WELCOME Amendment of the Schedules to the Financial Intelligence - - PowerPoint PPT Presentation

WELCOME

Amendment of the Schedules to the Financial Intelligence Centre Act: Consultation with the Trust Service Providers’ Industry

22 March 2017

Discussion Points

• Background
• Amendment of the Schedules to the FIC Act
• 7 Pillars of Compliance
• Case studies
• Vulnerabilities of the trust and company service providers’ industry in the Schedules to the FIC Act
• Benefits to regulating the the trust and company service providers’ industry for ML/TF purposes
• International standards pertaining to trust and company service providers
• Questions and discussion
• Way forward

Background

• The Financial Intelligence Centre Act (FIC Act) was passed in 2001 and FIC was started in

2003

• The FIC implements and administers the Act
• FIC is South Africa’s national centre for the production of financial intelligence, responsible for

identifying the proceeds of crime, combating money laundering (ML) and the financing of terrorism (TF)

• The Act is a key component of South Africa’s anti-money laundering and combating the

financing of terrorism (AML/CFT) regime

• The Act identifies certain business sectors, called accountable institutions, as vulnerable to

ML and TF activities

Background – continued

• Central to implementing the AML/CFT regime, is the FIC Act’s intent of making the financial

system transparent – requiring financial and other institutions to apply customer due diligence measures – the knowledge that an institution has about its customer

• Institutions achieve customer due diligence measures by adequately capturing customer

information in their records and sharing information for the further investigation of ML and TF, where necessary

• The FIC uses the information submitted by business, including accountable and reporting

institutions, as well as additional information to develop its financial intelligence reports

Background – continued

• The FIC shares these reports with law enforcement authorities, the South African Revenue

Service and other competent authorities. These partners of the FIC are able to use these reports for their follow up action and investigations

• These competent authorities rely on the FIC as the only source of financial intelligence in the

country, which is critical in assisting them with mitigating, addressing and disrupting criminal activities

• The FIC also works closely with supervisory bodies, such as the South African Reserve

Bank, the Financial Services Board and the Estate Agency Affairs Board – together they help identified sectors adhere to the necessary FIC Act compliance measures

• Where no supervisory body exists for any sector, the FIC is the default sector supervisor

Amendment of the Schedules to the FIC Act

• The FIC commenced a process of reviewing the current ML/TF legislative framework with the

view to improving South Africa’s capability to combat ML and TF

• The FIC Amendment Bill is one initiative in the review process
• The amendments to Schedules 1, 2 and 3 to the FIC Act is another initiative in the review

process

• Amendments to the Schedules will improve the FIC’s ability to obtain information concerning

the identities and financial activities of customers from a wider range of financial and other institutions

• Widening the scope of the FIC Act will also bring South Africa’s legal framework against ML

and TF in line with international standards set by the Financial Action Task Force (FATF), of which South Africa is a member

Amendment of the Schedules to the FIC Act – continued

• Schedule 1 to the FIC Act contains a list of “accountable institutions” that are required to

fulfill compliance obligations

• Schedule 2 lists “supervisory bodies” that are responsible for ensuring accountable

institutions comply with the FIC Act provisions

• Schedule 3 lists “reporting institutions” that have to register with the FIC, submit reports on

cash transactions of R25 000,00 and above and suspicious transactions

• All business is obliged to report suspicious and unusual transactions to the FIC

7 Pillars of Compliance – for Schedule 1 institutions

 Registration – section 43B of the FIC Act requires every accountable and reporting institution to register with the FIC  Identification and verification of clients – section 21 of the FIC Act requires an accountable institution to identify and verify the identity of the client  Keeping record of clients – section 22 of the FIC Act requires records of business relationships and transactions to be kept  Appointment of a compliance officer – section 43  Setting of internal rules related to compliance – section 42  Training staff on company compliance rules – section 43  Submitting reports to the FIC – among the statutory reports required of institutions are: suspicious transaction reports (section 29), cash threshold reports (section 28) – on transactions of R25 000.00 and above and terrorist property reports (section 28A) (only applicable to accountable institutions)

