Financial Intelligence Centre Bill (Cl 21-38): deliberations

Meeting report

Clause 21 - Identification when business relationships are established or single transactions
The National Gambling Board submission requested the incorporation of specific provisions catering for patrons who visit casinos for entertainment. Mr Smit said that these submissions were in accordance with the FATF suggestions and thus he had no objections.

The Chairperson asked why verification requirements were not being included in the Bill. Mr Phillips told Adv de Lange that these requirements would be included in the regulations. These regulations would be considered after the Act and would be formulated in consultation with the various members of the Council. Mr Phillips added that matters such as verification would best be dealt with in the regulatory process as each member, and their respective industries, had different dynamics and operated under different circumstances. Constructing a detailed framework at the legislative level would not be the best course of action.

The Association of Unit Trusts' submission called for the inclusion of an additional clause. The Association requested that subclause (d) would provide that subsection 21(b) not apply if the prospective client acting on behalf of another was an accountable institution.

Mr Smit from the Asset Forfeiture Unit, also a member of the drafting team, said that this matter should also be left to the regulatory process. He said that a matter like this would depend largely on what happened in actuality and would be difficult to deal with theoretically.

The Chairperson commented that he felt that the Association's submission was attempting to amend the definition of "client", and recommended that the matter be dealt with carefully.

Mr K M Andrew (DP, Finance) asked, in relation to clause 21 (b), how it could be ascertained that a person was acting on their own behalf or on that of another. Mr Phillips said that the drafters identified this problem but tried not to impose too onerous a burden in constructing the clause.

Adv M T Masutha (ANC, Justice) said that the matter should be viewed in light of the law of agency. When a principal wants to do business through an agent, then in terms of the proposed subclause (d), the identity of the principal would not need to be disclosed. Mr Phillips agreed with Adv M T Masutha (ANC, Justice) saying that he thought this was the intention of the Association of Unit Trust's submission.

Ms Hogan, co-chairperson, then rendered the amendment rejected saying that this matter would be dealt with under exemptions.

The Committee then considered the Price-Waterhouse Coopers submission. This submission requested that the phrase "and gather prescribed background information on the customer" be inserted at the end of subclause (c).

The Committee agreed that the term 'background information ' was far too wide and did not contribute in any meaningful way. This submission was also rejected.

The South African Institute of Chartered Accountants suggested that clause 21(a) be expanded to provide for matters relating to corporate clients.

Mr Phillips said that this situation would be covered by clause 22(1)(b) and (c), while clause 21 would only apply to individuals.

Adv de Lange was not satisfied with this construction. He said that clause 21 spoke of 'client' and a client could be natural or juristic.

Mr Phillips said that this was true, but whether or not the client was a natural or juristic person, a juristic person would have to be presented by someone else. As a company, it cannot physically do business for itself, and some person would have to actually do the business on its behalf. This person would have to disclose the identity of the principal or juristic person, if not in terms of subclause (1)(b) then in terms of (1)(d).

Adv de Lange stated that he understood Mr Phillips' reasoning but submitted that it was clumsy and the manner in which this matter was provided for differed from the way in which it was dealt with in other acts. Adv de Lange said that he was not sure whether people would understand this section.

Adv de Lange said that he felt Professor L de Koker's submission was a very good one. The professor called for the clause to include procedures for the verification of the legal existence and structure of a client. Adv de Lange said that this would be a good provision as it would tie up a lot of 'loopholes'.

Mr Smit submitted that the section be substituted with a section he had drafted. Mr Smit drafted his own section to resemble the British equivalent. Mr Smit's section allowed for the conclusion of some basic agreement or contract with a prescribed period of time within which the information had to be furnished. Mr Smit said that such a position was necessary to protect business interests
Mr Smit mentioned that difficulties could occur in the area of e-commerce where people do business anonymously.

Clause 22- Identification when transactions are concluded in the course of business relationships
Mr Phillips told the Committee that the Department of Justice was thinking of collapsing this clause into clause 21. Adv de Lange agreed that this was possible and saw no reason for these two clauses to be separate.

Clause 23 - Record to be kept of business relationships and transactions
Adv de Lange expressed concern that the Bill made no provision for keeping a record of the recipient of the money in any given circumstances. He said that after various conversations concerning the British position it was apparent that keeping record of the recipient was very important.

