affiliated Lenasia Youth League, played a leading role in the 1980s school boycotts, and had the dubious distinction of being the first House of Delegates pupil to write matric while in detention”.

“Naidoo worked in the Treasury during the Trevor Manuel era (and some of Pravin Gordhan’s), heading the budget office for some years before he went off to the Presidency to set up and head the secretariat of the National Planning Commission,” wrote Joffe.

With these credentials, one would expect Naidoo to fight to protect the Bill of Rights as enshrined in the Constitution of the Republic of South Africa.

The FATF is the international standard-setter in the fight against terrorist financing, corruption and money laundering. It was established in 1989, by a Group of Seven (G7) Summit held in Paris. The summit recognised the growing threat posed by money laundering to the banking system and financial institutions and set up the FATF to develop and promote national and international policies, globally, to help eliminate this threat.

In 2001, the FATF took over responsibility for the development of standards in the fight against terrorist financing. FATF has become a powerful international body, not through formal legal or treaty powers, but by using peer pressure and the threat of blacklisting to get 180 jurisdictions to sign up to its standards. With some gaps, FATF has largely succeeded in getting countries to pass AML and CDD laws.

However, as FATF itself recognises, similar effort must be made to ensure these laws are implemented effectively by governments, supervisors, law enforcement and financial institutions.

There must also be an assurance that some people do not use this to further their own political goals, there is no financial exclusion, racism and discrimination, and that FATF recommendations are implemented in a transparent and democratic manner and, in particular to South Africa, there is respect of the constitution and in particular the Bill of Rights.

FATF monitors compliance with the 40+9 recommendations through a twopronged strategy. Firstly, member countries complete an annual self-assessment style questionnaire and, secondly, the FATF regularly conducts on-site mutual evaluation report examinations on individual jurisdictions, assessing the effectiveness of their national policies in dealing with money laundering and terrorist financing.

The mutual evaluation of South Africa was performed in 2009. Since then, there have been 11 follow-up reports to monitor how South Africa is progressing in implementing the recommendations.

The OECD is a perfect example of how different government departments can work together with business and other stakeholders to fight corruption bribery. In June 2016, the OECD compiled a report that evaluated South Africa’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 2009 Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions.

According to the OECD report, the South African government’s commitment to fighting corruption, including the OECD foreign bribery offence (OECD offence), is expressed in key national policy documents inclusive of the National Development Plan (NDP, Chapter 14: Fighting Corruption), the 2014-2019 Medium-Term Strategic Framework (MTSF) and the National Security Strategy (NSS).

Global Witness has recommended that FATF assessors should seek input from a broad range of stakeholders on the implementation and effectiveness of a country’s AML system.

This could include business, civil society, parliamentarians, academics, journalists, other jurisdictions and other people with experience or knowledge of the AML system.

The question is to what extent does the FIC and indeed Treasury, in their participation in FATF and responses to follow-up reports to the 40 + 9 recommendations mentioned above, encompass other government departments, the criminal justice system and law enforcement?

Treasury may best emulate the OECD process which has an executive management committee comprising directors general or their delegated representatives of the departments represented in the structure and an operational management committee that takes decisions regarding the investigation and prosecution of corruption offences.

All decisions relating to the investigation and prosecution of the OECD offences also take place under the auspices of the ACTT operational management committee. Without prejudicing the NPA’s and DPCI’s constitutional obligation to perform their duties without fear, favour or prejudice, all decisions are collective.

FATF also states that “countries are free to implement the details of the recommendations in the manner they choose, in order to fit them into their own constitutional frameworks. Despite not being binding, many countries have chosen to make a commitment to implement them in order to combat money laundering.

“Global Witness recommendation: Assessors should seek input from a broad range of stakeholders on the implementation and effectiveness of a country’s AML system. This could include business, civil society, parliamentarians, academics, journalists, other jurisdictions and other people with experience or knowledge of the AML system.”

Why is the FIC Amendment Bill ignoring this advice?

A delegation from the BBC met with the Association for Savings and Investment South Africa (ASISA) where it was agreed we convene a workshop on the FIC Amendment Bill to discuss BBC concerns and how these concerns can be resolved.

The workshop took place and included the South African Reserve Bank, Treasury, the Banking Association of South Africa and the Financial Intelligence Centre (FIC). Naidoo was part of this meeting. In its meeting, the BBC emphasised its concerns:

“The provision in FIC Amendment Bill of Prominent Persons as defined, infringes on the rights of citizens as contained in Chapter 2 (Bill of Rights) of the constitution, particularly sections 7, 8 , 9, 10, 12, 14, 18, 19, 21, 22, 25, 32, 33 and 34;

“The provision in (the) FIC Amendment Bill of Risk Management and Compliance Programme as defined, violates the constitutional right to due process and effectively pre-authorises violation of the established sacrosanct legal principle of ‘Audi Alteram Partem’.

“The provision (in the) FIC Amendment Bill of Risk Management and Compliance furthermore pre-authorises violation of the Constitution and the rule of law by transferring criminal investigative, prosecutorial and judicial authority from law enforcement agencies and the independent judiciary into the hands of banking and financial institutions.”

Treasury explained the process followed in passing the FIC Ammendement Bill. Unfortunately we could not agree on a common ground to resolve the issue and we will all be appearing before the standing committee on January 25. We will continue to lobby our members of parliament from all the parties that they do not turn parliament into a court of law that will require decisions based on legal opinions but on voters’ legitimate concerns based on the constitution.

Instead of writing affidavits in support of Gordhan, Naidoo should focus his energy on protecting the South African financial system similar to what US and Swiss regulators did in December 2016.

US regulators fined Goldman Sachs $120 million for attempting to manipulate a widely used global interest rate benchmark to benefit its trading positions. The Swiss Competition Commission also hit eight large global banks, which included Barclays, Citigroup and JPMorgan Chase, a total fine of nearly $100m for rigging international rates.

Government’s first task may be to investigate the utterances of Laurie Diepenaar who publicly stated that whether the FIC Amendment Bill is enacted or not, FNB is going to implement it.

The FATF’s plenary year begins in July and ends in June. Korea is currently holding the presidency during this plenary year. During a plenary year, the FATF holds three plenary meetings, a meeting of experts on typologies and, depending on the focus of current work, inter-sessional meetings and meetings of various ad hoc groups. The plenary meetings usually take place in February, June and October of each year.

All of these meetings are only open to delegations from FATF members, observer jurisdictions and observer organisations. They are not open to the public. The question is who will constitute the South African delegation and do they include other government departments in addition to Treasury, supervisors, law enforcement and financial institutions?

The structure of South Africa’s delegation to the February 2017 FATF Plenary and the allocation of roles and responsibilities to support that team, needs rapid resolution. Zuma must ensure that the working methods, which enable the team in Treasury and other government departments to function seamlessly, must also be strengthened.

The delegation has enough time to engage with FATF because the fourth round mutual evaluation of South Africa by the joint FATF/ESAAMLG mutual evaluation of South Africa onsite visit is in October or November 2019 and the plenary discussion in June 2020.

So what is the hurry?

The FIC Amendment Bill… (transfers) criminal investigative, prosecutorial and judicial authority… into the hands of banking… institutions

Sello Rasethaba is chairman of the Black Business Council and serves on the Brics Business Council financial services working group, currently working on the Brics Ratings Agency.