Being “Fica’d” will no longer be the frustration it has been in the past. “It will become easier for all concerned,” Deputy Minister of Finance Mcebisi Jonas says. “Yay!” I hear you say. And I don’t blame you. The Financial Intelligence Centre Act (Fica) has been a headache for consumers and providers of financial services since it came into effect more than a decade ago.
We are told that the Act is being amended (FIC Amendment Bill) to make compliance “easier for customers of financial products, while maintaining the controls necessary to protect the integrity in the system”. sounds great, until you consider the proposal to introduce “a risk-based approach” for compliance, which will apply to financial institutions. “This approach will simplify the current complex and rules-based system of compliance by providing financial institutions with the flexibility to determine how they verify their clients’ identity, taking into account the particular circumstances pertaining to that client,” a media statement by National Treasury says.
Sounds to me like the bigger the financial institution’s “appetite for risk” the more leeway the institution has to choose how it complies with Fica. And at the end of the day customers bear the cost of compliance and non-compliance.
But Ismail Momoniat, Treasury’s deputy director-general for tax and the financial sector, says a risk-based approach does not give a financial institution license to take improper risks. If a financial institution takes greater risks, it will be subject to more supervision, he says.
He says customers carry the cost of complying with a rules-based approach which applies indiscriminately to all customers. In the case of a bank, this cost is recovered through bank charges. The cost of non-compliance, in the form of penalties, is carried by the bank’s shareholders.
At the heart of Fica is the obligation on the “accountable institution” – the bank, insurer, estate agent, investment adviser, attorney, and so on – to “know your customer” (KYC). This is to prevent money laundering, terrorist financing and the illicit transfer of funds.
If Fica is preventing money laundering and terrorist financing, then it’s achieving part of its purpose. As for preventing the illicit transfer of funds, I don’t know that it’s working.
Take, for example, victims of phishing attacks. When their bank accounts are cleaned out in an internet banking fraud and there is an “illicit transfer” of their funds into a beneficiary bank account, Fica doesn’t help the victim one jot, especially if the beneficiary had an “exemption 17” account.
Exemption 17 of Fica is an exemption from providing proof of residential address. To quote an info sheet by one of the banks, it’s “a solution to the challenge faced by financial institutions to verify customers who are unable to provide the bank with proof of residential address when opening an account”.
Certain restrictions apply on such accounts. For example, you may not transfer, withdraw or make payments exceeding R5 000 a day, or R25 000 in a monthly cycle. But these accounts are commonly used for the illicit transfer of stolen funds, and attempts at tracing the owners of these accounts tend to be futile. When your money is siphoned into one of these accounts, you have no redress.
Last year, the South African Reserve Bank (SARB) fined the four largest banks R125 million collectively for their failure to comply with Fica, and earlier this year Capitec was fined R5 million for a Fica breach that it apparently reported to the SARB. The bank said it was as “an oversight”.
If I were a cynic, I’d say the Bill proposes introducing laxity – and it is as a result of the banks seeking to avoid more fines.
“Quite the opposite,” Momoniat says. The Bill will force banks to take much more responsibility, and the risk-based approach is the international norm and required standard in terms of Basel, he says.
I understand that the government has various policy challenges that have to be balanced. Treasury’s media statement explains the need to facilitate access to financial services while ensuring that consumers are protected; the need to combat financial crime while ensuring that honest customers are not excessively burdened by compliance.
But, in the words of the deputy minister of finance, the financial sector’s “destructive force, if it is not well regulated, should never be underplayed”.
Treasury is inviting comments on the Bill. You can send your submission to [email protected] or fax to 012 315 5206 by May 31.