Hasty legislative changes to avoid SA greylisting face serious backlash

Lawmakers are racing to push through changes to the law to prevent SA from being put on the Financial Action Task Force (FATF) gray list – but they are facing stiff resistance.

One of the laws currently being drafted before being presented to parliament is the awkwardly worded Protection of Constitutional Democracy Against Terrorism and Related Activities Bill, also known as the Anti-Terrorism Bill.

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Last week, the Parliamentary Portfolio Committee on Policing heard several presentations from civil society groups concerned about the potential loss of freedoms due to the vague wording of terms such as “terrorist activity” in the bill.

More than 26,000 South Africans commented on the bill through the DearSA public participation platform and 99% were against, mainly for the potentially chilling effect it could have on political protest, freedom of expression, press and religious activity.

Thin line

“It is clear that South Africa needs tougher anti-terrorism legislation, but the public participation campaign we have been running on this bill suggests that we need to get this legislation right or risk lose some of our freedoms,” said Rob Hutchinson, CEO of DearSA.

“The country is deeply concerned about the bill as it currently stands, particularly the vagueness of what constitutes terrorist activity and the danger that a legitimate political demonstration or religious activity could be considered terrorism.

South Africans are certainly concerned about terrorism, but do not want to sacrifice fundamental freedoms in the process.

Speaking at a public hearing last week, the chair of the Portfolio Policing Committee, Tina Joemat-Pettersson, said a key reason for the terrorism bill was the threat of the greylist.

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In his mid-term budget speech last week, Finance Minister Enoch Godongwana referred to the gray list threat and the fact that two bills were currently before parliament “aimed at addressing the weaknesses of our legislative framework”.

“This will be an important step towards meeting the 40 recommendations made by the FATF,” Godongwana said. “We are also required to implement anti-money laundering and anti-corruption laws more effectively.”

Lax regulatory regime

One problem highlighted by the FATF is the lax regulatory regime for non-financial institutions such as estate agents, lawyers, casinos and dealers in precious metals and stones.

Also mentioned were virtual asset service providers (Vasps) such as crypto exchanges, which preemptively screen virtually all customers for money laundering (ML) activity and subject them to the same Know Your Customer rules. (KYC) applied by banks.

The recent declaration of cryptos as a financial product under the Financial Advisory and Intermediary Services (Fais) Act, and the fact that crypto companies must now apply to be licensed as financial service providers (FSPs), mitigates partly the greylisting. threatens.

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Another problem highlighted by the FATF is the difficulty of establishing beneficial ownership. “ML important [money laundering] risks remain largely unaddressed for the beneficial owners of corporations and trusts, cross-border movement of cash and criminal justice efforts are not yet geared towards effectively addressing higher risks such as ML related to corruption, narcotics and tax offences,” the FATF says.

The ability to lift the corporate veil, something not yet included in the Companies Act, would have made it easier to stop the Guptas before they inflicted such carnage on the country, as they were able to hide their beneficial ownership in offshore and complex trusts. business structures.

The Fiduciary Institute of Southern Africa (Fisa) is lobbying Parliament’s Standing Committee on Finance to redraft sections of the General Laws (Anti-Money Laundering and Anti-Financial Financing) Bill Terrorism) which is being fast-tracked by Parliament and which, in turn, would introduce amendments to the Trust Property Control Act.

In particular, Fisa is concerned about the inclusion of trustees in the definition of “beneficial owner”.

“Overall, South Africa is under pressure to strengthen its anti-money laundering and anti-terrorist financing laws,” said Louis van Vuren, CEO of Fisa. “In some jurisdictions, regulations require that the “beneficial owners” of a legal entity be identified.

“We have no problem with the apparent objective of increased oversight of fiduciary assets under certain conditions, but it would appear that the drafters of the bill simply deleted the term from foreign law without regard to the law on existing trusts in South Africa.”

Van Vuren says the proposed changes run counter to existing trust law, introduce ambiguities into the definition, and are worded in a way that creates confusion and potentially criminalizes those who merely fulfill their fiduciary duty.

Fisa says it is disappointed it was not consulted when the new legislation was drafted and points out that trusts do not have legal personality under South African law, while some of the proposed changes appear to work from the start. assumption they have.

The effect of the proposed changes may open the door to the premature acquisition of certain rights of trust beneficiaries, limit the discretion of trustees and reduce the existing rights of trustees and the founder of a trust, explains the Fisa.

This could be done by amending the Trust Property Control Act to:

  • Exclude a trustee from the definition of “beneficial owner”, as they are not the beneficial owner of a trust and should not be included in the definition; and
  • Placing on the trustee reasonable oversight duties over those involved in the trust by perhaps amplifying the definition of “trustee” and placing those duties on trustees by simply including “trustee” next to “beneficial owner” in the relevant sections. if applicable.

George Herman, chief investment officer at Citadel, said it seemed inevitable that South Africa would be graylisted early next year for not taking enough action against illicit money flows. , but at least it looks like the National Treasury and Parliament are finally starting to take the right steps to get off the list quickly and stem the inevitable negative impact this fate will have on GDP.

The International Monetary Fund (IMF) recently warned that greylisting is strangling legitimate fund inflows into affected countries.

Mauritius was graylisted in February 2020 and subsequently blacklisted by the EU as a high-risk country, leading to a 1% drop in GDP.

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The island nation was removed from the list less than two years later due to compliance measures taken by the government.

“South Africa will have to do the same and really step up its prosecution of financial crimes, such as bribery and money laundering, to get off the gray list quickly,” Herman says.

Listen to this special podcast in which Ryk van Niekerk learns more about the graylisting debate from Intellidex founder Stuart Theobald (or read the transcript here):