Fica'd to death

Fica is a four-letter word for anyone who has had financial dealings in the past three years. Consumers have had to provide certified copies of a set of documents for each account with every financial institution, the information required varying between institutions.

Where clients have not complied, their accounts have been frozen. Financial institutions have had to persuade clients—17-million accounts in the case of banks alone—to produce their documentation in person.

Where financial institutions do not comply they face fines of as much as R1-billion.
Facing such potentially huge penalties, the institutions have, in some cases, gone overboard in implementing Fica.

It has been estimated that the total costs of implementing Fica are in the region of R750-million. FNB alone has spent R35-million just communicating Fica requirements to its clients.

Financial institutions have been swamped with paperwork, a proper audit would no doubt show that many trees have been chopped down in the name of the Act.

Fica is a swear word partly because the financial services industry has been over-zealous in its demands on its customers. Systems were typically also not integrated enough to smooth the process.

South Africa has set itself a higher standard than even the United States and the United Kingdom. The South African Fica standard demands that all existing clients have to be Fica’d, whereas in the US and UK, for instance, it is only high-risk clients who had to be verified.

It is understood that South Africa chose this route because, as the only African member of the Financial Action Task Force (FATF) on money-laundering, it was keen to show it could meet a higher standard.

It also appears that local banks oversold their technological ability to manage such a sophisticated system.

The financial services industry counters that the government does not trust its own identification process and has effectively outsourced it to financial institutions, placing the full costs on their shoulders.

Change is now, however, under way, whereby low-income individuals will be exempt from Fica requirements. The entire Fica system, as administered in South Africa, is also up for review, says Fica head Murray Michell. “We applied the standards as set by G7 countries. It was only once we implemented that we started to realise the obstacles and understand the problems.”.

Most countries, including the UK and US—which are among the biggest proponents of money laundering legislation—have not required clients to be retrospectively verified.

After commissioning an independent cost-benefit analysis from PricewaterhouseCoopers, the UK’s Financial Services Authority (FSA) decided that benefits did not justify the cost. According to the FSA “we considered whether to introduce new industry-wide rules on the identification of existing customers.

“We needed to be satisfied that any new general regulatory obligation would be proportionate to the benefits and would not be detrimental to the industry’s competitiveness, nor unduly inconvenience customers.”

The US, a major driver of eliminating money laundering to cut off terrorist funding, also went for a softer approach.

Both of these developed economies chose to verify high-risk accounts.

A client with a regular income and track record with a bank would not, for example, need to be verified.

Yet South Africa chose to verify everybody in the financial system. This has been an onerous and expensive exercise.

The stick has been a R10-million fine for not complying with Fica. This could run as high as R1-billion if money laundering takes place and a bank is shown to have been grossly negligent. Fica even went as far as holding individual employees accountable.

Different institutions require different levels of Fica proof. Some will accept statements from clothing stores as proof of residence, others insist on a utility bill. But if the bill is in your partner’s name then the partner also needs to prove identity.

Getting foreign currency can be very difficult. You have to have a utility bill with you and your passport is not a substitute for your green ID book.

Prof Louis de Koker, director for the Centre for the Study of Economic Crime at the University of Johannesburg, says that, in some ways, the industry has brought some of the distress upon itself.

The costs and frustrations were in part due to a lack of systems and basic due diligence, says De Koker. For example, a customer with a cheque account and a mortgage bond would often be Fica’d twice as databases are not integrated.

He argues that financial institutions have overreacted and are not flexible—which is understandable when the fines are so onerous. But he also points out that, while Fica put the responsibility on the financial institutions, their customers were not equally encouraged to participate.

For the industry, it has been like drawing blood from a stone. However, Cassim Maheter, head of compliance and risk at FNB, says that freezing accounts as Fica deadlines arrived did have the desired effect and approximately 95% of their clients have been Fica’d.

De Koker says there have also been benefits to the financial institutions as they now have tidy databases and have a better understanding of who their clients are.

Murray Michell, director of Financial Intelligence Centre argues that South Africa and its insitutions are under tremendous pressure to meet First World standards.

But he agrees with De Koker that banks’ internal systems were also a problem and this raises a more important issue.

South Africa has no trustworthy central database of its citizens. Certainly government showed little trust in the identification process of home affairs by insisting that banks collect proof of residency.

De Koker says criminals are still able to produce professional false identities which would foil any bank employee.

This means that while Fica may be a pain in the butt for law-abiding citizens, but is a minor annoyance for seasoned criminals.

Some argue that the conviction rate of only 39 cases of fraud since Fica came into effect in 2003 proves the system is not working.

Michell says that it is too early to judge these figures and that we need five to eight years to make a proper analysis.

He admits that changes need to take place and there will be changes to legislation as compliance issues in developing countries are now better understood.

“We will push this at FATF and explain that some of the standards do not apply to developing countries.”

The real answer to the four-letter word is to develop a central identification database that is trustworthy. Michelle says there is nothing in the law that prevents sharing Fica information but it is an issue between industries of shared costs and systems.

South African Revenue Services would be an excellent starting point as it has done tremendous work in capturing the details of South Africans.

“There is now an opportunity now to become creative,” says Michell.

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