Mr Smit told the Committee that clause 23(1)(e) would broadly provide for the keeping of such records. Mr Smit however added that to provide for the keeping of such records expressly and in a detailed manner would not be practical nor wise as the type of transaction conducted from one institution to another would differ widely. Mr Smit said this matter would best be dealt with in the regulations.

Clause 24 - Period for which records must be kept
The Committee said that the five year period prescribed in the Act was in accordance with the FATF submissions. The Committee said that the keeping of records for three years, as suggested by the South African Insurance Association, was too short. This submission was rejected.

Clause 25 - Centralisation of records
Mr Smit submitted that this clause be deleted. He said that he was not adverse to the principal but felt that the matter should be dealt with in the regulations. He stated further that there were some accountable institutions who felt the same way. He said these bodies would prefer for all institutions to keep their own records.

Adv de Lange reminded the Committee that it was a number of accountable institutions which themselves requested this provision. Adv de Lange said this request was made to cut down on administration cost, to maximize storage space, and to prevent multiplicity of records.

The Association of Unit Trusts also made a submission. Their submission called for the amendment of the clause to allow for the outsourcing of the keeping of records. Mr Phillips said that the Department of Justice would have no objection against the outsourcing of the keeping of records. He said this would be perfectly acceptable provided the obligation to actually keep records remained with the accountable institutions.

Mr K M Andrew (DP, Finance) said that if outsourcing was allowed and records were centralized, there should be an obligation to report suspicious transactions which rests with the record holder.

Clause 26 - Admissibility of records
The submissions made in relation to this clause consisted primarily of amendments relating to word usage. However, the Johannesburg Stock Exchange submitted that the clause should provide that the records be admissible as evidence subject to certification "by an officer of the accountable institution".

Mr L T Landers (ANC, Justice) said that this should not be allowed because the accountable institution might be involved in illegal activities and would therefore alter the records and then certify these as true copies of the original records.

Clause 27 - Centre's access to records
Under this clause, the JSE submitted that subclause (1)(c) be added which would provide that "An authorized representative of the Centre - may not reveal any information relating to a client or trade which is not directly relevant to the matter under investigation."

Mr Smit said that accountable institutions should not be left with the ability to decide which information can and cannot be accessed.

Adv de Lange said that he was concerned with the construction of subclause (3). He said that in its present form the subclause provided that every time the Centre wanted to investigate a small transaction, it would have to gain audience with a judge in chambers and present evidence. He said that this was too onerous and was not reconcilable with subclause (1).

Mr Phillips said that this subclause provided for information outside the centre. He said that the Centre or any of its employees could access any records held by the centre, however if it wanted information not held by the centre it would have to go through the same process as what is ordinarily required by law.

Mr Phillips said that in terms of clause 33, background information can be requested in relation to any report. This background information would include matters such as, why the accountable institution reported the transaction, why the transaction was felt to be suspicious, and all other information that the accountable institution is willing and legally able to give. Once the Centre decides it wants other information that the relevant institution is either unable or unwilling to give, the Centre will then have to obtain a warrant.

Mr Phillips told the Committee that clause 33 dealt with a report and not a record. Background information in relation to the report could be requested but not demanded.
Mr Phillips says that other jurisdictions have found accountable institutions to be quite co-operative, and where they are not, they quickly learn to be. Mr Phillips said that most banks furnish any information requested quite readily but stop when their legal obligations necessitate this.

The National Directorate of Public Prosecutions made a submission that the access to records of accountable institutions should not be limited to combating money laundering. Adv de Lange said that he did not see how the provision could be made wider. Mr Phillips agreed and said that to do this would detract from the Centre's capacity to perform its specific function, namely money laundering. Giving the Center access to other information might entice it to address matters not within its mandate.

The meeting went into recess.

The meeting was reopened and discussions continued.

Clause 30 - Electronic transfers of money to or from the Republic
Adv de Lange (ANC) asked which institutions would be ''not a bank''. He asked if it would be all those listed in Schedule 1.

Mr Phillips explained that if bank transfers were included then that would unnecessarily flood the system with information.

Adv Smit said that when a transfer is made on the instruction of another person that is not a bank, then that transfer must be reported. The exclusion focuses on who gives the instruction for the transfer to take place.

