FICA Bill has cast the net wider when defining “Politically Exposed Persons”

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04 Jul 2016

In March 2013, the South African Financial Intelligence Centre (FIC) issued FIC Guidance Note 3A for Accountable Institutions on Customer Identification and Verification and Related Matters (Guidance Note 3A), which purports to assist ‘accountable institutions’ under the Financial Intelligence Act, 2001 (FICA) in their implementation of FICA’s anti-money laundering (AML) and counter-terrorist financing (CTF) standards.  International AML and CTF standards, on which FICA is based, are developed by the Financial Action Task Force (FATF), of which South Africa has been a member since 2003.

Although FICA itself does not presently expressly recognise the term “politically exposed person” (PEP), Guidance Note 3A notes that a PEP is an individual who is, or has in the past, been entrusted with prominent public functions in a particular country.  According to the FATF, PEPs hold positions of influence that can potentially be abused for the purposes of money laundering and other related offences, and accordingly may be seen to pose a potential higher risk of involvement in activities such as corruption and bribery. In order to address this potential raised risk, the FATF requires member states to ensure that their accountable institutions (or equivalent) implement measures to prevent and detect abuse of the financial system by PEPs.

The Financial Intelligence Centre Bill, 2015 (“the Bill”) now seeks to introduce the concepts of “domestic prominent influential person” and “foreign prominent public official” into FICA.  The Bill defines a “domestic prominent influential person” as an individual who holds, or has held, a prominent public function (e.g. senior government officials and leaders of political parties), while a “foreign prominent public official” is defined as being an individual holding a prominent public function in a foreign country.  Significantly, in respect of the definition of “domestic prominent influential person”, the Bill also includes individuals who hold prominent positions in the private sector.  The Bill accordingly goes further in its definition of PEPs than definitions contained in many international counterpart instruments.

Pursuant to the Bill, if an accountable institution regards a customer or client as being a ‘domestic prominent influential person’, it will need (among other things) to make a determination, in accordance with its internal compliance programme, as to whether that customer or client presents a higher risk to the accountable institution from an AML and CTF perspective.  In the event of a positive determination in this regard, the accountable institution will need to take ‘reasonable measures’ to determine the source of the customer’s wealth and the origin of his / her funds in respect of a particular transaction, and to conduct ‘enhanced’ ongoing monitoring of the customer’s account going forward with a view to identifying transactions that seem anomalous or out of the ordinary to that particular customer.  While the Bill does not clarify the precise manner in which accountable institutions are expected to do this, further guidance notes are sure to follow in this respect.

The steps set out in the Bill in relation to PEPs are also required to be taken in respect of the immediate family members and ‘known close associates’ of identified ‘domestic prominent influential persons’ and ‘foreign prominent public officials’.  Much has been said of the recent decision of some of South Africa’s biggest banks to discontinue their respective relationships with a prominent business family notoriously said to exercise influence over some of South Africa’s top government functionaries.  While it is generally understood that the banks took this step in order to safeguard their brands against reputational damage, it is not inconceivable that they also had the principles of the Bill in mind.

Treasury has acknowledged that the initial identification of prominent and influential persons will pose something of a challenge to accountable institutions looking to comply with the Bill’s prescripts, in the absence of a register setting out the names of such persons.  This acknowledgement could see the implementation of the provisions of the Bill relating to PEPs being delayed until such a list or register is available.  Obviously, the register would need to be updated regularly and kept current.

In general, the Bill seeks to address regulatory gaps in FICA and to enhance South Africa’s broader AML and CTF regulatory regime.  Whilst it is true that Politically Exposed Persons will be subject to greater scrutiny from accountable institutions, it is arguable that the potential risks associated with dealing with PEPs justifies the application of more intrusive AML and CTF preventative measures. This is especially so considering the recent happenings in South Africa, involving a number of prominent persons.

For more information on Politically Exposed Persons click here.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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