AC NOTE FICA. What FICA governs and requires

Transcription

1 AC NOTE FICA What FICA governs and requires In the past decade South Africa enacted various laws aimed at combating money laundering. The mainly criminal legislation was recently supplemented by the Financial Intelligence Centre Act 38 of 2001 (FICA), which creates the administrative framework for money laundering control. South Africa recognized a need to implement measures to prevent money laundering within its borders and thereby ensure continued international investment in South Africa. In furthering this goal, South Africa is now a member state of the Financial Action Task Force (FATF) and is obliged to comply with the requirements set out in the FATF Recommendations. The FATF has noted increasingly sophisticated combinations of techniques, such as the increased use of legal persons to disguise the true ownership and control of illegal proceeds, and an increased use of professionals to provide advice and assistance in laundering criminal funds. The FATF now calls upon all countries to take the necessary steps to bring their national systems for combating money laundering and terrorist financing into compliance with the new FATF Recommendations and effectively to implement these measures. A key element in the fight against money laundering and the financing of terrorism is the need for countries systems to be monitored and evaluated in view of these international standards. The Financial Intelligence Centre Act (FICA) is the result of five years of investigation and development. It complements and works with the Prevention of Organised Crime Act 121 of 1998 which contains the substantive money laundering offences. FICA sets up a regulatory anti-money laundering regime which is intended to break the cycle used by organized criminal groups to benefit from illegitimate profits. By doing so the Act aims to maintain the integrity of the financial system. The regulatory regime of FICA imposes know your client, record-keeping and reporting obligations on certain categories of persons which FICA refers to as accountable institutions. It also requires these accountable institutions to develop and implement internal rules to facilitate compliance with these obligations. The Financial Intelligence Centre was established under FICA as the body to identify the proceeds of unlawful activities and to combat money laundering activities. How the FSP is impacted by FICA 1

2 In terms of the Act, there are three types of institutions as follows: accountable institutions; reporting institutions; and ordinary institutions. Rigorous obligations are imposed on accountable institutions, including: identifying and verifying new and existing clients; keeping records of identities of clients and transactions entered into with clients; reporting certain transactions to the Financial Intelligence Centre; formulating and implementing internal rules in respect of client identification and verification; record keeping and reporting of suspicious and unusual transactions; training employees with regard to FICA to enable them to comply with the provisions of FICA and the internal rules applicable to them. A list of those businesses which constitute accountable institutions is provided in Schedule 1 of the Act and includes FSP s that deal in long-term insurance business as defined in the Long-Term Insurance Act, 1998 (Act 52 of 1998), including an insurance broker and an agent of an insurer as well as any person or business that renders investment advice or acts as an investment broker. Where an FSP is an accountable institution, that FSP must appoint a responsible person to monitor compliance (a Money Laundering Reporting Officer) and that person has the responsibility to ensure compliance within the organisation by its employees. It also has the responsibility of drawing up internal rules, to which all the employees must adhere. It stands to reason that training of staff is a prerequisite. Having established rules and trained the staff, employees must be monitored to ensure that they are acting within the boundaries of FICA and the internal rules. The reporting officer must also make sure that the relevant institution fulfils all its obligations under FICA. FICA prevents accountable institutions from establishing business relations or entering into single transactions with their clients unless they have established and verified the identities of the clients concerned and the agents and the principal of their clients. FICA also requires institutions to verify an agent s authority to act on behalf of a principal. The regulations to FICA provide some detail on the identification and verification of most of the classes of clients that an institution is likely to deal with. These are natural persons, companies, close 2

3 corporations, other legal persons, partnerships and trusts. FICA also considers that the client may be resident in South Africa or overseas. In terms of the regulations, the Act requires accountable institutions to obtain specific information concerning the identities of each of its clients and also to indicate the manner in which their particulars should be verified. It is this detail that must be specifically included in the rules that the FSP designs. In terms of the rules, high risk clients should be subjected to a higher degree of due diligence than lower risk clients as each FSP will have developed a rational methodology to determine the risks posed by different classes of clients as well as clear guidelines on the due diligence procedures to be followed in respect of the different risk categories of clients. Applying a risk-based approach to the verification of the relevant particulars implies that the FSP can itself accurately assess the risk involved. It also enables the FSP to take an informed decision based on its risk assessment as to the appropriate methods and levels of verification that should be applied in a given circumstance. The FSP should therefore always have grounds on which it can base its justification for a decision that the appropriate balance was struck in a given circumstance. Accurately assessing the relevant risk means determining how a reasonable person in a similar situation would rate the risk involved with regard to a particular client, particular product and/or a particular transaction and what likelihood, danger or possibility can be foreseen of money laundering occurring with the client profile, product type or transaction in question. It would be pointless to implement this type of assessment if the information was not used. Therefore in the event that a suspicious transaction is suspected, the FSP must report this to the Financial Intelligence Centre. The obligation to report suspicious or unusual transactions under Section 29 of the Act is not confined to accountable institutions and applies equally to a very wide category of persons and institutions. The Act imposes this obligation on any person who: Carries on a business; Is in charge of a business; Manages a business; Is employed by a business. Therefore, even FSP s that do not render long term or investment services are still obliged to report suspicious transactions. All individuals have a duty to report suspicious transactions where it is suspected that: 3

