Small FSP that was fined R1.1m shares four lessons in FICA compliance

Don’t wait for an audit by a supervisory body before you get serious about complying with the Financial Intelligence Centre Act (FICA). This is one of the messages the owner of a small FSP hit with a hefty fine has for accountable institutions.

The FSCA announced on Tuesday that in June it imposed a penalty of R1.1 million on Pretoria-based MIKA Finansiele Dienste (Pty) Ltd (MFD).

However, the penalty was reduced to an effective R500 000 after the FSCA conditionally suspended the payment of R600 000.

The suspension was in recognition of MFD’s commitment to addressing its shortcomings in respect of anti-money laundering and terrorist financing risks and its efforts to remediate the non-compliance.

Miros Kaffka, the owner of MFD, told Moonstone he decided not to appeal against the fine after receiving legal advice that the FICA Appeal Board might reverse the suspension.

He emphasised that MFD – which has been in existence of 27 years – was in no way involved with money laundering, or terrorist or proliferation financing. None of its clients has experienced financial damage or losses because of the administrative sanction.

Reasons for the sanction

In August 2022, the FSCA conducted an inspection of MFD as part of its routine supervisory activities in terms of section 45B of FICA. The inspection found that MFD was in breach of the following provisions of the Act:

1. Defective Risk Management and Compliance Programme (RMCP)

Section 42(1) and (2) require accountable institutions to develop, document, maintain, and implement an RMCP for anti-money laundering and counter-terrorist financing. Although MFD had developed an RMCP, it was found to be defective because it failed to outline the processes to comply with various provisions of the Act. Additionally, MFD did not implement the RMCP effectively by failing to risk rate most of its customers.

The FSCA fined MFD R200 000 for non-compliance with sub-section (1) and R700 000 for not meeting the requirements of sub-section (2).

2. Non-verification of beneficial ownership

In the case of clients that are legal entities, trusts, or similar arrangements between natural persons, section 21B requires that an accountable institution establish the nature of the client’s business and the ownership and control structure of the client. At the time of the inspection, MFD had failed to establish and verify the beneficial owner of one client.

The non-compliance with section 21B resulted in a fine of R200 000.

Kaffka said MFD found it difficult to understand how the Authority determined the size of the fines for each transgression.

“Is the failure to prove the ultimate beneficial ownership of one company really worth a R200 000 fine? Fines handed out recently to companies like Ashburton (R16 million) and Old Mutual (also R16m) do not really compare to the fine given to MFD, especially taking into account that MFD is a small FSP. As a percentage of turnover, there is a substantial difference. During a meeting, the FSCA told MFD that they will not disclose how the fines are calculated,” he said.

Zero-tolerance approach

In a statement, the FSCA said it viewed the breaches for which MFD was sanctioned as serious.

“The requirement to understand and mitigate money laundering and terrorist financing risks through the implementation of an RMCP is vital not only because it assists accountable institutions to protect and maintain the integrity of their own businesses but also because it helps contribute to the integrity of the South African financial system as a whole,” the Authority said.

It said the proper due diligence of clients, particularly in respect of beneficial ownership, is also crucial to help identify and mitigate against suspicious and criminal elements from infiltrating the financial system.

The sanction was a reminder that the FSCA will not tolerate non-compliance with FICA.

Kaffka said MFD accepted it had been negligent in not complying with FICA. “In hindsight, the RMCP did have holes in it, and MFD does not deny that a certain number of its clients were not risk-rated – specifically clients before 2019.”

Regarding the lack of proof of beneficial ownership, Kaffka said the FSCA inspector who performed the audit merely instructed MFD to obtain a letter from the company in question, disclosing any natural person, entity, or trust with shareholding of 25% or more, per Public Compliance Communication 121A. (PCC 59, which replaced PCC 121A in August this year, reduces the threshold to 5% or more.)

However, after forwarding the letter to the FSCA, he said MFD was told by another FSCA employee that this merely proves legal ownership, not beneficial ownership, something that was not explained to MFD by the inspector.

Kaffka said he has since come to terms with the beneficial ownership requirements after spending many hours studying FICA, as well as the Guidance Notes and Public Compliance Communications issued by the Financial Intelligence Centre.

“FICA, as with any law, is open to interpretation. Accountable institutions are allowed to use their interpretation and understanding to formulate their RMCP, which stipulates how the institution will prevent money laundering, and terrorist or proliferation financing. As the majority of financial advisers do not have an LLB or Bachelor of Language and Communication, they lack the understanding and correct interpretation of the Act. By outsourcing the RMCP and processes, they simply fall into a false sense of security of being compliant,” he said.

Remedial action

The three-year suspension of R600 000 of the total penalty of R1.1m is conditional on MFD complying with a directive to address the identified deficiencies and remaining fully compliant with sections 42(1) and (2) and section 21B.

Several meetings (virtual and in-person) have taken place. The FSCA’s remedial team receives regular progress reports from MFD. The latest version of MFD’s RMCP is with the team for comment and input.

Kaffka is therefore confident that MFD will rectify its non-compliance well before the three years are up.

Four lessons for accountable institutions

Kaffka said that, based on his experience, he has four key messages for accountable institutions, particularly if they are small entities:

1. Having a copy of a client’s Identity Document and municipal account (or any other utility bill) does not even come close to complying with FICA.
2. Do not moan about the non-compliance of other financial institutions. MFD found out the hard way that product houses and even banks have kept their responsibilities at bay for the past 15 years, instead making FICA compliance the responsibility of intermediaries.
3. Stop making excuses about not complying. Start to come to terms with what FICA requires and act to comply. Do not wait for an audit before you get serious about adhering to the anti-money laundering and counter-terrorist financing regulations. They are there for a reason.
4. Accountable institutions should not depend on a third party to ensure they are FICA-compliant. At the end of the day, the third party will not be held liable for any non-compliance – you will.

 

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