A firm of attorneys is taking its case against the Financial Intelligence Centre (FIC) to the High Court after the FICA Appeal Board upheld a R7.7-million fine imposed for non-compliance.
The FIC yesterday hailed the Appeal Board’s decision as “definitive”, showing that it endorsed the Centre’s approach to sanctioning designated non-financial businesses and professions (DNFBPs) that do not meet their FICA obligations.
According to the Centre, the decision, handed down last month, is the first outcome of an appeal lodged by a firm of attorneys against an administrative sanction issued by the FIC.
In December 2022, the FIC assumed responsibility for the supervision of all DNFBPs – including legal practitioners – listed under Schedule 1 of the Financial Intelligence Centre Act.
“The FIC has consistently on public platforms pleaded with attorneys to comply with the FIC Act. The outcome of this appeal is a clear message that non-compliance with the FIC Act may have serious consequences,” said Christopher Malan, the FIC’s executive manager for compliance and prevention.
The FIC determined, following an inspection of Kunene Ramapala Incorporated in June 2023, that the law firm had not complied with FICA’s requirements to document, maintain and implement a Risk Management and Compliance Programme (RMCP), and to scrutinise clients against the Targeted Financial Sanctions (TFS) list.
In addition, KR Inc failed to comply with Directives 1, 2, and 4, in that its registration details were not updated on the FIC’s goAML system, and it had shared its log-in credentials.
KR Inc also did not comply with Directive 6 of 2023, which requires certain accountable institutions, including legal practitioners, to file a risk and compliance return (RCR) questionnaire within a specific time frame.
The FIC determined that KR Inc was “grossly negligent and in wilful non-compliance” and in March this year imposed a fine of R7 772 000 in the following respects:
- Failure to scrutinise clients against the TFS list – R3.922m.
- Failure to document, maintain, and implement an RMCP – R3.8m.
- Failure to comply with Directive 6 by not timeously submitting its RCR – R50 000.
- Failure to comply with Directives 1, 2, and 4 – R20 000.
The combined fine exceeded 10% of KR Inc’s turnover for the 2022/23 financial year, and the Centre decided to limit the sanction to not more than 10% of its annual turnover.
Apart from the financial penalty, the FIC issued directives to the appellant to scrutinise and document its new and existing clients in compliance with the TFS list, review its RMCP at various intervals to ensure its relevance in respect of their operations, and comply with Directives 1, 2 and 4 and update its log-in credentials and registration details.
‘Lack of awareness’
KR Inc contended that the financial penalties were excessively harsh and asked the Appeal Board to set them aside or reduce them.
The law firm accepted responsibility for past non-compliance but said this was because of a lack of awareness, not gross negligence. The appellant also argued that it had addressed its compliance issues before the penalties were imposed, claiming the FIC failed adequately to consider its co-operative conduct and mitigating factors, such as its remedial efforts.
KR Inc further submitted, inter alia, that:
- The penalties were disproportionately high, particularly in light of the nature of its non-compliance, which involved a specific conveyancing transaction valued at some R2.822m, for which a penalty of R3.8m was excessive.
- Since it primarily serves organs of state, there is minimal risk that its services could be used for terrorist financing or money laundering.
- It was not in “wilful non-compliance”, because it notified the Centre about technical difficulties in accessing the goAML system.
‘Remediation doesn’t negate penalties’
The FIC contended that KR Inc’s prolonged non-compliance and minimal engagement in addressing the issues warranted the penalties imposed, underscoring that these actions served the FICA’s deterrence objectives.
Among other things, the Centre submitted:
- The law firm had operated since 2012 but registered with the FIC in November 2019, which was nearly seven years late, without a valid explanation beyond claimed ignorance of its compliance obligations.
- Following the inspection, a draft report was issued on 21 July 2023, outlining the KR Inc’s non-compliance with various sections of FICA. The final report on 4 August 2023 confirmed these non-compliance findings and required the appellant to implement specific remedial actions. However, KR Inc failed to comply by the deadline of 4 September 2023.
- The appellant continued to miss subsequent deadlines for submitting required documents, such as the RCR, which was ultimately submitted on 5 February 2024, well past the deadline.
Notably, the FIC said that rectifying non-compliance after enforcement proceedings does not negate the original transgression: “The fact that a transgression has been rectified does not mean that it was not a transgression and cannot and should not be subjected to a sanction.”
Citing case law, the Centre held that penalties are warranted for non-compliance observed during inspections, regardless of subsequent remedial actions.
Demonstrable ‘gross negligence’
The Appeal Board found that KR Inc’s extensive delays in meeting its obligations under FICA, as well as its continued non-compliance despite ample guidance and warnings, demonstrated gross negligence.
KR Inc failed to act promptly even after receiving repeated notifications and assistance from the Centre, leading the Appeal Board to conclude that the appellant’s actions showed “a complete obtuseness of mind” and qualified as “a conscious risk-taking”.
The Appeal Board also dismissed KR Inc’s argument regarding the reduced risk posed by its state-organ clients, emphasising that FICA compliance is mandatory regardless of client risk ratings.
Furthermore, the Board reaffirmed that “an administrative sanction cannot be avoided merely because non-compliance was rectified after the fact”, a point well-established in precedent. Even though KR Inc took remedial actions after the inspection, these were not sufficient to prevent sanctions.
It said the Centre made a conscious decision to cap the sanction at no more than 10% of KR Inc’s annual financial turnover.
“It is a well-established legal principle that the Centre’s use of guidelines in the sanctioning process is legally sound. The guidelines serve to promote consistency, but the Centre is not legally bound to follow them if the facts of a case justify deviation. The Centre took a holistic approach in determining the sanctions, with deterrence being the primary goal,” the Board said.
The Appeal Board concluded that the sanctions were neither “startlingly inappropriate” nor legally flawed. Therefore, it upheld the sanctions and dismissed the appeal.
KR Inc this month instituted an application in the High Court to have the Board’s decision reviewed.
This is good news as there are too many accountable institution who refuse to take FICA seriously. FICA is there for a reason and need to be complied with as a non-negotiable.
I have just left an accountable institution where I was the appointed Compliance Officer and whilst I was there I found it to be an uphill battle to have FICA taken seriously by all.
We recently had an audit and were found to be compliant but, I am afraid, to say there is no one in that organisation who has the passion to continue along the path I did and now I wait for their next audit to unfold.
We need to have strict controls in an effort to have the country’s credit rating upgraded from its present level.
Mr. Allan Ullyett, could you clarify the extent to which you are being compensated by FIC for endorsing them? The implementation of FICA appears to some as a potential avenue for facilitating government-related financial misconduct. Could you provide transparency on this matter?
A R7.7million fine arising from a transgressions involving R2.3million is excessive and punitive and would not happen to a white firm.
This is BS by the FIC and another blatant example of targeting black firms under the guise of fighting crime.