Anti-Money Laundering and Counter-Terrorism Financing Workshop: FIC Act Amendments

Anti-money Laundering and Counter
Terrorism Financing Workshop
28 February 2019

Amendments to the FIC Act

Agenda
08:00 – 08:30 Registration
08:30 – 08:40 Housekeeping arrangements FSCA
08:40 – 09:15 Opening and welcome, Overview of the FSCA FSCA 09:15 – 10:30 ML/ TF risks, RMCP, CDD FSCA 10:30 – 11:00 Tea FSCA 11:00 – 12:30 Record keeping, governance, inspections FSCA 12:30 – 13:00 Lunch 13:00 – 13:45 Registration and Reporting FIC 13:45 – 14:45 What happens with the intelligence that is gathered? FIC 14:45 – 15:00 Recap and closure FSCA

What is ML/TF risks?
❑ Which risks are we talking about? – ML/TF risks ❑ ML/TF risk is the risk that your business may be used to launder money ❑ Money laundering and terrorism are global problems, with serious social, economic and political impact for every country in the world ❑ South Africa (SA) has prioritised the fight against ML/TF ❑ The legislative framework for combating ML/TF is:

• POCA, 1998 – criminalises money laundering;
• POCDATARA, 2004 – criminalises terror financing; and
• FICA, 2001 – provides control measures to mitigate ML/TF risks.
  ❑ FIC Act was introduced to mitigate ML/TF risks

How FSPs could become vulnerable to ML/TF risks ❑ FSPs are constantly exposed to ML/TF risks. As the main point of contact between the public and product providers, your business can be exploited for ML/TF as follows:
❑ In the placement stage, criminals will try to place illegally obtained money into the financial system. FSPs who collect client funds or accept cash in the business are more vulnerable. You should establish the source of funds or source of wealth ❑ In the layering stage, criminals will attempt to break up funds, set up complex transactions and move funds around to conceal their original source and audit trail. FSPs are vulnerable because they offer many different types of financial products that could be utilised ❑ In the integration stage, criminals withdraw funds from the financial system and use them without raising any suspicion and integrate them into the economy. By this time, the funds will appear legitimate ❑ FSPs should implement measures or procedures in the FIC Act to limit the risk and protect their businesses from being abused by criminals and terrorists ❑ FSPs may still be abused for ML/TF purposes despite having FICA measures in place

Why was the FIC Act amended
❑ AML/CFT Standards have changed substantially since the enactment of the FIC Act in 2001 ❑ Significant gaps have been identified in SA’s AML/CFT regime following FATF’s Mutual Evaluation in 2009 ❑ SA was placed under constant FATF follow up process to monitor compliance and must report progress at every FATF Plenary ❑ After the evaluation, FATF recommendations were implemented in phases. ❑ The FATF findings were first addressed by amending the FIC Act in 2010. ❑ The FIC Act was amended again in 2017 to address most of the remaining deficiencies. ❑ SA has made significant progress in addressing the findings and aligning its AML/CFT legislative framework to international standards

Commencement dates of the amendments
❑ The FIC Amendment Act was signed into law by the President on 26 April 2017 and gazetted on 2 May 2017 ❑ Various provisions of the Act came into effect on different dates as follows:

• The first set of provisions commenced on 13 June 2017. These provisions did not require
  withdrawal or changes to existing exemptions or regulations, or systems readiness to comply with the FIC legislation
• The second set of provisions commenced on 2 October 2017. These provisions required systems
  changes by accountable institutions, and the withdrawal and amendment of existing exemptions and relevant regulations
• The last set of provisions are expected to take effect later this year. These relate to targeted
  sanctions - UN Security Council Resolutions

Introduction: CDD
The previous FIC Act made provision for a rule based approach for know your client (s21)

• Obtain:
  – Full names
  – Date of birth
  – ID number
  – Residential address
• Verify in the information obtained against:
  – ID Book
  – A document stating the client’s residential address

Introduction: CDD
The amendments to the FIC Act now makes provision for a risk based approach for customer due diligence (s20A-21H )

• The information that you need to obtain and verify it against depends on the institution’s Risk
  Management and Compliance Programme RMCP.
• The contents of the RMCP is prescribed in section 42

Risk Based Approach to CDD
Sandbox
RBA
No anonymous clients or clients acting under false or fictitious names Understanding and obtaining information on business relationship Additional due diligence measures relating to legal persons, trusts and partnerships Enhanced due diligence for FPPO, DPIF their families and known close associates RMCP RMCP

Financial Inclusion
A single transaction is a transaction:

• Other than a transaction concluded in the course of a business relationship; and
• The value of the transaction is less than R5 000
  For a single transaction, the institution only needs to know the name of the client (s21 & s20). No verification necessary A business relationship is an arrangement between a client and AI for the purpose of concluding transactions on a regular basis The AI needs to specify in its RMCP when a client enters into a single transaction and when it is establishing a business relationship (s42(2)(b))

