The fact that a client is an accountable institution’s shareholder does not reduce the institution’s customer due diligence (CDD) obligations under the Financial Intelligence Centre Act (FICA).
This is one of the take-aways from the FICA Appeal Board’s decision to dismiss an appeal by a financial services provider that was fined R2.9 million.
The FSCA fined Tana Africa Capital Managers (Pty) Ltd following an inspection in February last year. Of the R2.9m penalty, R1m was suspended for three years, subject to conditions.
Tana Africa Capital Managers (Pty) Ltd is wholly owned by Tana Africa Investment Managers Ltd (TAIM), a Mauritian entity.
The FSCA fined Tana R1m for failing to develop, document, maintain, and implement an adequate Risk Management and Compliance Programme as required by section 42 of FICA.
A penalty of R1.4m was imposed for contraventions of sections 20A, 21, and 21A to 21C. Among other things, these provisions require accountable institutions to establish and verify the identity of clients, assess the risks of business relationships, and obtain information to evaluate the consistency of future transactions with the client’s profile.
Tana was fined R500 000 for contravening sections 28A read with section 26A to 26C, which require an accountable institution to screen its clients against the Targeted Financial Sanctions list and report property owned or controlled by persons or entities identified in United Nations Security Council resolutions as associated with terrorism or related activities.
Tana’s appeal originally challenged both the factual findings and the penalties, but at the hearing, Tana’s legal representative only pursued arguments on the severity of the financial penalties.
Tana contended that the FSCA failed properly to consider several factors that should have influenced its decision. These factors included:
- Tana’s relationship with its 100% shareholder, TAIM, and the overlap in directorships and senior employees shared between Tana and its shareholder.
- The shared knowledge and record-keeping between Tana and its shareholder.
- A contractual agreement between Tana and TAIM that prohibits Tana from taking on additional retail or other clients.
- Tana’s shareholder operates under a regulated environment in Mauritius.
- Tana’s access to TAIM’s corporate structure, ultimate beneficial ownership records, and other relevant information.
Relationship with shareholder
The Appeal Board rejected Tana’s argument that having only one client (TAIM) reduced the risk of financial crimes.
The mere fact that a client is a shareholder or that there is overlap in the board members does not reduce the institution’s obligations under FICA. The Board agreed with the FSCA’s view that the potential for abuse in such a situation makes it even more critical for financial institutions to comply with the requirements to ensure that the client is properly risk-rated and appropriate CDD is carried out.
The fact that the shareholder company was based in a country, Mauritius, previously on the Financial Action Task Force’s grey list further heightened the risk.
Although the Board acknowledged the close relationship between the directors of Tana and TAIM, it said such internal overlaps in control did not absolve Tana of its regulatory duties.
The Board found that the obligation to conduct proper CDD and risk assessments existed regardless of the level of familiarity between the client and the institution’s directors. The Board made it clear that the proximity between Tana’s directors and those of TAIM did not diminish the legal and regulatory requirements imposed on Tana.
The Board said Tana’s submission that its agreement with TAIM prohibited it from dealing with other clients was misleading and incorrect. It found that the agreement did not contain any such restriction, and therefore Tana could not claim it was limited to servicing only its shareholder.
Remediation does not avert sanctions
In this matter, as is in other appeals, the accountable institution argued that the remediation of non-compliance is a ground for penalties to be reduced.
Tana said it had taken significant steps to address its non-compliance issues and remediate its risk management practices. Specifically, Tana contended that it had implemented improvements in its systems and processes following the FSCA’s initial findings. Tana claimed that these remedial actions should be considered as mitigating factors, which, in its view, justified a reduction in the financial penalty.
In keeping with its decisions other appeals, the Board emphasised that remedial action taken after non-compliance is detected does not absolve an institution from facing penalties. The purpose of administrative sanctions is to punish the non-compliance at the time of inspection.
The Board stated: “Remediation of non-compliance after the notice of intention to sanction was issued does not avert administrative sanction […] The fact that a transgression has been rectified does not mean that it was not a transgression and that it cannot and should not be subject to a sanction.”
The Board observed that Tana’s remedial actions were undertaken only after the FSCA had issued its findings, indicating a reactive approach to compliance rather than a proactive commitment.
The Board’s decision underscores compliance with FICA requires an institution to maintain rigorous risk management and compliance systems as part of its ongoing obligations, not merely as a response to regulatory scrutiny.
External compliance
It is also worth noting the Board’s stance towards Tana submission that a mitigating factor was that its compliance failures were the result of being wrongly advised by its external compliance provider.
The Board rejected this argument, holding that ultimate accountability for compliance with FICA rests with the accountable institution itself.
It quoted approvingly from the FSCA’s submission that Public Compliance Communication 12A makes it clear that “the third-party service provider cannot and does not discharge any FICA obligations on behalf of the accountable institution when it has entered a contractual relationship”.
The Appeal Board concluded that all of Tana’s contraventions were serious, and it affirmed the FSCA’s penalties as appropriate.
The Board’s decision underscores that accountable institutions must adhere strictly to compliance obligations under FICA, and that financial penalties are an appropriate tool for enforcing compliance and preventing financial crime.
