AML/CFT and Financial Inclusion in SADC - Finmark Trust

1 AML/CFT and Financial Inclusion in SADC Consideration of Anti-Money Laundering and Combating the Financing of Terrorism Legislation in Various Southern African Development Community (SADC) countries South African Country Report Finalised by: Compliance & Risk Resources March 2015 Contents SOUTH AFRICA COUNTRY REPORT .. 3 1. Changes to the Legal and Regulatory Framework Post August 2008 ..4 Table 1: South Africa: Legislation, Regulation Guidelines (Post FATF-ESAAMLG Evaluation) .. 5 2. Current AML/CFT Legislation and Regulation in Force in South Africa .. 7 Table 2: The AML/CFT Regulatory Landscape in South Africa as of June 2014 .. 7 3. South Africa s Approach to Recommendation 10: Customer Due Diligence (CDD) .. 10 When is CDD required in South Africa? .. 10 Identification measures and verification sources .. 11 Table 3: Identification and Verification Requirements for Natural Persons Set Out in the MLTFCR .. 12 Timing of verification of identity.

2 15 Risk-based approach to CDD: Simplified Measures and Exemptions .. 16 Diagram 1: Example of a Risk Matrix .. 17 Table 4: Suggested Additional Weightings .. 17 Exemption 17 .. 18 Diagram 2: Exemption 17 .. 20 Banks Act Circular 6/2006 on Cell Phone Banking .. 21 Diagram 3: The Scope of Circular 6 .. 22 Prepaid Low Value Product Dispensation .. 22 4. South Africa s Approach to Recommendation 11: Record Keeping .. 23 5. South Africa s Approach to Recommendation 13: Correspondent Banking .. 25 6. South Africa s Approach to Recommendation 14: Money Transfer Services .. 25 7. South Africa s Approach to Recommendation 15: New Technologies ..26 8. South Africa s Approach to Recommendation 16: Wire Transfers .. 27 9. South Africa s Approach to Recommendation 17: Reliance on Third Parties .. 28 10. South Africa s Approach to Recommendation 18: Internal Controls ..29 11. South Africa s Approach to Recommendation 20: Suspicious Transaction Reports (STRs) .. 30 Diagram 5: Content of Guidance Note 4 on Suspicious Transaction Reporting.

3 31 Table 6: Indicators of Suspicious and Unusual Transactions .. 32 12. South Africa s Approach to Recommendation 34: Guidance and 33 13. High Level Recommendations for South Africa .. 34 Table 7: High Level Recommendations for South Africa .. 34 SOUTH AFRICA COUNTRY REPORT Finmark Trust , an independent Trust based in Johannesburg, South Africa, was established in 2002, and is funded primarily by UKaid from the Department for International Development (DFID) through its Southern Africa office. Finmark Trust s purpose is Making Financial markets work for the poor, by promoting Financial Inclusion and regional Financial integration as well as institutional and organisational development, in order to increase access to Financial services for the un-served and under-served. While the underlying focus of this report is on the harmonisation and calibration of provisions found in Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) laws and regulations in the Southern African Development Community (SADC), it is hoped that the country reports will become living documents that will be used as a resource for SADC Member States to make appropriate amendments to their domestic laws and regulations, define the strategic direction to achieve the objectives of Annex 12 of the FIP and prompt further research and other initiatives that will support State Parties in fulfilling their harmonisation objectives.

4 Finmark Trust commissioned Compliance & Risk Resources to conduct the final review of the report and to circulate the report to country stakeholders in order to obtain support and facilitate finalisation. The initial research that informed this country report was conducted and prepared by Sarah Langhan and Associates. Raadhika Sihin assisted in reviewing and editing the initial research and country report. She was assisted by a panel of technical experts comprising of Ben Musuku (World Bank), Tom Malikebu (ESAAMLG) and Prof Louis de Koker (Deakin University, School of Law, Faculty of Business and Law) who reviewed and provided guidance on the content for the initial edited research report. The authors are grateful for the level of cooperation and assistance provided by all persons consulted during the research phase of the project. We especially acknowledge the willingness of those who made themselves available, often at very short notice, in all participating countries to answer questions, provide numerous documents and generally provide the information that was requested.

5 In this regard, we acknowledge and thank all those who assisted. 1. Changes to the Legal and Regulatory Framework Post August 2008 South Africa was evaluated by a joint Financial Action Task Force - Eastern and Southern Africa 'Anti-Money' Laundering Group (FATF-ESAAMLG) evaluation team from the 4th to the 15th of August 2008, and the final report was adopted and published 6 months later in February Since August 2008, South Africa has passed the Prevention and Combating of Trafficking in Persons Act, 20132, amended the Companies Act through the promulgation of the Companies Amendment Act, 20113 and issued Companies Regulations in 2011. Stakeholders have been invited to comment on the new Criminal Law (Sexual Offences and Related Matters) Amendment Bill, 2013 by the Portfolio Committee on Justice and Constitutional South Africa is widely considered to set the benchmark in the SADC region with respect to creating a special dispensation for Financial Inclusion in terms of the Financial intelligence Centre Act, 20015.

