The Financial Intelligence Centre (FIC) has again expressed its dissatisfaction with the poor response to the Risk and Compliance Returns (RCRs) it issued last year. It says businesses that do not submit the RCRs are disrupting efforts to get South Africa off the grey list.
The FIC is the state agency responsible for gathering and analysing financial information to combat money laundering (ML), terrorist financing (TF), and other financial crimes.
Last year, the Centre required certain accountable institutions, as defined by Schedule 1 of the Financial Intelligence Centre Act, to complete an RCR.
The RCR is a questionnaire that assists businesses in identifying the risks they face of ML and TF abuse. The FIC uses its risk and compliance assessment analysis tool to evaluate the RCRs it receives, identifying higher-risk “designated non-financial businesses and professions” (DNFBPs). This informs the FIC’s supervisory approach, which includes inspections on high-risk entities.
DNFBPs refer to specific sectors and professions that, although not financial institutions, are recognised as being susceptible to being exploited for ML and TF purposes.
The RCRs should have been submitted by 31 May or 31 July last year, depending on the directives issued by the FIC. But, according to the Centre, the response has been unacceptably low.
Since August last year, the FIC has pleaded with entities that have not submitted the RCRs to do so, warning that non-compliance will result in administrative sanctions, including fines (see here, here, and here). Furthermore, it says these businesses are stumbling blocks to South Africa’s making “meaningful headway” towards exiting the grey list.
The Financial Action Task Force (FATF), the global ML and TF watchdog, put South Africa on its grey list in February last year after finding that the country has deficiencies in its measures to combat ML and TF.
The FATF adopted a jointly agreed Action Plan containing 22 Action Items linked to the eight strategic deficiencies identified in the country’s anti-money laundering and combating terrorism financing regime. South Africa must address all 22 Action Items to exit the grey list. The Action Plan contains deadlines by which South Africa must have addressed the 22 items. The final deadline is January 2025.
At the FATF’s plenary meetings in June, South Africa reported on how it has been addressing the identified deficiencies.
Read: Exiting the grey list before June 2025 is unlikely, says Treasury
“The FATF acknowledged that the FIC had made progress in understanding the risk levels of DNFBPs, following the introduction of the RCR questionnaire. However, the FATF remained concerned about the low rates of RCR submission to the FIC by DNFBPs and emphasised that these accountable institutions needed to increase their response rates,” the FIC said in a statement on Tuesday.
Sectors’ compliance with Directive 6
In March 2023, the FIC issued Directive 6 calling on legal practitioners, estate agents, trust service providers, company service providers, and casinos to complete and submit their RCRs online, via the FIC’s website. The due date for these RCRs submissions was 31 May 2023.
The FIC said the average submission rate by 23 July this year is 63%, The submission rates per sector are: legal practitioners, 60%; estate agents, 66%; trust service providers, 74%; company service providers, 76%; casinos, 100%.
The Centre reminded businesses that not submitting the RCR makes them non-compliant, which exposes them to being sanctioned.
Stephen Thomson, director at Thomson Wilks Attorneys, described the recalcitrance of the non-compliant law firms as “an embarrassment to the legal profession”, adding it is severely obstructing the government’s plans to having South Africa removed from the grey list.
Compliance by delinquent law firms requires a far more co-ordinated approach by the FIC, both with the Legal Practice Council (LPC) and the banks, Thomson said.
Attorneys and law firms are governed by the Legal Practice Act. For an attorney to be lawfully entitled to practice, the attorney must be in possession of a Fidelity Fund certificate, which is issued annually by the LPC. Every law firm is also required to have a trust account in terms of section 86 of the Act.
“If the FIC were to co-ordinate with the LPC and the banks who provide the trust account facilities, by having the LPC refuse to issue Fidelity Fund certificates and having the banks suspend the operation of trust accounts until the RCR reports have been submitted, this would immediately prevent the delinquent law firm from conducting business. This approach, rather than relying on the threat of imposing penalties, would create the urgency needed by FIC from these law firms to become compliant,” he said.
‘Wilfil non-compliance’
Also in March last year, the FIC issued Directive 7 instructing dealers in precious stones, dealers in precious metals (including Krugerrand dealers), credit providers, and crypto asset service providers to submit RCRs by 31 July 2023. RCR submissions are still outstanding from these sectors.
“There appears to be wilful non-compliance by businesses in these sectors, despite repeated calls and appeals for them to complete and submit their long outstanding RCRs to the FIC,” said Christopher Malan, the Centre’s executive manager for compliance and prevention.
“Institutions that have still not submitted their RCRs are considered delinquent institutions and are automatically deemed to be at high risk of being used for money laundering and terrorist financing purposes. These institutions now face targeted inspections or targeted sanctions their non-compliance.
“Over and above this, these businesses are dismantling and disrupting South Africa’s efforts to exit the grey list and improve the country’s standing in the world economy. Remaining on the grey list can impact the lives of ordinary citizens, let alone a broad range of business and the economic future of the country as a whole,” Malan said.
The FIC said it has started to issue notices of intention to sanction, aimed at remediation and the payment of fines as admission of non-compliance. Institutions that do not comply and pay the fine undergo a formal adjudication process. In such instances, the resulting financial penalty may be increased because of the wilful non-compliance.
Accountable institutions can complete and submit the RCRs by clicking here on the FIC’s website.
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