If the bank is doing the transfer then it is not automatically excluded simply because the bank is making the transfer. If a person instructs the bank to make the transfer then it must be reported.

The Committee looked at proposals made during the submissions. The Banking Council wants the words ''that is not a bank'' removed. Adv de Lange asked why they would want this.

Adv Smit replied that it will be easier for banks to set up systems which will give over all the information. It will be harder for them to set systems to sort out different types of information.

Adv de Lange asked in which circumstances one bank would ask another bank to do something that the first bank could have done itself.

Mr Andrew (DP) said that there were different types of banks, for example there were commercial banks, investment banks and so forth. He suggested that they describe what bank means when it is used in a clause.

Adv de Lange asked for a comment on conceding to the Banking Council's request.

Adv Smit replied that they do not want to overload the FIC.

Adv de Lange said that they must put both options there for the Committee to look at. He added that, as a consumer he did not want to create further cost implications (in terms of the banks passing on costs to clients).

PriceWaterhouse Coopers suggests that clause 30 be deleted.

The Committee said rejected this suggestion.

The Johannesburg Stock Exchange suggested the addition of a subclause which would have the effect that the subsection only applied to the first accountable institution that receives the cash.

Adv de Lange told the drafters to draft options for the Committee to look at (including an option to delete the whole clause).
He also asked what the Australian position on this clause is.

Clause 31 - Reporting by supervisory bodies
The Compliance Institute suggested that the clause should require a supervisory body to notify an accountable institution that a report on that institution was made to the Centre, provided that this does not constitute ''tipping off''.

Adv de Lange said that one cannot put this in the law. It seems quite odd therefore it is not a workable solution. Mr Phillips agreed with the Chairperson.

The Life Offices Association wants to delete the whole clause.

Adv de Lange said that he has some sympathy with them in the sense that the clause probably will not be used. He said however that it does not hurt to keep the clause in.

Clause 32 - Conveyance of cash to or from the Republic
Mr Phillips pointed out that they were trying to address the problem of people smuggling money in and out of the country. People could try to smuggle money out of the country and then smuggle it back into the country through electronic measures.

Adv de Lange said that the issue of forfeiture will have to be examined by the drafters. He told them to develop a proposal to bring back to the Committee.

Mr Andrew asked if ''cash'' as it is used in this clause included travellers cheques.

Mr Phillips replied that they have been discussing this amongst themselves. One option they are considering is that agencies must report when they issue travellers cheques. They may be required to do this as an accountable institution or separately.

Adv de Lange said that he preferred the second option.

Clause 33 - Reporting procedures
Adv de Lange said that this relates closely to clause 27. He said that he agreed with Mr Phillips contention (made in a previous meeting) that one can never completely take away the problem of money laundering. However they must try to diminish this as much as possible.

Mr Andrew asked about smaller organisations (such as estate agents) without groups of experts behind them to quickly gather and present the information.

Mr Phillips said that if it is necessary then this can be supplemented by regulation.

PriceWaterhouseCoopers suggested that a new clause be inserted after clause 33. The suggested new clause is the "Power to request reports by an accountable institution and accountant". Adv de Lange asked why the accountant found this necessary. Mr Phillips replied that he did not understand it but the motivation was that the Centre needs additional information from accountable institutions.

Clause 34 - Continuation of suspicious transactions
The Committee looked at the proposals. The three proposals made the same point. Adv de Lange asked what exactly the organisations were saying.

Mr Andrew explained that the way the clause is drafted, if they have a suspicion then they cannot continue the transaction until they have made a report. That is their concern.

Mr Phillips said that Mr Andrew was absolutely right. The intent of the drafting is that reporting on the transaction does not mean that one has to stop the transaction. The transaction can continue.

Adv de Lange said that they should make it clear that the accountable institution can continue with the transaction.

Mr Andrew pointed out that it may not be desirable if someone feels that they can continue with the illegal transaction as long as they report it. The Bill should not allow an excuse for them to do this.

Adv Smit said that the fact that the person can continue with the transaction does not provide a defence to money laundering.

Adv de Lange asked if this meant that the way it is drafted here it cannot affect POCA.

Adv Smit suggested that they can amend the POCA Act to refer to this, to reflect the standing in this Act.

