Counter-Money Laundering & Registering Your Business in South Africa

Doing business in South Africa post-9/11 requires your entity or you individually to have a local presence with supporting documentation that meets a lot more than the old “Know Your Customer” requirements we are familiar with. The new multi-jurisdictional requirements are a product of an international task force sponsored by the World’s biggest financial participant nations. Nations who choose not to participate in the disclosure regime are punished by “peer to peer” rebukes rather than force of international law.

This new regime demands the disclosure of the routine post 9/11 data on you and your company (the potential tax payor) and descends into the depths previously unexplored by all but a few nations -- levels of candor which descend into the workings of the company and you right down to the identity of the “beneficial owner,” meaning the person who is really in charge or really getting the money. This new disclosure is then shared with the participant nations. No warrants. No suspicions.

This is the new world of information sharing in which your private information is freely exchanged across international boundaries with nations in which you may or may not be doing business. South Africa is a charter member of this new world, and you need to be aware of its rules if you wish to do business in South Africa and thus all of Sub-Saharan Africa it serves.

The new disclosure regime has also added a very new affirmative “duty to inquire” – imposed on the new “reporter” class of banker, lawyer, auditor, and real estate broker – an unimaginable burden on the well-heeled cadre of secret keepers who have long sheltered the principals of any deal behind veils, if not walls, if not bunkers of institutionally condoned silence. These reporters face criminal charges for failure to snitch on clients under the new regime’s disclosure standards even if the client is never charged with a crime.

Therefore, under the new regime there is (1) more disclosure by more professionals than in the past, and (2) the failure to either disclose, require disclosure, or snitch on the client’s transactions, will result in the reporter facing criminal justice.  In sum, your banker, lawyer, or auditor (among others) must affirmatively look for unusual transactions by you or your company and then must report you or your company to the authorities if he thinks a transaction you have ordered is “unusual” without regard to any request by you for his involvement. He must “snoop” on you or face jail time. He must “snitch” on you or face jail time. This is the new regime.

However, nothing should be surprising about these facts to the international businessman. This new regime is already in place in many countries but in “name only,” and thus do not conflate the national laws with express statutory requirements, stiff criminal sanctions, and the commensurate tradition of abuse of legal process, with an equally vigorous and honest implementation regime at the national level. It will take decades to alter the cultures which preceded this new regime. It will take huge alterations of budget priorities to make enforcement a credible inducement for voluntary local compliance. But, the more international the client or the reporter firm – then the more likely that compliance will be automatic and readily volunteered. It is best to assume that you and your company should as well.

Contextualize the new regime requirements to the simple matter of the market entry issue within South Africa alone. A business wishing to enter the South African market must (1) register [broad description]; (2) engage a series of professionals [lawyer, auditor, banker]; (3) open a bank account, and (4) obtain a phone [assuming mobile phone for speed and reliability]. In order to accomplish any of these four steps the company and its officers need to satisfied the identification requirements of the Financial Intelligence Centre Act (38 of 2001) (the FIC Act) came into effect on the 1st of July 2003 . The Act created a Financial Intelligence Centre for specialized criminal investigations, and the Counter-Money Laundering Advisory Council which distills trends in moving dark money, and then advises the stakeholders on improved enforcement.

South Africa participates in the new multi-jurisdictional requirements through the Financial Intelligence Centre Act which is intended to assist with the identification of the proceeds of unlawful activities; combat money laundering; and combat the financing of terrorist and related activities. The Act does this currently by creating a legal framework for identification and verification of the “client” identity. Mobile phones are covered by a “little brother” to FICA know as RICA. Regulation of Interception of Communications and Provision of Communication-Related Information Act 70 of 2002 (RICA)(effective July 1, 2011) is a law that makes it compulsory for everyone in South Africa to register their cellphone number providing the seller with a complete proof of identity document set (with no companion protections against identity theft ) and allows the government to eavesdrop on those conversations under proscribed circumstances. RICA provides that seller must make sure that they keep proper records of the collected information, are obligated to verify the information collected in terms of RICA, and the seller must update any changes to such information when it becomes aware of changes. The information collected from clients must be “verified” in order to enable the government to identify that particular client and SIM card. The information collected must be recorded and stored and the facility in or on which the information is recorded and stored, must be secure, and only accessible to persons specifically designated. http://www.groundup.org.za/article/rica-south-africa-how-big-big-brother_1882/

 

  • Register Your Business – Financial Intelligence Centre Act (38 of 2001) (the FIC Act);
  • Hire A Professional - Financial Intelligence Centre Act (38 of 2001) (the FIC Act);
  • Open a Bank Account - Financial Intelligence Centre Act (38 of 2001) (the FIC Act);
  • Lease an Office or Purchase Realty -- Financial Intelligence Centre Act (38 of 2001) (the FIC Act);
  • Obtain A Mobile Phone -- The mobile phone requires compliance with the Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA)

