Financial Intelligence Centre Annual Report 2006/7

FINANCE PORTFOLIO COMMITTEE
5 September 2007
FINANCIAL INTELLIGENCE CENTRE ANNUAL REPORT 2006/7

Chairperson: Mr N Nene (ANC)

Documents handed out
Presentation to Portfolio Committee on Finance
Financial Intelligence Centre Annual Report 2006/2007

Audio recording of meeting

SUMMARY
The Financial Intelligence Centre presented its Annual Report for the period 2006/2007, highlighted the perceived current weaknesses and detailed the moves towards increasing and strengthening control of anti money laundering and financing of terrorism countermeasures. At present, the agencies, such as the Commercial Banks and other role players” were required to report any “suspicious transactions”. This reporting would, in the event of a charge of collusion, should any suspicious transaction evolve into money laundering or promotion of financial terrorism, act as a defence. The setting up and operation of the Financial Intelligence Centre (FIC) was outlined, and an explanation of its functions was given, together with the work that it did at the international level. It was noted that it was accountable to the Minister of Finance. It had been allocated a budget in 1993 but since its work had been purely of an establishment nature until the past year, the amount of R74 million was rolled over, and there had been no allocation for 2007. Its main cost was personnel. It had been exempted from some sections of the National Treasury regulations, but this would now be implemented. It had a clean audit for the year ended March 2007. Employment equity requirements had not yet been addressed but this would change once it began to appoint permanent staff. Challenges included this, and the need for changes to the legislation to allow for penalties for compliance failures. The compliance undertaken was summarized. It was aiming for further awareness, and outreaches had been carried out. A summary of suspicious transactions reported were given, and it was noted that 549 referrals, amounting to R1.4 billion, had been referred to investigating authorities. It was working on improving all detection systems.

Members raised questions on the audit committee, why the budget appropriations had been carried over, the reasons for staff shortages and the lack of employment and disability equity. Further questions related to the peer review mechanism’s effects, the outcome of the referrals to the investigating authorities, the monitoring of casinos, cooperation with other bodies, and what was regarded as a suspicious transaction. Members also asked for clarity on operating costs, training, and whether FIC wished to be separate from the oversight of National Treasury.

MINUTES
Financial Intelligence Centre (FIC) Annual Report 2006/7 Briefing
The Chairperson noted that the Annual Report had been circulated. He asked that there should be a warning of any sensitive, confidential, or classified information.

Mr Murray Michell, Director, Financial Intelligence Centre, advised that there were small discrepancies between the Report and the slide presentation, which had come to light during the final review the preceding night, and he would indicate these during the presentation. Any further details not in that presentation could be raised in the questions.

Mr Michell stated that the Financial Intelligence Centre Act No 38 was passed in 2001 but only promulgated in 2003, with FIC becoming operational from 2 February 2003. Financial intelligence was not only a new concept but his office was a new office. Therefore FIC was still reviewing its strategic plan for the forthcoming three years but intended, within 5 years, to be in a position to be able to say what it had achieved, and was still achieving. Much of its work lay in the IT field, which was a dynamic area of operations where the challenge not only lay in keeping abreast of developments but utilising IT to the utmost. Overseas developments in countering money laundering and financial terrorism were substantial and dynamic, constantly advancing the frontiers of knowledge and operation. FIC was required to keep up with these developments.

Mr Michell outlined the function of FIC. Since the legislation had only been enacted from February 2003 the first task, without any guidelines, had been to place the basic blocks in position, so that FIC could operate. As a result it had only been in the last two years that its footprint had been fully and effectively put in place. FIC was working to an eight-year horizon and the key areas were reflected as ensuring that it was a sustainable and capable institution; that information from FIC (being the proceeds of crime, money laundering and transactional forces) was not only recognised but was relevant and of a high quality, so that it could be used by the law enforcement agencies; and that the stakeholders had an increased understanding of FIC, its mandate and responsibilities. Furthermore FIC wished to build increased recognition of money laundering and combating of financing of terrorism (ML/CFT) vulnerabilities and the threats; and to have a general recognition of the need for ongoing prevention. Vulnerable institutions which could be exploited by criminal or terror networks must develop a culture of compliance and the combating of ML/FT should be able to rely on a robust, relevant and adequate legal framework. The task of FIC was to collate, inspect and analyse information as FIC was mandated as an anti money laundering body.