Case study 1 – Government the victim of fraud

FACTS OF THE MATTER

FIC assistance was required where a trust was used as a vehicle for the laundering of the proceeds of crime where a government department was the victim of fraud

FIC’s ROLE

The FIC received a request from the South African Police Service to assist in obtaining information associated with an inter vivos trust (also known as a living trust) which was created by attorneys for the purpose of enabling criminals to distance themselves from the crime and ultimate proceeds of the crime

• Confirmation of the registration of a

trust (with the registration number)

• Names and identifiers of the

founders of the trust

• Names and identifiers of the

beneficiaries (as well as previous beneficiaries) of the trust

• Names and identifiers of the

trustees (as well previous trustees)

• f the trust
• Copies of trust instrument (trust

deed)

FOR INVESTIGATION PURPOSES THE FOLLOWING WAS REQUIRED

Case study 2 - VAT Fraud -Trust used as a vehicle for the laundering of the proceeds of crime

The D family from the Free State runs a chicken farm The family committed a VAT scam defrauding SARS of more than R50 million

The son is a chartered accountant. He used two trusts (inter vivos) to which his parents were trustees and two companies to conduct the scam. The proceeds from the scam were routed through the various accounts of the trusts and the companies.

Refer to

• http://www.dumelangnews.co.za/articles/family-scams-sars-r59m and
• http://www.news24.com/SouthAfrica/News/couple-busted-in-massive-bloemfontein-vat-scam-20161116

Case study 3 - Theft of student fees at a university and laundering of proceeds of crime

FACTS OF THE MATTER

• Based on information analysed in STRs

the FIC identified that an employee of a university was unlawfully diverting R12 million from student loans into bank accounts under his control.

• FIC’s analysis reconstructed how the

individual laundered the proceeds of his crime and identified that the individual made payments into various bank accounts, including payments to bank accounts of a family trust, and purchased luxury motor vehicles.

OUTCOME OF THE MATTER

• This information was shared with law

enforcement agencies which then took action against the accused.

• The FIC froze the relevant bank accounts,

securing more than R4.6 million.

• The financial intelligence enabled the Asset

Forfeiture Unit to obtain preservation orders for funds in the accused’s (including family members) bank accounts, including the family trust account and against movable and immovable property purchased by the accused.

Vulnerabilities of the trust and company service providers’ industry

• Trust and company service providers’ industry is exposed to potential exploitation by those

looking for ways to launder criminal proceeds or raise funds for terrorist activity

• This industry generally includes all those persons and entities that, on a professional basis,

participate in the creation, administration and management of trusts and corporate vehicles (such as companies)

• Trust and company service providers and other similar professions (such as accountants) are

acknowledged as gatekeepers to the financial system

• “Gatekeepers” can be described as those who provide gateways to the financial system

through which potential users of the system, including launderers, can pass in order to do business with financial institutions

Vulnerabilities of the trust and company service providers’ industry - continued

• In their report: FATF Money Laundering Typologies (2003 – 2004) concluded that:

“Increasingly, money launderers seek out the advice or services of specialised professionals to help facilitate their financial operations…”

• The FATF typologies report “Laundering the Proceeds of Corruption” (July 2011), cites every

case examined as having used corporate vehicles, trusts, or non-profit entities of some type. Generally, corporate vehicles and trusts have long been identified by FATF as posing a risk for money laundering

Benefits to regulating the trust and company service providers’ industry

• Spreading the regulatory burden associated with combating ML/TF, closing regulatory and

intelligence gaps, enhancing national security and enhancing the reputation of the South African financial system

• AML/CFT regulation of the trust and company service providers' industry would also further

enhance the industry’s awareness of ML/TF risks and tighten the sector against criminal exploitation

• Consider and better understand the identity of the client, the source of funds used by a client

for a transaction and the nature of the intended business relationship with the client