The origin story for the new regime is the ever- increasing standardization of information collection and sharing predates the 21st Century. Drug cartels provoked national laws aimed at interdiction and arms control in the last century. The rise of the Euro, the consolidation of European banking at all levels, and the fall of the so called “Communist Block” and then the collapse of the “Pan-Arabist” nations all set the standardization stage by making fewer participants at the top of the monetary system, and fewer state actors operating to frustrate that system’s efforts at hegemony. The standardization effort starts with the Financial Action Task Force on Money Laundering (FATF) which was established by the Paris 1989 G-7 Summit. The Financial Action Task Force (FATF) is not an enforcement agency or organization. Instead it is an international “inter-governmental body” established in 1989 by the Cabinet Ministers of its member states. In addition, the FATF has not been formed as a formal international organization under treaty or United Nations authority. Rather, the FATF is a “club” self-styled as a task force composed of the designated unelected representatives from member governments whose governments agree to fund the FATF for specific goals and projects (a "mandate" in FATF-speak).   If you are a country invited to participate and you are willing to pay a designated share as determined by the existing members – then you can have a seat at the table. This is one of the least transparent and undemocratic organizations (“clubs”) ever established by the international community, and its bias (as seen in its standardization demands on other nations) is well tilted to advantage the wealthy northern sphere nations.

The stated objectives of the FATF are to set international standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.  The FATF is therefore classed and self-described as a “policy-making body.” In turn those policies are intended to generate the “necessary political will” (to quote the FATF) to bring about national legislative and regulatory reforms in these areas. The more candid language would admit that “peer to peer” coercion is used to force all nations into the system whether members of the “club” or not.

The FATF has coercive hammers. It developed a series of “Recommendations” that are promulgated as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction. In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations intended to strengthen global safeguards expanded to deal with the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption (“2012 Recommendations”).  The 9 Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering into the 2012 Recommendations adopted by the FATF's decision making body, the FATF Plenary (an unelected self-selecting body), which meets three times per year. Nations are then subjected to “peer evaluations” by the “club” members, and subsequently “encouraged” to repair non-compliance by aligning national laws, economic and budget priorities, and implementation and police strategies with closing those “weaknesses.”

Shame and peer pressure push uniform compliance. The FATF identifies jurisdictions with weak measures to combat money laundering and terrorist financing (AML/CFT) in two FATF public documents that are issued three times a year. The FATF’s process to publicly list countries with weak AML/CFT regimes has proved effective. South Africa’s 2009 Mutual Evaluation identified several areas of “weakness” in the security of the financial reporting system. The 2012 Recommendations (anti-terrorist provisions) set more comprehensive standards for “transparency in international financial transactions – in effect – looking behind the entity facade to the “real” people in charge.

Outside of the rule of law or nations the FATF operates autonomously. The Organization for Economic Co-operation and Development (OECD) has, together with the Group of Twenty (G20), developed a standardized, secure and (self-described) “cost effective” model for bilateral automatic exchange of information as a companion to the FATF standardization collection efforts. On 23 February 2014, the G20 Finance Ministers endorsed the Common Reporting Standards for automatic exchange of tax information (CRS Standard).  The FATF and the OECD are separate entities with the OECD being the only “international organization” of the two -  yet - the FATF Secretariat (currently 17 full time unknown bureaucrats) is housed administratively at the OECD.  Although the member countries overlap to a large degree, there are several countries which are members of the FATF and not the OECD, and vice versa. The conclusions to be drawn from the disjunction are evident.

South Africa is a “charter member” as one of the early adopters of the FATF Recommendations and the CRS Standard and has committed to commence exchange of information automatically on a wider approach from 2017 onwards. Under the current executive administration South Africa has fallen behind schedule in its obligations to adopt the current FATF Recommendations. This failure places the South African international movement of currency into regulatory jeopardy. Many stakeholders are exorcised by the delay.

The South African 2013 FICA Amendment process, the results of which are enshrined in the 2015 Amendments Bill, remain ineffective until the Bill is signed by the national executive. That process has witnessed an orchestrated effort to prevent its adoption according to the press in South Africa. Issues of “state capture” and politically “exposed” people resisting financial transparency are often cited in press reports as reasons for the delay. The rationale for the delays include stakeholder guilds expressed concern about warrantless searches by the financial regulators of the member countries. Whatever the reasons the deadline imposed by FATF for alignment of the law to the 2012 Recommendations expires in February 2017.