FIC was a juristic entity, located outside the Public Service, but within the public administration. It fell under Section 195 of the Constitution, was accountable directly to the Minister of Finance, funded from the National Budget and physically located within the National Treasury, Pretoria. It was to administer the Financial Intelligence Centre Act (FICA), analyse information obtained from reports from “accountable institutions,” to refer any relevant information to the Law Enforcement Agencies, to co-ordinate SA’s policy on AML/CFT, in close coordination with Treasury and public and private sector stakeholders, and to liaise internationally. It also covered monitoring and inspection for para-statals and the Post Bank, the exchange of information with similar bodies in other countries, and other financial intelligence units. It participated in Financial Action Task Force (FATF) and other non-SA bodies. Parliament had passed legislation whereby FIC had been allocated funds. However, in the first three years it had been engaged in the process of establishment, with seconded staff, and so the National Treasury had absolved FIC from having to utilise these funds. R74 million had been rolled over. The consolidated account reflected no Parliamentary allocation for 2007 as the previous monies were not spent but had been invested and gained interest. They would be spent in the current year. The main cost drivers were personnel costs, the recruiting and retention of skilled professionals, professional fees where it would be more cost effective to use contractors, as the skills would not be ongoing. FIC had also been exempted from certain sections of the National Treasury regulations, which expired on 31 March 2006. FIC had in the financial year 2006/07 begun to implement the regulations, including an Audit Committee. A clean Audit had been received for the year ending 31 March 2007, and congratulations were expressed in public to the CFO, Ms A Puoane. All staff had to support the three features of the FIC. As a relatively new institution FIC had not yet had the need or time to comply with Employment Equity requirements but this was being addressed and he expected compliance within a short time, and once all contracts had run. FIC had only 59 employees and he conceded that there was not yet equity, but he tabled a slide showing what had been achieved and what was planned. Some IT requirements were currently being addressed by outsourcing, but FIC had a campaign to recruit, and/or train IT professionals. Certain staff members had been seconded from other Government departments.

FIC’s key activities required amending legislation, but FICA currently placed responsibility for supervision over compliance with various supervisory bodies, yet did not provide for any penalties for compliance failure. Submissions were made already to National Treasury for the necessary amendments. It was hoped that amendments could be implemented by 1 April 2008, with the establishment of an Inspectorate for the non supervised areas, where compliance and procedures still needed to be set. South Africa would shortly undergo an evaluation of its own AML/CFT system, which would concentrate on and measure the adequacy of South Africa’s laws on money laundering and terror financing, as well as implementation of those laws by SA authorities. The assessment would be done by a combination of experts from FATF and Eastern and South African Anti Money Laundering Group (ESAAMLG) member countries and would use FATF’s recommendations as the benchmark. The aim of this was to encourage a global view and approach. The presentation tabled the ways in which FIC had started to prepared.

Mr Michell explained that ESAAMLG was currently based in Dar Es Salaam but the Secretariat suffered from serious capacity shortages which affected all aspects of its work. A meeting was held two weeks ago to discuss the issues and South Africa might be required to provide additional capacity to the Secretariat. The work in the region required a holistic approach. Technical support was being provided by FIC to other member states.

In the past year FIC monitored compliance implementation through regular engagement with supervisory bodies and designated accountable institutions, co-operated with the FSB directive on exemption 4 under FICA and the know your own client (KYC) verification process by the banks. It had undertaken jointly (with the various accountable institutions) audits of 29 casinos, 18 authorised dealers in Foreign Exchange, 12 Estate Agencies and on site visits to Post bank and Ithala. It facilitated draft guidance notes for suspicious transaction and terror financing reporting, facilitated a circular on cell phone banking, enhanced awareness of FICA through the Website, responding to public queries, and media awareness on crime fighting, identifying customers, suspicious reporting, and obligations of estate agencies. Outreaches on compliance with FICA were conducted with estate agents, national imbizos, auctioneers, bookmakers and totalisators and regulators. FIC was also undertaking trend analyses. As a consequence of supervisory aspects 21 466 suspicious transaction reports had been received, of which 88% had emanated from financial service providers and 12% from other sources. 549 referrals, amounting to R1.4 billion, had been referred to the investigating authorities. These reports were studied, investigated, and retained in the system.

Mr Michell noted that FIC was working towards the establishment of a monitoring system to cover the situation where money intended for laundering or financing of terrorism could be detected in the system even if one regulator failed to report. It was also working towards a system in which a non-reporting institution could be charged with aiding and abetting money laundering or financing of terrorism activities. Enforcement over those not complying was as important as ensuring compliance.

IT was vital to FIC, and it was attempting to avoid the mistakes made by other coutries which had impacted severely on the costs and reputation. There must be appropriate IT staff and skills development, which was a specialised skill requiring issue specific and high quality training and integrity.