• Intelligence from the professional accountants’ industry could generate leads which may

result in section 34 FIC Act directives (freezing) orders and section 35 applications (monitoring orders)

International standards pertaining to trust and company service providers

• The FATF standards (which were revised in 2012) apply to a number of financial and other

institutions, including what is referred to as “designated non-financial businesses and professions” (DNFBPs)

• DNFBPs include lawyers, accountants, trust and company service providers, real estate

agents and dealers in precious metals and stones

• The trust and company service providers industry is required by the FATF standards to be

included in the legislative framework against money laundering and terrorist financing

International standards pertaining to trust and company service providers – continued

In terms of the FATF standard, trust and company service providers should be covered under the scope of the FIC Act when they prepare for or carry out transactions for a client concerning the following activities:

• Acting as a formation agent of legal persons
• Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a

partnership, or a similar position in relation to other legal persons

• Providing a registered office; business address or accommodation, correspondence or administrative

address for a company, a partnership or any other legal person or arrangement

• Acting as (or arranging for another person to act as) a trustee of an express trust or performing the

equivalent function for another form of legal arrangement

• Acting as (or arranging for another person to act as) a nominee shareholder for another person

Questions for discussion

• Are there any major industry bodies in this business sector that have been omitted?
• Does item 2 of Schedule 1 to the FIC Act adequately and clearly cover the above

areas (identified by the FATF)? What are the views of the sector? Item 2 of Schedule 1 to the FIC Act reads as follows: “A board of executors or a trust company or any other person that invests, keeps in safe custody, controls or administers trust property within the meaning of the Trust Property Control Act, 1988 (Act 57 of 1988).”

• What would you consider to be additional trust provider services, if any, that may be

high risk for ML/TF and whether they should be included under the scope of AML/CFT legislation?

Questions for discussion – continued

• Exemption 10 (deals with exemptions for attorneys and administrators of property). In particular,

Exemption 10(2) provides that accountable institutions in terms of item 2 of Schedule 1 to the FIC Act are exempted from complying with Parts 1 (duty to identify clients) and 2 (duty to keep record) of Chapter 3 of the FIC Act in respect of the following transactions:

• The preparation of a testamentary writing
• The administration of a deceased estate as an executor of that estate
• The administration of trust property as trustee of a trust established by virtue of a testamentary writing or court
• rder; and
• The administration of trust property as trustee of a trust established to administer funds payable from an

employees’ benefit fund for the benefit of a nominated beneficiary or dependant of a deceased member of such an employee’s benefit fund.

• What are the views on the withdrawal of Exemption 10?
• If Exemption 10 is withdrawn, what will be the impact, if any, on item 2 of Schedule 1 to the FIC Act?

Questions for discussion – continued

• Initial views on possible amendment:

“A [board of executors or a] person who carries on the business of a trust [company] service provider [or any other person that invests, keeps in safe custody, controls or administers] including by acting as a trustee by virtue of an authorisation under the Trust Property Control Act, 1988 (Act 57 of 1988), providing a registered office, business address or administrative address to a such a trustee [or client?] or investing, keeping in safe custody, controlling or administering trust property within the meaning of [the Trust Property Control Act, 1988 (Act 57 of 1988)] that Act.”

Way forward

• This meeting is the initial consultation between the FIC and the trust service providers’

industry in respect of the amendment of item 2 of Schedule 1 to the FIC Act

• Follow up meetings, where necessary
• Written input from the industry bodies of the trust service providers’ industry in respect of the

proposed amendment of item 2 of Schedule 1 to the FIC Act, once all necessary consultations have been attended to and a consultation paper is published

• Minutes of this meeting to be communicated

FIC contact

For any enquiries relating to the consultation process of the amendment of the Schedules to the FIC Act, please contact: Kamla Govender Legal & Policy Financial Intelligence Centre 012 – 641 6000 kamla.govender@fic.gov.za

THANK YOU