The Amendments and the debate surrounding them don’t attempt to address another systemic weakness created by the very particular burdens of the FATF Recommendations which is the failure to address the economic challenge of compliance by the citizens of ESAAMLG countries (Eastern and Southern Africa Anti-Money Laundering Group). Such a debate surrounding the Amendments would actually be a legitimate reason for a regional leader, such as South Africa, to resist the new regime. But. Alas. The delay has nothing to do with improving the access of ordinary South Africans to traditional institutional banks leaving “unbanked” 23% of South Africans in 2015. The 2015 FinScope survey shows that in South Africa levels of financial inclusion remain stable at 87% compared to 86% in 2014. About 31.2 million (84%) of adults are formally served, that is they have a bank and other formal non-bank product/services, compared to 80% in 2014. While overall inclusion figures have not changed substantially, the make-up of inclusion in terms of product usage has changed – the percentage of the banked population increased from 75% in 2014 to 77% in 2015, while the percentage of adults relying exclusively on informal mechanisms to manage their money declined from 6% in 2014 to 3.4% in 2015.  Unlike many citizens of the developed nation members, the citizens of many African nations do not have access to identity documents, banks, auditors, and other “Accountable Institutions” and professionals . The documentation burdens are real. More important, the increase in financial participation since the new regime came into effect has occurred in the “informal mechanisms” which are the same ones which fee the criminals the new regime is supposed to be discovering.  These barriers imposed through international “Recommendations” fail the test of integrating the unbanked part of the population into the formal financial sector.

FATF Secretariat  (through its written reports to member states) is convinced that financial inclusion and AML/CFT pursue mutually supportive and complementary objectives: the application of measures which enable more citizens to use formal financial services will increase the reach and the effectiveness of AML/CFT regimes. Her Majesty Queen Máxima of the Netherlands, in her capacity as United Nations’ Secretary General Special Advocate for Inclusive Finance for Development, visited the June 2013 FATF Plenary and commended FATF’s commitment to support financial inclusion efforts. Unfortunately, the Queen could not identify a single exception to the “Recommendations” designed to assist the “unbanked” population. Further, nothing in the South African Amendments Bill lifts a single burden from the “unbanked” who continue to be blocked from entering the financial mainstream. These same people are often the most vulnerable in our societies – and the least financially sophisticated – easy prey for criminal conspiracies.

Should the Amendments Bill, in its current form, fail to become law then the injury in fact to the Republic is more a matter of public confidence and ease of future transactions than it is a specific penalty, loss or sanction. South Africa will need to explain itself to the Financial Action Task Force plenary meeting in February 2017 and could be issued a warning for failing to sign into law amendments to the Financial Intelligence Centre Act, said Treasury deputy director-general Ismail Momoniat . Even a mild rebuke from the TATF could have significant consequences for the Republic, say banking industry sources, as it would raise concern among foreign regulators and banks about South Africa’s commitment to vigilant financial regulation. This in turn would have a ripple effect throughout the economy since correspondent relationships between banks are vital to effect payment for exports and imports. The TATF, in June 2016, extended the time, until February 2017, for South Africa to align its laws to the 2012 Recommendations. But it is unlikely to become law by that deadline. Foreign banks could cancel their correspondent relationships with SA banks says the Registrar of Banks Kuben Naidoo on December 24, 2016. So, international trade could become problematic because of failure. But the existing FICA laws will continue to apply and each business seeking to operate within South Africa will need to prepare a disclosure package. We provide recommendations for compliance packets below (“Compliance Packets”).

  • Company statutory documents: Certificate of Registration, Memorandum of Incorporation, Certificate of Name Change (if applicable) and signed by a director of the company
  • Proof of physical operating address, e.g., invoice, rates bill etc. (less than 3 months old)
  • SARS issued document confirming Income Tax and VAT registration number
  • Letter from the Auditors confirming shareholding
  • Directors resolution appointing the authorized representative of the Company
  • Certified copy of the ID document of the authorized representative
  • Certified proof of residential address of the authorized person, being not older than 3 months

In respect of any individual or entity holding 25% or more in the Company:

  • Certified copy of their ID and proof of residence, being not older than 3 months
  • If applicable, company statutory documents as above and proof of physical business address.

Who Gets To Ask For Your Documents?

No business nor its officers and owners wants to disclose person information sufficient to enable identity theft or other criminal activity. The resistance to such inquiries is prudent, and efforts to purloin that information are real and constant. Vigilance is critical at all points of interface where such information is sought or volunteered. The responsible officer needs to ensure that anyone seeking information under FICA is actually entitled to the information. Further, the information should be “hand delivered” rather than posted, emailed, or cast into cyberspace. The only entities or individuals entitled to obtain your Compliance Packet are as follows:  “Accountable Institutions” as defined under the FICA laws.  Each must obtain from the business the Compliance Packet information and keep it current. This is not a mere “one & done” inquiry. This is a constant sequence of inquiry. “Accountable Institutions” include the following individuals and entities  :

Clients/Consumers include:

  • Natural Persons
  • Natural person acting on behalf of another, or
  • Foreign national
  • Close corporation
  • South African company
  • Foreign company
  • Legal Persons
  • Partnerships
  • Trusts

“Accountable Institution” or “Reporters” include:

  • Attorneys
  • Auditors
  • Trust Companies
  • “Banks” however defined
  • Securities Brokers
  • Real estate agents
  • Insurance Brokers
  • Casino Operators
  • Currency Dealers
  • Financial Services Providers
  • Any entity or person which sells, trades or “redeems” travelers’ checks
  • Any person who handles the money of others (“money remitter”)

 What this means for the business owner is that there is no longer an unimpeded ability to change ownership of 25% or more without disclosures to “Accountable Institutions”. Each movement of money needs to be documented in such a way as to make transparent the beneficiary of the funds and the purpose.

What Are The Consumer’s Responsibilities In Terms Of FICA?

The consumer must:

  • ensure the FIC Act documents are kept up-to-date, notifying staff or consultants of applicable accountable institutions in a timely manner for inclusion in the FIC Act Database;
  • authorize staff and/or consultant to collect, view, collate, process and store FICA documents in the FICA database;
  • acknowledge and accept the current privacy policy;
  • not falsely state, impersonate, or otherwise misrepresent his/her identity and/or proof of residence and/or any other information provided;
  • guarantee the accuracy, truthfulness, correctness, and validity of his/her personal information;
  • disclose or receive his/her FICA documents to or from:
  • any accountable institution seeking to establish a business relationship or conclude a single transaction with the customer;
  • any legitimate third party (such as SARS, deeds office, credit bureau , municipalities) for verifying or comparing personal information in the FIC Act Database, and;
  • any accountable institution or competent authority for investigation or prevention of any criminal activity and auditing of the Database.

The prevention of Organized Crime Act (POCA) created the main money laundering offences which apply to every person in South Africa, regardless of whether you are a member of an “Accountable Institution” or not. If you commit a money laundering offence as a result of your intended or unintended conduct, then you could be found guilty under POCA and would thus face the associated penalties of 15 years in jail, and a R10,000,000 fine for each violation. The offences and penalties created in the Financial Intelligence Centre Act, 38 of 2001 include Failure to Identify (Sec.46); Failure to Keep Records (Sec.47); Failure to Give Assistance (Sec.49); Failure to Advise the Centre (Sec.50); Failure to Report Suspicious or Unusual Transactions (Sec.51); and Failure To Report Conveyance Of Cash Into Or Out Of The Republic (Sec.54). These are serious penalties and the Republic has well-resourced the investigation and prosecution of such crimes. Furthermore, the person reporting such an event of non-compliance, whether your attorney or auditor (who must report any suspicion), is anonymous and immune from adverse reaction.

What are the Reporter’s Responsibilities in the Terms of FICA?

The reporter must “snoop” on the client and “snitch” on the client. Failure to do either will result in the reporter facing criminal sanctions. The Republic has various stakeholders pressing for timely adoption of the 2012 Recommendations. The reasons articulated are similar – global compliance – but the subtext is different for several. For example, the Law Society of South Africa (the attorneys’ guild) expressed a fear of breaches of the Attorney – Client Privilege against forced disclosure of secrets (a common-law country concern) as a result of the self-reporting requirements. There are other objections reported in the press. What few people doubt is that the Amendments Bill will be enacted (eventually). Once effective the new regime will force all of the mandatory reporters to disclose to FICA any suspicions aroused by a transaction or transactional parties.

The new regime, further, compels the “Accountable Institutions” to develop and apply some new levels of inquiry compared to the former, more basic, principles of customer due diligence.  Each must -

  • look for evidence that you are not transacting business with fictitious persons;
  • always identify the “beneficial owner” – being the natural person who either owns or controls a juristic person (entity) – find the heartbeat and the authority person;
  • take enhanced measures for scrutinizing the transaction if the “beneficial owner” is or are “domestic prominent influential persons” such as persons holding prominent public functions;
  • understand the purpose and nature of the business relationship with a customer for the purpose of predicting the types of transactions that a particular customer is likely to undertake;
  • monitor the business relationship and transactions on an ongoing routine basis.

In effect – the new rules will make every financial professional a mandatory reporter of any suspicious activity of a customer without regard to a foundation in fact. No secrets maybe be retained with licensed professionals. No notice of an investigation of a customer’s accounts or transactions will be required. It is a newly vigilant business world, with serious criminal penalties, and very non-specific criteria for liability. The business operating in South Africa will be well served to retain all backup documentation for each transaction, obtain business identification materials (such as tax clearance certificates or registration certificates) regardless of whether or not your business is a mandatory reporter, and confirm the physical identity of the person in charge of whichever business you either send money to or receive money from overseas.

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