6 In an unprecedented move in 2010, South Africa issued a proven low risk dispensation for a prepaid instrument that meets strict criteria and conditions of usage. This was gazetted in Gazette 33309 on the 25th June 2010. The aforementioned is discussed in detail in section of this report. The Money Laundering and Terrorist Financing Control Regulations, 2002 were amended in 2010 and published in Gazette 33596 No. R. 867 and in Gazette 33781 GN1107. Since August 2008, the Financial intelligence Centre (FIC) has published two additional Guidance Notes, Guidance Note 5 (undated) and Guidance Note 3A. Guidance Note 5 provides guidance on section 28 of the Financial intelligence Centre Act, 2001 and Guidance Note 3A, guidance for accountable institutions, on client identification and verification and related matters. The Guidance Notes are published by the FIC under section 4(c) of the Financial intelligence Centre Act, 2001 to assist accountable institutions and the relevant supervisory bodies with the practical application of certain client identification and client verification requirements of the Financial intelligence Centre Act, 2001.

7 It must however be stressed that both Guidance Notes and documents included in the Public Compliance Communication series (PCC) are issued for information purposes only. In this regard, the FATF-ESAAMLG Mutual Evaluation Report states however that, the introduction of each Guidance Note states that, although they are authoritative, the Guidance Notes are intended for information purposes only. The Notes have been issued by a competent authority, in this case the Centre under the authority of the Financial intelligence Centre Act, 2001 . There is no specific range of sanctions associated with non-compliance, although the Banking Supervision Department (BSD) of the South African Reserve Bank (SARB) checks for compliance with these Notes and exercises its supervisory authority to request information. However, it is insufficient to consider any of the Guidance Notes to be legally enforceable. The Registrar of Banks has also indicated that the Circulars issued by the SARB are not considered to be legally enforceable.

8 Nevertheless, the authorities advise that, in practice, the banks do comply with these instruments and the BSD checks for compliance with these Guidance Notes and exercises its supervisory authority to request information. On the 22nd February 2010, the FIC launched the PCC series. The PCC series provides guidance under section 4(c) of the Financial intelligence Centre Act, 2001, on the Centre s interpretation of the relevant legislation. This form of guidance has the same legal status as the guidance notes 1 See Joint Financial Action Task Force (FATF) - Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 2009 Mutual Evaluation Report Anti-Money Laundering and Combating the Financing of Terrorism: South Africa. 2 Act 7 of 2013. 3 Act 3 of 2011. 4 The closing date for submissions was the 26th July 2013. 5 Act 38 of 2001. In South Africa exemptions are always Gazetted.

9 Issued by the To date, 30 PCCs have been issued covering several important issues. Those particularly relevant to the Financial Inclusion agenda are: (PCC 02) which covers the period for record keeping of matters reported to the Financial intelligence Centre (2010), (PCC 12) which deals with the outsourcing of compliance activities to third parties (2012), (PCC 14) client identification and verification requirements when a person acts on the authority of another (2012), (PCC 15) the acceptance of a Smart Card Identification Document issued by the Department of Home Affairs for client identification and verification purposes (2013) and (PCC 21) on the scope and application of Exemption 17 in terms of the Financial intelligence Centre Act No. 38 of 2001 . Table 1: South Africa: Legislation, Regulation Guidelines (Post FATF-ESAAMLG Evaluation) Year Legislation, Regulation and PCCs Enacted and Issued Post FATF-ESAAMLG Evaluation In-country Assessment August 2008 Adopted 2009 Prevention and Combating of Trafficking in Persons Act 7, 2013 Companies Amendment Act 3, 2011 Companies Regulations, 2011 Criminal Law (Sexual Offences and Related Matters) Amendment Bill, 2013 Gazette 33309 Financial intelligence Centre Act (38/2001): Exemptions in terms of the Act (Prepaid Products), 25 June 2010 Gazette 33596 No.

10 R. 867 Financial intelligence Centre Act (38/2001): Amendment of Money Laundering and Terrorist Financing Control Regulations, 2010 Guidance Note 5: On section 28 of the Financial intelligence Centre Act, Act 38 of 2001 (undated) to assist accountable institutions and reporting institutions meet their reporting obligations Guidance Note 3A: Guidance for accountable institutions on client identification and verification and related matters (2013) PCC 01 Establishment of the Public Compliance Communication Series (2010) PCC 02 Period for Record Keeping of Matters Reported to the Financial intelligence Centre (22 February 2010) PCC 03 Identification and Verification Matters Relating to Account Opening Procedures for Asylum Seekers and Refugees in Terms of the Financial intelligence Centre Act, (Act 38 of 2001) (28 May 2010) PCC 03A Reissued - Supplementary Information Applicable to PCC 03 (2012) PCC 04 Obligations Arising from the Financial intelligence Centre Act Pertaining to the Voluntary Disclosure programme (2 November 2010) PCC 05 Registration of Accountable and reporting Institutions with the Financial intelligence Centre (9 December 2010)