Business relationship
In addition to CDD the AI needs to obtain information from the client to enable it to determine whether future transaction are consistent with the institution’s knowledge of the prospective client, including information describing:

• The nature of the business relationship concerned;
• The intended purpose of the business relationship concerned; and
• The source of funds which the prospective client expects to use in concluding transactions in the
  course of the business relationship

Customer due diligence

• AI’s now have the flexibility to choose the type of information by means of which it will establish clients’
  identities and also the means of verification of clients’ identities, instead of following the rigid steps provided for in the MLTFC Regulations.
• An AI should always have grounds on which it can base its justification for a decision that the
  appropriate balance was struck in a given circumstance.
• The systems and controls by which an institution decides to manage ML/TF risks and the levels of due
  diligence it chooses to apply in relation to various risk levels must be documented in its RMCP.

Customer due diligence
High Risk
Client
More information obtained from client
More secure confirmation of clients’ information Closer scrutiny of clients transactions Low Risk Client Less information obtained from client Less secure confirmation of clients’ information Less frequent scrutiny of clients transactions Enhanced due diligence Simplified due diligence

Risk Evaluation
Factors that may be indicative of ML/TF risks relate to a number of aspects such as product or service features, delivery channels, geographic areas, etc. and each of these may interact differently with the characteristics of different types of clients. Inherent Risk Delivery Channels Clients Products & Services

Natural Persons

• At the very basic level the following information needs to be obtained:
  – person’s full names;
  – date of birth;
  – a unique identifying number issued by a government source
• This may be supplemented by applying other attributes of a natural person including:
  – his/her physical appearance or other biometric information; – place of birth; – family circumstances; – place of employment or business; – residential address; – contact particulars (e.g. telephone numbers, e-mail addresses, social media); – contacts with the authorities (e.g. tax numbers) or with other accountable institutions.
• This list of examples is not exhaustive and depends on the risk profile of the client

Natural Persons

• Verification methods vary. Regardless of the method applied, it is important that verification be done
  using information obtained from a reliable and independent third-party source and, as far as possible, the original source of the information.
• AI’s should, as far as practicable, use government issued or controlled sources as the means of
  verification when verifying basic identity attributes:
• ID or smart card
• Valid driver’s license
• Foreign identity documents
• Passports
• Asylum seeker or refugee permits
• Work permits
• Visitor’s visas
• The Centre encourages AI’s to make use of information in electronic form to corroborate a prospective
  client’s information against multiple third party data sources.

Ongoing due diligence

• Scrutiny of transactions undertaken throughout the business relationship including:
• The source of funds to ensure transactions are consistent with knowledge of the client and client’s
  business and risk profile
• Pay attention to unusual patterns of transactions or unusually large or complex transactions
• Ensure client information is accurate and relevant
• Frequency and intensity of ongoing due diligence based on money laundering or terror financing risks
  associated with business relationship with client
• Ongoing due diligence processes detailed in risk management and compliance programme

Inability to conduct due diligence
– Prohibits AI from entering into or maintaining business relationship or concluding single transaction if it cannot perform customer due diligence – Consider report in terms of section 29 – Risk management and compliance programme should indicate the sequence of attempts to obtain the required information as well as when verification must be completed and at which point the conclusion is reached that the information is not forthcoming and is therefore unable to conduct customer due diligence – Risk management and compliance programme should also provide for the manner in which it will terminate an existing business relationship when unable to complete customer due diligence requirements

Foreign prominent public official
– AI must know who their clients are and understand their client’s business – Business with foreign prominent public officials must always be considered high risk – AI must

• Obtain senior management approval for establishing the business relationship
• Take reasonable measures to establish the source of wealth and source of funds of the clients; and
• Conduct ongoing monitoring of the business relationship
  – Examples:
• Head of State, or head of a country or government
• Member of a foreign royal family
• Government minister or equivalent senior politician or leader of a political party
• Senior judicial official
• Senior executive of a state owned corporation
• High ranking member of the military

Domestic prominent influential person
– AI must know who their clients are and understand their client’s business – Business with domestic prominent influential persons is not always considered high risk – AIs will have to include the management of business relations with person in prominent positions in their risk management and compliance programme Public functions Private functions President, Deputy president Chairperson of board of directors, chairperson of audit committee, EO, CFO of company that provides goods or services to the State and annual transactional value exceeds the amount determined by the Minister Minister, Deputy Minister Premier, member of executive council Mayor Leader of a political party Member of the royal family Accounting authority, CFO of a public entity listed in PFMA Head or executive accountable to the head of international organisation based in RSA

Family members and known close associates
– The provisions on foreign prominent public officials and domestic prominent influential persons also applies to their immediate family members and known close associates

• Current or previous spouse, civil partner or life partner
• Children and step children and their spouse, civil partner or life partner
• Parents; and
• Siblings and step siblings and their spouse, civil partner or life partner

Additional due diligence for legal persons, trusts and partnerships Corporate vehicles Legal persons Trusts Partnerships Beneficial ownership Ownership and control structure Nature of client’s business

Legal persons
Definition
A legal person is defined in the FIC Act as any person, other than a natural person that establishes a business relationship or enters into a single transaction with an AI table institution and includes:

• A person incorporated as a company
• Close corporation
• Foreign company
• Or any other form of corporate arrangement or association but excludes a trust, partnership or sole
  proprietor.

