The president and the parliamentary standing committee on finance appear to be headed for a stalemate over the provisions of the Financial Intelligence Centre (FIC) Amendment Bill, with the inevitable delay presenting dire consequences for South Africa’s financial services sector.
After sitting on the amendment Bill for six months, President Jacob Zuma sent it back to Parliament, citing concerns about its constitutionality.
Earlier this week the chairperson of the standing committee on finance, Yunus Carrim, said the disputed issues could go all the way to the Constitutional Court. However, on Wednesday evening Carrim told the Mail & Guardian that legal advisers have indicated it would not be possible for a parliamentary committee to initiate such a case.
Of particular concern to Zuma is the Bill’s provision for searches without a warrant in certain instances, which the committee, as well as parliamentary and state legal advisers, views as being able to pass constitutional muster.
The committee will also hold public hearings in the new year on the constitutionality of warrantless searches, tentatively set for January 24. Once the committee has concluded its deliberations, it must report to the National Assembly.
But the inevitable delay in signing the Bill into law will not bode well for South Africa’s financial services sector.
As a member of the Financial Action Task Force — an intergovernmental body developing and promoting policies to combat money laundering and terror financing — South Africa’s financial system was subjected to a review (termed a mutual evaluation) in February 2009.
The task force identified a number of issues that weren’t in line with international best practice and required change, as gauged against a set of measures known as the 40 recommendations.
Ismail Momoniat, the treasury’s deputy director general for tax and financial sector policy, said the weaknesses identified by the task force are addressed in the amendment Bill.
“We are asked every year since 2009: ‘When will you comply?’ ” Momoniat said.
In the task force meeting in June, South Africa was given an extension until February for reporting back, he said, noting that, even once the president signs the Bill into law, drawing up the regulations is expected to take a few months.
“We won’t meet the February deadline but we will go back to [the task force] and motivate for more time,” said Momoniat.
Anthony Smith, partner for risk advisory and financial crime services at Deloitte, said the deadlines are really aimed at having the changes in place at the time of the next review in 2019, so that the task force can have something new to assess.
“As far as the legislative changes to the FIC Act go, we are cutting it fine,” Smith said.
“In terms of the mutual evaluation, they don’t only look at the legislation but also at the operating effectiveness of it. Given that it will take two years at least to bed this down, there will be a very limited time to [accumulate] evidence that it is operating effectively, which may lead to us not getting a clean pass.”
In a presentation by the treasury in Parliament this week, it was made clear that not signing the Bill into law timeously could cause other countries to be less likely to provide information that local authorities need to prosecute South African criminals who take funds out of the country. It may also make it very hard, if not impossible, to deal with illicit cross-border flows.
If the delay in signing the Bill into law is protracted, the worst-case scenario is that South Africa is deemed noncomplaint, Momoniat said.
“If you look at the sanctions against Iran, it means you can’t take funds out of your country.”
There are currently three countries blacklisted by the task force — (Burma), Iran and North Korea. “Not great company,” Smith remarked.
The Financial Action Task Force could terminate South Africa’s membership, the treasury said in its parliamentary presentation, noting that “these steps can have major and long-term implications on South Africa’s trade, investment and economic growth”.
In a less dire scenario, if the country is placed on a watchlist, it would mean fewer banks would come forward to do business with South African institutions, “and for those who do come forward, the pricing structure will be more expensive because of a bigger risk”, Momoniat said.
South African banks and other institutions would suffer in such a scenario, Smith added.
Kokkie Kooyman, portfolio manager at Denker Capital, said in essence the danger for the banks is United States sanctions. “The Fed [US Federal Reserve] and IMF [International Monetary Fund] are serious about combating money laundering — and won’t hesitate to act and block our banks from international transactions.”
Smith said compliant institutions elsewhere would think twice about doing business with South African institutions when confidence in the country’s money-laundering controls was in question.
De-risking — or how financial institutions terminate or restrict business relationships with categories — is a hot topic globally.
It comes in the wake of some hefty fines levied against major banks for lapses in oversight. HSBC, for one, paid a record fine of $1.9‑billion when staff at its global subsidiaries laundered billions of dollars for drug cartels, terror groups and pariah states. Now it is being sued by families of US citizens murdered by druglords in Mexico.
South African banks, Smith said, need assistance from international institutions. Not all local banks have a presence in the US, and so are reliant on a correspondent bank over there to clear dollars for them. But if their control over their banking operations is in question, that tie could be severed in the name of de-risking.
“Everyone is getting skittish about de-risking and cutting off relations,” Smith noted.
He said it could also potentially affect the banks’ cost of funding on the global market if a perceived higher risk is priced into the debt they issue.
Membership of the Financial Action Task Force is voluntary and nations can leave if they wish.
But, Smith said, applicants go through a rigorous process before being admitted in the first place. Additionally, “the [task force] relationship is held with treasury, and I think it would have very little appetite to pull out”.
Momoniat said that, regardless of what any international body says, it is in South Africa’s interest to strengthen its anti-money-laundering measures to combat corruption and illicit flows.