INTRUSIVE FOCUS ON POLITICALLY EXPOSED PERSONS
The subject of politically exposed persons has been receiving a lot of media attention in the South Africa. Unfortunately what is lost in the current debate is an accurate record of what is actually being proposed in relation to the supervision of the business affairs of politically exposed persons. Unlike South Africa, the international financial regulatory community has long recognized that individuals in positions of power (both in the public and private sectors) are at high risk of involvement in corruption and bribery. These individuals are referred to as “politically exposed persons” (PEPs).
A PEP is an individual who is or has been entrusted with a prominent public function. PEPs occupy positions that can be abused for the purpose of committing money-laundering offences and activities related to terrorist financing. The risk posed by PEPs has given rise to the need to apply more intrusive anti-money laundering (AML) and counter-terrorist financing (CTF) preventative measures with respect to business relationships with PEPs.
In June 2003, the Financial Action Task Force (FATF), an international body of which South Africa is a member, issued mandatory requirements covering foreign PEPs, their family members and close associates. These requirements were later expanded, in 2012, to include mandatory requirements in respect of domestic PEPs and PEPs of international organisations. FATF members, like South Africa, are required to implement measures obliging financial institutions to develop risk management systems to more closely monitor domestic and foreign PEPs. In essence, South Africa is following a global trend in implementing stringent monitoring of the business affairs of PEPs.
The Financial Intelligence Centre Act, 2001 (FICA) provides for a number of mechanisms for the detection and investigation of money-laundering. These mechanisms include requirements for “accountable institutions” (such as banks, insurers and credit providers) to establish and verify the identities of their clients, and to report certain information. An example of this would be information concerning a transaction with a client of the accountable institutions pays to, or receives from, the client, an amount of cash in excess of the amount prescribed in FICA, which is about R25,000. However, FICA does not currently prescribe mechanisms for monitoring PEPs.
In order fulfil South Africa’s obligations as a member of FATF, the National Treasury (Treasury) introduced the Financial Intelligence Centre Bill, 2005 (Bill) which proposed amendments to FICA. The proposed amendment will address the position of PEPs. To that end, the Bill 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. This category of PEPs would include senior government officials and leaders of political parties. However, the Bill goes further in its definition of PEPs than definitions contained in similar international instruments. In this regard, the Bill’s definition of a “domestic prominent influential person” also includes individuals who hold prominent positions in the private sector. In this regard, a domestic influential person includes: a chairperson of the board of directors; a chairperson of the audit committee; executive officer; or chief financial officer, of a company, if the company provides goods or services to an organ of state. This way, captains of industry whose companies do business with the state will also be closely monitored by the FIC. Consequently, any suggestion that the monitoring of the business affairs of PEPs by the FIC is selectively focused on state officials is inaccurate.
What are the practical implications of the Bill on the business of accountable institutions, and on PEPs themselves? Pursuant to the Bill, if an accountable institution (such as a bank) regards a client as being a “domestic prominent influential person”/”foreign prominent public official”, it will need (amongst other things) to make a determination, in accordance with its internal compliance programme, whether that client presents a higher risk to the accountable institution from an AML and CTF perspective. In the event of a positive determination, the accountable institution will have to take “reasonable measures” to determine the source of the client’s wealth and the origin of her/his funds in respect of a particular transaction. The accountable institution will also have to conduct “enhanced” ongoing monitoring of the client’s account, with a view to identifying transactions that seem anomalous or out of the ordinary to that particular client. 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”.
On reflection, it is true that PEPs (as well as their associates and family members) will be subject to greater scrutiny from accountable institutions. However the potential risks associated with dealing with PEPs justifies the application of more intrusive and stringent AML and CTF preventative measures. The proposed regulations are preventative in nature, and should not be interpreted as stigmatising PEPs by suggesting that they are involved in criminal activities. In any event, an accountable institution cannot refuse or discontinue a business relationship with a client merely because the client is a PEP. That would be contrary to the objects of the Bill.
The Bill does not clarify the precise manner in which accountable institutions are expected to take “reasonable measures” and to conduct “enhanced” ongoing monitoring of PEPs, consequently further guidance from the FIC should be expected. Treasury has acknowledged that the initial identification of PEPs 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.
The parliamentary process in respect of the Bill is complete, and the Bill has been submitted to the President for assent. However, it has been reported that the President has expressed reservations about the Bill’s constitutionality. The objections are based on a concern that the Bill potentially infringes on the rights of PEPs, it is important to remember that some constitutional rights are not absolute, they can be limited. The only question is whether the measures proposed in the Bill for monitoring money laundering and terrorism financing activities, which may be perpetrated by PEPS, are reasonable and justifiable. We do not know whether the President will assent to the Bill, or return it to Parliament for further deliberation and possible amendment. For now, we will all have to wait and see.