4 The business in which the person is involved has received, or is about to receive the proceeds of any unlawful activity; A transaction or series of transactions in which the person s business is involved has facilitated or is likely to facilitate the transfer of proceeds of unlawful activities from one person to another or from one location to another; A transaction or series of transactions in which the person s business is involved has no apparent business or lawful purpose; A transaction or series of transactions in which the person s business is involved is conducted to avoid giving rise to a reporting duty under FICA; A transaction or series of transactions in which the person s business is involved may be of interest to the South African Revenue Service in a possible investigation of tax; or The business in which the person is involved has been used or is about to be used in any way to hide or disguise the proceeds of unlawful activities. Suspicious transactions must be reported as soon as possible but not later than 15 working days after becoming aware of a fact concerning such transaction. ln terms of regulation 22 of the Money Laundering Control Regulations, a report must be made by means of the internet-based reporting available on the FIC s website at In exceptional cases where a person does not have the technical capability to make a report electronically that person may send it by facsimile or deliver it to the Financial Intelligence Centre. Accountable Institutions South African law contains a number of control measures aimed at facilitating the detection and investigation of money laundering. These control measures are based on three basic principles of money laundering detection and investigation which are: intermediaries to the financial system must know with whom they are doing business; the paper trail of transactions through the financial system must be preserved; and possible money laundering transactions must be brought to the attention of investigating authorities. As discussed earlier, the control measures include requirements for institutions to establish and verify the identities of their clients, to keep certain records, to report certain information and to implement measures that will assist them in complying with the Act. 4

5 Section 8 of the Fit and Proper requirements as detailed in Board Notice 106 of 2008 states that an FSP who is an accountable institution as defined in the FIC Act, must have in place all the necessary policies, procedures and systems to ensure full compliance with that Act and other applicable anti-money laundering or terrorist financing legislation. It is argued that this should only apply to those persons or FSP s that deal with policies of an investment nature, but Guidance Note 2, issued by the authorities to assist with the interpretation of the FIC Act, provides general guidelines which the relevant accountable institutions may apply in order to interpret the term "transaction". In respect of Long term insurance it provides an indication of the types of activities which might be regarded as transactions. These include: The entering into a new long-term insurance policy; An amendment or variation of the terms and conditions of a long-term insurance policy, including a change in the beneficiary or policyholder; An instruction by the client to the long-term insurer to switch or reinvest the underlying assets of a linked policy with linked investment service providers or investment managers; and Termination (including the lapsing and surrender), withdrawal, or reinvestment of a long-term insurance policy. It follows that all intermediaries that distribute or deal in life insurance instruments are accountable institutions and must comply with the FIC Act which, in Section 43, states that an accountable institution must provide training to its employees to enable them to comply with the provisions of the Act and the internal rules applicable to them. As in the Fit and Proper requirements, there is no mention of the regularity by which the training must take place, and this is left to the discretion of the FSP. However, the FSB has made it quite clear that they would prefer to see this as part of an ongoing programme of development and it is advisable for the FSP to provide some form of refresher course, perhaps on an annual basis, for those employees who have already been trained. The training must be divided into the following two parts: the content and application of the Act itself; and the actions of staff in terms of the FSP s internal rules. In terms of the Act itself, the training must cover all aspects and there is no need to provide any detail here. However, training in terms of the internal rules requires clarification. Accountable institutions are well advised to have a documented money laundering policy which incorporates the procedures that should be followed by staff. These procedures would form the rules as required in terms of the Act. 5

6 The rules would cover (inter alia) issues such as: The duties and responsibilities of management; The duties and responsibilities of staff The duties of the money laundering compliance officer; The screening methods of clients; The documentation required and processes; The handling of PEP s Reliance on agents; Reporting procedures; and Record keeping. Who can provide the training? There is no requirement in the regulations for an FSP to employ an accredited training provider. Having said this, the training must have credibility and records must be properly kept as to who participated in the training and the content thereof. 6