Adv de Lange commented that the heading is very confusing. Perhaps they should try to change it (even though headings are not part of the law).

Clause 35 - Intervention by Centre
Mr Phillips said that they disagree completely with the Compliance Institute's suggestion. As the Bill stands it implies that any losses incurred will be borne by the client.

Mr Phillips said that they are sympathetic to the problems of the Bond Exchange.

Adv de Lange asked if they should create an exception or deal with it in the exemptions.

Mr Phillips said that the real purpose of clause 35 is to give breathing space so that the Centre can assess the facts in order to decide if there must be a freezing order or not.

Mr Andrew pointed out that an important dimension of the stock exchange market is that one does not know who they are trading with.

Adv de Lange said that as an exclusion there would be no breathing space but then they have not lost the freezing order.

Clause 36 - Monitoring orders
Mr Phillips said that once someone has formed a suspicion but they lack sufficient evidence they can use this order to watch all activity over a period. The Committee agreed to amend the clause to read ''judge or magistrate''.

Clause 37 - Reporting duty not affected by confidentiality rules
Mr Phillips noted that the attorney client privilege is an issue that he and Adv Smit were still looking at. They will make a proposal to the Committee.

Clause 38 - Protection of persons making reports
The JSE wants to add a subclause 5 to clause 38. Adv de Lange said that the point this subclause made is already covered by the Criminal Procedure Act.

The Committee then looked at subclause 3 and subclause 4 of clause 38.
Mr Phillips said that subclause 3 and subclause 4 of clause 38 are provisions to protect the anonymity of reporters.

Adv de Lange asked if these subclauses will not lead to serious ramifications if the prosecution requires the reporters testimony as evidence. The case will not be proved in court if the person cannot give evidence.

Mr Phillips said that they tried to balance the need for the desirability of bringing evidence before court and protecting reporters so that they can feel relaxed enough to make the report.

Adv de Lange asked how one could legally obligate someone to report the transaction and then deprive oneself of the main witness when one goes to court.

Adv Smit said that it was about the physical endangerment of people making the report and protecting them from that. The person must be a competent witness but not compellable to make a report.

Adv de Lange said that he was not comfortable with these clauses. Why spend so much money on the Centre and then do this?

Mr Andrew said that it could involve the whole accountable institution. All who contributed to the report cannot be compelled to give evidence. It is a widespread limitation to prosecute.

Adv de Lange said that the clause was also saying that one can never prove the point unless ''that person'' gives the evidence. This is a licence to get the person killed.

Mr Phillips said that the Centre collects information. They want it to generate the information and not necessarily evidence. The information is passed on to investigators who must follow the leads and collect evidence. Other ways of gathering evidence is okay as long as the identity of the reporter is excluded. The drafters made this call but it is arguable.

Adv de Lange asked why they need clause 38(1). He also asked why they needed subclause 3 and 4 if they have subclause 2.

Mr Phillips said that subclause 3 and 4 flow from subclause 2.

Adv de Lange said that it does not follow logically. In the Criminal Procedure Act there is a reference to ''competent and compellable'' but it is not further spelt out the way subclause 38(3) and 38(4) are.

Adv Smit said that the reporter must be treated by the police as someone who gave an anonymous tip-off. Following from this tip-off the investigation can follow. Mr Casella (an expert on the American counterpart to this Bill) was consulted and he said that in practice in the USA they treated the report as a tip-off. They do not rely on the reporter to give evidence.

Adv de Lange remarked that the USA may do this but they do not have a clause like the FICs subclauses 38(3) and 38(4). He asked Adv Smit to check on which other countries do this.

Mr Phillips said that they get the tip-off and use the FIC to develop the suspicion. Investigators collect evidence. Just because one report is not admissable does not mean that the investigation is shut.

Adv de Lange said that it does not shut the investigation but it shuts the evidence in court. It is important for the reporter to identify the person who made the transaction because in a syndicate this person will be acting on behalf of someone. This ''smaller guy'' is the link to the ''big guy''. The drafters are killing the link to the big guy.

He said that his gut feeling about this clause is not a good one. He asked the drafters to see if similar clauses exist elsewhere and if they do to check if they work.

Adv de Lange thanked the panel members and the meeting was adjourned.