Future challenges therefore were summarized as the legislation amendments, especially to allow for implementation of penalties, and creation of an effective legal system skillful enough to oppose criminal syndicates with extensive legal assistance or skills at their call.

Discussion
A member said that he was seeking guidance in what he should know about FIC and FICA

Mr S Asiya (ANC) said Members of Parliament had a both a right and a duty to investigate all matters and he was concerned by the reference to confidential aspects or matters at the beginning of the session. He wondered if the session should be closed and the media excluded.

The Chairperson replied that it was not only the physical presence of the media but the aural and camera recording that could pose a problem.

Mr Asiya replied that he wished to make the point, and be on record.

Mr M Johnson (ANC) sought clarity on who were members of the audit committee, how it operated, and the connection between the audit Committee and Mr Michell.

Mr Michell said the Audit Committee was newly appointed and that for the first year it had reported to him but this would be changed to bring it in line with regulations.

Mr Johnson asked about the management of FIC and why the budget appropriations had been carried over and nothing had been awarded by the National Treasury this year, yet there was still a surplus.

Ms Alice Puoane, CFO, FIC, stated that when in 2003 FIC had been established it was foreseen that it would start running from day one. However, the IT question had been an enormous problem and so, with National Treasury concurrence, the money had not been expended but invested in an interest bearing manner. Now that FIC was up and running it was not receiving any appropriations but drawing off the money plus interest accrued, which had not been spent. This money was being depleted, and it was an accounting term to describe the process. That was the reason why there was now R7 million left of the original amount. As this was not going to suffice, approaches had already been made to National Treasury for further appropriations.

Mr Michell the elaborated that with regard to IT, it was both a question of hardware and software systems and the staff to run or administer what was to have been installed.

Mr Johnson asked the reasons for the staff shortages and the lack of equitable representation.

Ms J Fubbs (ANC) requested clarification of the profiling in FICA investigations, expressed concern that the staff profile was not in accordance with the demographics and that no change was envisaged in Top management and felt that these deficiencies could be addressed by way of a business plan. She asked what FIC was doing to address the skills shortage.

Mr Marais pointed out that with regard to employment equity there seemed to be no consideration for persons with disabilities and he was of the view that this is not acceptable.

Mr Michell said that FIC was very aware of the equity issues, acknowledged the skewness, and would be doing all it could to comply. At the moment many staff were seconded, because of their skills, and when they returned to their original postings and FIC could appoint its own staff, equity considerations would be paramount.With regard to skills, he said that at inception it was not known what skills were required, and when these had been identified it was a question of training or poaching. He repeated that the skills existed, but they had to be refined for the purposes of FIC. FIC was establishing its own academy but would be working in conjunction with other established academies. The question was to acquire and retain the staff to monitor the transactions, and determine which were suspicious. The need for specialist skills was creating a shortage. FIC and the other Units were training and creating a pool of availability but at the same time these were being snatched up, both by the private sector and the public sectors.

Mr D Gibson (DA) stated that while he agreed with Mr Asiya and that there could not a system of state secrets, he agreed with the ruling by the Chair. He then addressed himself firstly to the fact that amendments of FICA were intend for later in the year while the Peer Review Mechanism (PRM) was to take place next year. He was concerned that the results of the PRM might necessitate further amendments.

Mr Gibson was concerned that nothing had been said about the outcomes of the referrals to the Investigating Authorities, of which there were 549. He wondered if the investigating authorities had dealt with the matters, and were sophisticated enough to handle them. Until there was reporting there would be speculation as to the number of withdrawals of investigations or successful prosecutions, which would make the public aware of the Act and its provisions.

Mr Gibson wanted to know what was necessary to raise public awareness, for he felt that at the moment FICA was viewed as just another unnecessary and expensive bureaucracy giving rise to irritation and expense.

Mr N Singh (IFP) questioned the R1.4 billion, and wished to know whether this was in line with expectations.

Mr Michell then addressed himself to an acceptable threshold for reporting. This was not something which, in his opinion, could be determined in isolation and applied mechanically. Regard must be given to the whole series of transactions and this was why FIC wanted to have an Amendment providing for criminal sanctions, for money laundering and failing to report it. The whole series of transactions had to be studied before the “missing link” became obvious.

Mr Singh enquired what would be the ideal number of staff, the vacancy rate, the turn over rate and the availability of the required skills.

Mr Singh asked for details of the FIC’s mission.

Mr Singh asked how many of the 549 referrals related to combating the financing of terrorism.

Ms Fubbs asked how casinos were monitored.