Legal persons
Characteristics which describes identity of legal person Verification Name and trading name AI to decide on degree and methods of verification based on money laundering or terror financing risk Form Registration number Methods may vary Address of registered office/business address if different Verification with information obtained from a reliable and independent third-party Powers source Directors Senior management As far as possible the original source of the Tax numbers information

Legal persons: Beneficial ownership
Step 1:
Who is the main shareholder or voter

• The percentage of
  shareholding with voting rights = good indicator
• Ownership of 25% or
  more of shares/voting rights = good indicator
  Step 2:
  Who is natural person who exercises control through other means
• e.g. through voting
  rights attaching to classes of shares or through shareholder Step 3:
  If no natural person can be identified - management
• AI must determine
  who = natural person who exercises control over the management of the legal person

Partnerships: Beneficial ownership
Identify Verify
Name of the partnership Take reasonable steps to verify particulars Identity of each partner AI needs to be satisfied that it knows the Person who exercises control over partnership identities of natural persons concerned Person who is authorised to enter into business relationship or single transaction

Trusts: Beneficial ownership
Identify Verify
Name and number of trust Take reasonable steps to verify Address of the Master where trust is registered Identity of founder AI needs to be satisfied that it knows the Identity of each trustee identities of natural persons concerned Person who is authorised to enter into business relationship or single transaction Identity of each beneficiary or how they will be determined

Record keeping

• Records must be kept of CDD information for 5 years
• Record must be kept for 5 years of every transaction that are reasonably necessary to enable that
  transaction to be readily constructed and must include:
  – Amount involved
  – Date transaction concluded
  – Parties to the transaction
  – Nature of the transaction
  – Business correspondence
  – Account facilities of the client
• Record must also be kept of transactions or activity which gave rise to a STR or SAR for 5 years from
  the date on which the report was submitted to the FIC
• Records may be kept by third parties as long as the AI has free and easy access to the records and
  the records are readily accessible to the FIC and FSCA
• Records may be kept in electronic form and must be capable of being reproduced in a legible format

Governance
Board of directors/
Senior management must ensure compliance of the FIC Act and RMCP Must have a compliance function to assist the board of directors/ senior management Assign a person with sufficient competence and seniority to ensure the effectiveness of the compliance function Ongoing training to employees to enable them to comply with the FIC Act & RMCP Legal person Highest level of authority must ensure compliance Must appoint a person with sufficient competence to assist highest level of authority (excluding sole practitioner) Not a legal person Ongoing training to employees to enable them to comply with the FIC Act & RMCP

Transactions reported during 2017/18
Accountable
Institution
CTRs STRs TPRs Percentage of total reports
Authorised users of an exchange
31 498 127 0 0,6%
Collective investment schemes
860 64 0 0,02%
Long term insurers 1757 110,04%
Investment advisors and intermediaries
26 462 1 164 0 0,5%

Common inspection findings
1.Customer due diligence not understood and applied correctly 2.Cash threshold transactions not reported or reported late

• Dual reporting
• Cash threshold report aggregation
  3.Suspicious or unusual transactions not reported or reported late 4.Risk management and compliance programme not developed, not understood or incorrectly implemented 5.No employee training or training provided is superficial, sporadic and incomplete 6.Compliance not a board or senior management responsibility 7.Compliance officer not of sufficient competence or seniority 8.Failure to register or late registration 9.Failure to comply with Directive 4 – update registration details and activate profile on goAML

Scope of inspections
Compliance duty Section Regulation Directives, Guidance notes & PCCs Administrative sanction Criminal sanction Customer due diligence 20A-21H 1A GN7 Natural Person = R10 million Legal Person = R50 million except STR Not criminalised Record Keeping 22-24 20 PCC2 Reporting CTR 28 22, 24 22B￾22C Dir 3 GN5B 15 years imprisonment or R100 million fine TPR 28A 22A, 23B, 23C GN6 GN4A STR 29 23-23A Governance RMCP 42 GN7 Not criminalised Accountability 42A GN7 Registration 43B 27A Dir2, PCC5C Training 43 GN7, PCC18

THANK YOU