New accountable institutions will be given time to bed down Fica compliance

The Financial Intelligence Centre (FIC) will work with entities that become accountable institutions in terms of the amendments to the Financial Intelligence Centre Act (Fica), to help them bed down compliance with the Act, Pieter Smit, the FIC’s the executive manager for legal and policy, told the National Assembly’s Standing Committee on Finance (Scof).

Smit was speaking on Thursday, when the FIC and National Treasury responded to submissions on the proposed amendments to the three schedules to Fica.

Read: Low-risk businesses cannot be excluded from the list of accountable institutions, says FIC

The proposed amendments to Schedule 1 of Fica will significantly broaden the number of businesses that will become accountable institutions, which means they will have to meet all the Act’s compliance requirements when transacting.

Once the amendments become law, the FIC will become the default supervisor of credit providers, dealers in goods valued at more than R100 000, trust and company service providers, and crypto asset service providers. These entities will have to register with the FIC as accountable institutions, Smit said.

He said there would be a window period for entities that are brought under Fica to bed down compliance, systems and policies. The FIC would not conduct inspections and take enforcement action for 12 to 18 months but would work with the entities to improve their compliance.

Once the amendments become law, the FIC would have to formulate guidelines for the new sectors and embark on awareness programmes, such as through webinars and workshops, he said.

The FIC would conduct preliminary risk assessments to determine the money laundering and terrorism financing risks of the new sectors and entities, which would inform its supervisory programme.

Smit emphasised that Fica does not contemplate a rules-based approach where a small business must deal with compliance in the same way as a large business. The nature of a business will determine what it must do to comply with Fica.

Entities need to structure the level and intensity of their compliance in accordance with their understanding of the risk that their products or services will be exploited by their customers to launder money or finance terrorism. In other words, there cannot be a one-size-fits approach to the manner in which institutions comply with Fica. Supervision of compliance follows the same approach, he said.

Smit provided feedback to stakeholders’ comments on the proposed amendments.

Item 2. Trust and company service providers

Commentators have stated that:

• The text in the amendment appeared to be wider in scope than the Financial Action Task Force’s standard;
• The new provision would place a compliance burden on small businesses; and
• There was a potential overlap in supervision.

Smit said the wording of the item has been aligned as closely as possible with the FATF standard. The FIC could not simply copy and paste the terminology used in the standard, because it would not align with South African legislation.

The prevalence of the use of trusts and company service providers in money laundering underscored the need to include this category in the schedule, he said.

The amended Schedule 2 does not designate the FSCA or the Prudential Authority (PA) as supervisors of Item 2 entities. In any event, Smit said, the existing memoranda of understanding between the FIC, FSCA and PA were designed to avoid overlaps and conflicting mandates regarding the supervision of entities that fell under Schedule 1.

Item 8. Life insurers

It was proposed that pure risk life insurance be excluded from this item.

Smit said that currently there were no exclusions for any type of life insurance, and “we would find it difficult to make a convincing argument that a narrowing of Fica is justified”.

The amended schedule will exclude reinsurance business because this is typically business between two accountable institutions.

He said the proposal to exclude risk life business would create complications for the life insurance industry and the supervisors because an insurer would, in some instances, be an accountable institution, while in other instances, it would not.

He reiterated that Fica envisages that entities adopt a risk-sensitive approach to compliance, where enhanced due diligence measures are applied where an institution assesses the money laundering and terrorism financing risk to be high and applying simplified measures where the risk is assessed to be low.

Item 11. Credit providers

Stakeholders have called for a narrower drafting of the item or for the exclusion of certain sectors. It should include only certain types of credit transactions and exclude providers that offer lines of credit or instalment payment transactions.

Smit said such amendments would exclude most forms of consumer credit transactions. This would not meet the objectives of the amendment or the scope of what was required by the FATF standards, which explicitly included lending business – consumer credit, finance leasing and mortgage credit. “We would find it difficult to justify these exclusions.”

Item 20. High-value goods dealers

Submissions have called for:

• Narrowing the scope of the item to include cash transactions only;
• Excluding certain economic sectors, particularly mining and agriculture, from the definition of a “dealer”; and
• Including only transactions in the retail sector and excluding wholesalers.

Smit said the rationale for Item 20 was not to capture the details of cash transactions per se, but to create an audit trail for transactions by people who have the disposable income to afford expensive items.

The category will capture the non-financial institutions that FATF standards require are included, such as dealers in precious metals and stones.

The importance of the category was that, in the FIC’s experience, it was common for people who were involved in criminal activities to spend their disposable income on acquiring items associated with a luxurious lifestyle, such as vehicles and art.

Supervision of stockbrokers

In terms of the amendment to Item 1 of Schedule 2, which lists the supervisory bodies, it was proposed that the JSE should be the supervisory body for authorised users of exchanges (stockbrokers). It was submitted that it would be inappropriate for the FSCA to perform this function, because the Authority would have to rely on information from the JSE.

Smit said the Financial Sector Regulation Act entrusts the supervision of FSPs, including stockbrokers, to the FSCA. The JSE was not the only licensed exchange in South Africa. The JSE could supervise its members, but it would not be appropriate for it to supervise stockbrokers in general.