Mr S Marais (DA) referred to the volumes and figures provided and wished to know, in the light of the volumes of cash passing through the casinos, why only 12% of the suspicious transactions emanated from the casinos. In addition, in view of the relatively low amounts mentioned, he asked if there was a need for FICA, and if the problem was a serious one.

Mr Christopher Malan, Senior Manager Compliance and Prevention Department,.FIC, said Casinos would be looked at. He did not want them to be viewed as seedbeds of corruption but there were enormous sums of money involved and the temptation was there to launder money. He believed that casinos presently set limits of R5 000and R25 000 before there was reporting and such limits seemed to him to be very low. He understood that high rollers, as opposed to the recreational visitors to casinos, were dealing with increasingly larger sums of money and he wanted it known that mechanisms were in place to determine suspicious transactions. There were also machines into which money could be paid anonymously and an anonymous credit obtained, which could be used elsewhere.

In regard to the 12% reporting, Mr Malan said that FIC did not have a database and so relied on the operators to report any suspicious transactions, which was the reason why FIC wanted to have amending legislation to cover those who did not report. A single small transaction or a single large transaction in itself might not be suspicious but that what was required was investigation of these transactions against the pattern of transactions when any one transaction in a series might emerge as suspicious. The value chain was important.

Mr Marais asked for an indication of the level of co-operation with other bodies, or organs, of state such as Customs and Excise or SAPS, and whether there was the space and ability to co-operate.

The Chairperson asked for clarification on what was a suspicious transaction.

Adv Pieter Smit, Head of Legislation, FIC, stated that a suspicious transaction was not defined but could be regarded as unusual behaviour, or out-of-ordinary business transactions. It was difficult to set out examples but a feeling for the activities of FIC developed a sense of what was a suspicious transaction. Indicators could be an insistence by the client on anonymity, or insistence that the transaction be done a certain way, with specific geographical locations or if the person concerned with the transaction had acted in a mechanical way, without applying their minds to it.

Mr Michell added that the analysts had to apply their minds to the transaction before them and then it would soon become apparent as to what was or was not suspicious. Anything suspicious had to be reported. He added that even if only a small number of transactions were reported as being suspicious the fact that there was an overview would act as a deterrent. The weight or amount of the transaction was not the issue. As yet FIC was not part of the culture of law enforcement, but it must become a part. He noted that in the first nine months of FIC’s existence R159 million had been referred to the Asset Forfeiture Unit, and this was compared to the cost of FIC’s establishment at R79 million. The challenge was bringing it all together in one basket - what could be termed mutual evaluation of the process - and in this regard amendments to the FICA Act would be ongoing.

Adv Smit stated that any proposed Amendments were discussed in detail with National Treasury and fully dealt with before being tabled. He did not wish to cast aspersions on any other body or state department but they all had their way of doing things. The new culture to combat money laundering and combat financing of terrorism required a fresh outlook and approach. He suggested that it was all a matter of a “feel”. This came from deep analysis of the data and someone with either a police or a banking background might take some time to acquire or develop the sensitivity or the skills required. He felt that proposals should be forthcoming which could be developed into legislative amendments.

Ms Ursula M’Crystal, Senior Manager: Monitoring and Analysis, FIC confirmed that there was no definition of a suspicious transaction but a transaction might be considered suspicious when viewed against others in a pattern. This was the reason why reports emanating from 2003 were still under consideration as, and when new facts emerged. She hoped that this clarified the concerns of members. FIC was striving to equal International “best practice’

Mr B A Mnguni (ANC) queried the number of Africans in the staffing complement at high level and said that the Reserve bank showed that Africans were capable of holding positions at high level. He also asked for an explanation of the amounts of R40 million and R7 million.

A member said that he had missed the earlier explanations and wanted clarification on the thresholds of suspicious transactions and the obligation to report.

Mr Bici (UDM) wanted to know what was a good outcome of an investigation.

Ms Fubbs (ANC) wished clarification on the finances and the references to a FIC culture.

Mr Johnson (ANC) wanted an explanation on the operating costs and the reference to performance bonuses and the employee assistance programme.

A member wanted to know about the FIC strategic plan and the training to meet this.

