Urgent measures must be taken to address the deliberate weakening of the country’s institutions if South Africa is to exit the Financial Action Task Force’s grey list, Finance Minister Enoch Godongwana said the foreword to the Financial Intelligence Centre’s 2022/23 annual report.
“These steps must form part of the country’s broader fight against financial and other crimes, state capture, and the deliberate weakening of the institutions of law and order. I believe that strategic collaboration among all the role-players across government, including entities such as the FIC, will help us exit the grey-listing timeously,” Godongwana said.
He said such collaboration and partnerships were already under way through information sharing via the Fusion Centre and the South African Anti-Money Laundering Integrated Task Force (SAMLIT).
The Fusion Centre is a collaboration among various law enforcement agencies that co-ordinates the combating of corruption, fraud, abuse of power, and maladministration.
SAMLIT is a FIC-led partnership of domestic and foreign banks, banking industry representatives, and regulatory authorities that shares financial information and builds expertise to solve financial crime.
Godongwana said the FIC’s recently established Forensic Capability division will assist in gathering information and conducting forensic analysis to help ensure there is increased success in bringing matters to court and expediting asset forfeitures.
FIC Director Advocate Xolisile Khanyile said legislative amendments in 2022/23, including the General Laws (Anti-Money Laundering and Combating of Terrorism Financing) Amendment Act, have resulted in the FIC emerging as “a bigger, stronger, and more effective financial intelligence unit with expanded powers and objectives”.
At the same time, these legislative developments and South Africa’s grey-listing have resulted in the FIC experiencing “elevated workloads and high pressure” during the past two years. A high number of employee resignations further exacerbated this situation during the year under review, said Khanyile, whose term of office ended in August this year.
In February 2023, Godongwana announced the allocation of an additional R265.3 million in funding to the FIC. Khanyile said the allocation will enable the FIC to increase its human resources and general capacity.
Focus on DNFBPs
The legislative developments in 2022/23 included amendments to Schedule 1 of the Financial Intelligence Centre Act (FICA), which have increased the FIC’s supervisory responsibilities.
The FIC is responsible for supervision and oversight of all designated non-financial businesses and professions (DNFBPs) – legal practitioners, trust and company service providers, estate agents, and the gambling sector, in addition to credit providers, high-value goods dealers, and crypto asset service providers.
The FIC said DNFBPs are a priority focus area for the FIC because their FICA compliance is central in helping to address deficiencies identified by the FATF’s mutual evaluation of South Africa.
During the year, the FIC started to augment its risk-based framework by collecting and analysing information to inform its categorisation and inspection of legal practitioners and estate agents at high risk of being exploited for money laundering and terrorist financing purposes.
Problem areas with legal practitioners’ compliance
The FIC conducted 402 compliance inspections in 2022/23, of which 302 focused on legal practitioners. Only 21% of legal practitioners were compliant and required no further action.
Although the inspections pointed to improvements in some aspects of compliance behaviour among legal practitioners, they also found that a large proportion of them required further guidance and monitoring, the report said.
The inspections revealed non-compliance in some key areas, notably, legal practitioners struggled with conducting customer due diligence (section 21 of FICA), maintaining proper records of customer due diligence (section 22), and developing and implementing Risk Management and Compliance Programmes in accordance with section 42.
Nevertheless, there were some positive changes in the compliance behaviour among the legal practitioners inspected. Due to the compliance concerns with the legal practitioners, they will be subjected to continuous supervision oversight, the FIC said.
Apart from legal practitioners, the accountable institutions at the top of the FIC’s compliance inspections list were motor dealers (54 inspections), trust companies (19), and estate agents (18).
Click here for a table that shows the ambit of the FIC’s compliance inspections.
Sharp drop in fines
In 2022/23, the FIC and the FSCA each imposed sanctions on two institutions. The total financial penalty imposed by the FIC was R872 388, of which R436 194 was payable and the remainder was conditionally suspended for three years. The FSCA imposed fines totalling R70 000, of which R50 000 was suspended.
These penalties represent are substantial decrease from those imposed in 2021/22. The FIC imposed fines totalling more than R33m on 22 entities, of which R6.3m was payable and the remainder was suspended. The FSCA imposed fines totalling R1 116 980 on 14 non-compliant institutions, of which R980 000 was payable.
Intelligence reports help to recover R5.8bn
The FIC produced 3 424 intelligence reports that contributed to the recovery of R5.824 billion in proceeds from criminal activities in the 2022/23 financial year, a 14% increase from the R5.108bn recovered in the previous year, according to the annual report.
The Centre blocked R92.2m as suspected proceeds of crime in 2022/23, which was 54% lower than the R204.4m frozen in 2021/22.
The FIC has the power to block or freeze funds that are suspected to be the proceeds of crime. It can issue a section 34 directive to instruct an institution not to proceed with a transaction for 10 days. This allows the FIC to make enquiries about the transaction and, where necessary, to inform an investigating authority or the National Director of Public Prosecutions. The FIC also shares this information with the Asset Forfeiture Unit, which can seize the funds if necessary.
Slight fall in registered institutions
The number of institutions registered with the FIC decreased from 45 555 to 45 392, despite the amendments to Schedule 1 resulting in more sectors becoming accountable institutions from 19 December 2022.
The report said the slight decrease was because of an extensive clean-up of registration data during the financial year. The clean-up entailed deregistering entities from the FIC’s registration and reporting system where entities had gone out of business or had not updated their registration profiles with contactable user details.
Uptick in regulatory reports
During the financial year, the 45 392 institutions, including voluntary disclosure reporters and other business entities, submitted about 5.3 million (2021/22: 5.12 million) regulatory reports, including:
- 4 249 189 cash threshold reports (2021/22: 4 589 703);
- 558 348 suspicious and unusual transaction reports (2021/22: 533 277);
- Seven terrorist property reports (2021/22: four); and
- 503 062 international funds transfer reports, a new reporting stream started in February 2023.
The FIC interprets and analyses the information provided in the regulatory reports to develop financial intelligence reports. Law enforcement, prosecutors, and other authorities use these intelligence reports for their investigations, prosecutions, and applications for asset forfeiture.
Brilliant.
This should be headlines in the newspapers. Culprits should be ‘named and shamed’ just like rapists.