Ms Puoane replied that FIC put forward its requests to National Treasury annually and this was approved or declined. As set out in the Report the cash that was retained is regarded as a cash equivalent and amounted to R71 million. It had been expended and R7 million remains. This was an accounting term or stratagem. The question of performance bonuses was under discussion but not finalised as yet. With regard to staff there either had to be buying in or training of IT skills. It had been decided to obviate certain aspects of the shortage by hiring at low levels, and training as required by FIC
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Ms Grace Madilonga, Human Resources Manager at FIC, said she could not say more about top management. Retention of staff was difficult, especially against being able to pay market related salaries. The employee wellness centre was operational by outsourced specialists 24 hours a day, telephonically, to ensure confidentiality. The staff, because of the knowledge they had, were under tremendous stress and pressure. The Academy would be established and operated in co-operation with other units such as SARS.

Mr Michell stated that the wellness centre went hand in hand with the culture. Arising from the work and knowledge, staff had tremendous stress and found that they could never relax because of the fear of “giving something confidential away.” This impacted upon their personal and social lives. It related to the field of ethics.

Mr N Singh (IFP), referring to income, wished to know whether FIC made a charge for its services.

Mr Smit said that when any country applied to join Financial Intelligence there was what might be called an apprentice period to ascertain whether such country is worthy of membership. SA had undergone this period and been accepted by the international body and in 2003 the FIC centre had opened for operation but still required the legislative and other frameworks to do so effectively. All these had to integrated for successful operation.

Ms Fubbs said she required clarification on the mismatching. She was aware of the budgetary process but wanted to know why the money had been rolled over, and the process was now described as an accounting term and over expenditure.

Ms Puoane said that this had been agreed with National Treasury and the holding over of the R44 million, together with interest, had been “matched’ by the lack of appropriations currently.

Mr Michell added that this sum of R44 million, together with interest, had been utilised for the current year and R7 million currently remained until year end, which was why application is being made for supplementary funding until the end of the current Financial Year.

The Chairperson asked whether the National Treasury would assist with an evaluation of current needs.

Mr Michell added that National Treasury had proved most helpful in assisting FIC and this question was regarded as a work in progress.

A member asked what precisely was meant by a suspicious transaction in the financial sense and asked whether every suspicious transaction was indeed an illegal transaction and what is the risk of interchanging between the two categories.

He proceeded to state that at present FIC’s approach to FICA required only two considerations from the agencies, such as the Commercial Banks, and similar “third party role players”. They must report to FIC any “suspicious transactions,”. Such reporting would constitute a defence to a charge of collusion, in the event that any suspicious transaction evolved into money laundering and / or promotion of financial terrorism giving rise to a prosecution. A threshold was of minimal importance. A small sum of money could be a trial of the system, and if such transaction was successfully accomplished the perpetrators could continue the pattern of their illegal activities, with further small sums of monies in illegal activities, which in the aggregate could amount to a substantial sum. It did not follow that only large sums of money are “suspicious transactions,” destined for money laundering and / or the promotion of financial terrorism. Obviously, it was more practicable from a managerial aspect to embark upon a single large transaction for money laundering and / or the promotion of financial terrorism purposes, but those engaged in such purposes were sophisticated and experienced managers with criminal intentions. FIC was intent upon enforcing the provisions of FICA but unfortunately its approach must of necessity be a reactive one. It could only set about a formal investigation of any activity once a third party role player had reported a “suspicious transaction.” Every transaction must be investigated on a micro, as well as macro level, and such investigation might require a lengthy time period, to be matched against preceding or later transactions. In many instances the investigations might not immediately reveal a suspect transaction but might do so at a later time when viewed in the light of other suspicious transactions. All that FIC could do at this stage was to combine its own experiences of money laundering and the financing of terrorism with the shared experiences and wisdom of other Financial Intelligence Centres in the world and summarise these into guidelines, which were updated and issued at appropriate intervals. FIC was improving and its importance must be measured not by the rate of successful prosecutions but merely by the fact that its existence, operating skills and capacity were known to intending or actual criminal elements active in the world. To remain at an effective level of preparedness required the use of the most updated technology, being hardware, software and skills.

Mr Asiya queried the status of financial intelligence with regard to the fields of money laundering and the combating of the financing of terrorism and went on to state that his impression was that FIC would like to divorce itself from the National Treasury and operate in an autonomous fashion such as SARS or Stats S A.

The Chairperson added that such an aspiration on the part of FIC did not seem any way extraordinary to him.

Mr Michell replied that FIC was not an autonomous body, for it fell under the oversight of National Treasury. However, its eventual “destination” may well be that of an autonomous body, such as SARS or Stats SA. He was of the opinion that it approached its work in an independent way, and in a thoroughly professional manner. If there was any confusion it arose only from the sense that National Treasury ‘carried” FIC.

Mr Johnson, referring to the Annual Reports, pointed out that FIC reported to the Minister of Finance directly and not the National Treasury.

The meeting was adjourned.