Greylisting turns focus on financial institutions

SOUTH Africa has put new laws in place to address the concerns of global money laundering and terrorist financing watchdog, the Financial Action Task Force (FATF), which last month placed the country on the “greylist” of countries under increased monitoring.

These laws relating to beneficial ownership will have a significant impact on financial institutions and companies.

The FATF identified serious deficiencies in South Africa’s regulatory systems and the effectiveness of its anti-money laundering and counter-terrorism regime.

Countries on the greylist are committed to working with the FATF to put the necessary measures in place to address such deficiencies.

On average, it can take a country three to five years to get off the greylist, but two countries, specifically Mauritius and Morocco, satisfied the FATF requirements faster and were removed in less than two years.

The FATF considers both “technical compliance” and “effectiveness”. While South Africa has made some progress on technical compliance, it has fallen short on effectiveness.

One of the key areas where it will have to satisfy the FATF is in delivering successful prosecutions of those implicated in so-called state capture in the Zondo Commission report.

Technical compliance

The FATF listed eight deficiencies, seven of which are largely dependent on state action, including investigations, sanctions and other matters.

The eighth deficiency relates to beneficial ownership of entities and legal arrangements.

While some of the responsibility of addressing this deficiency rests with the state, South African businesses and financial institutions also have an important role to play.

The FATF wants South Africa to have laws and practices that provide for transparent ownership and control structures of legal structures and entities.

In its mutual evaluation report on the country, published in November 2021, the FATF found that although publicly available beneficial ownership information exists, it is basic and often difficult to access.

Beneficial ownership amendments

Two FATF recommendations on beneficial ownership are relevant: Recommendations 24 and 25. Recommendation 24 stipulates that countries should have adequate, accurate and up-to-date information on beneficial ownership that can be obtained rapidly by the authorities, either through a register or an alternative mechanism.

South Africa enacted various laws and amendments in December last year to try to stave off greylisting.

Provisions relating to beneficial ownership affect a number of laws: the Companies Act, Financial Sector Regulation Act, Non-Profit Organisations Act and Trust Property Control Act.

The Financial Intelligence Centre Act (better known as Fica) defines a beneficial owner as a natural person who, directly or indirectly, ultimately owns or effectively controls the client of an accountable institution, or a legal person/trust/partnership that controls the client of an accountable institution, or controls a client of an institution on whose behalf a transaction is being conducted.

The elements of “natural person” and “ultimately owns or effectively controls” are also seen in several other definitions of beneficial owner.

FATF guidance on the disclosure of beneficial ownership is that it goes beyond mere legal ownership and control to consider actual/ultimate ownership/control.

That means the natural persons who actually own and take advantage of the assets, as well as those who factually or actually exert control over them.

Recommendation 24 suggests determining the controlling shareholders of a financial institution based on a threshold, for example, any person owning more than 25%.

The percentage of shares with voting rights is usually a good indication of control. In South Africa, these thresholds are stipulated in the Companies Act but not in Fica.

The primary obligations of an accountable institution are, firstly, to identify the beneficial owner, and, secondly, take reasonable steps to verify the identity of that owner.

In the context of determining beneficial ownership of partnerships, Fica (section 21B) goes into detail.

The institution has to establish the identifying name of the partnership, and the identity of every partner, even silent partners. It must be determined whether the partnership acts on behalf of another natural person and whether there are people who exercise control over the partnership or those authorised to act for the partnership.

After establishing this information, the institution has to take reasonable steps to verify it, for example, through identity documents.

In the case of trusts, the accountable institution has to identify the trustees, and, if beneficiaries are specifically cited, verify each one.

If they are not specified but are a group, it is necessary to understand the methodology for appointing those beneficiaries.

The Companies Act requires companies, not only accountable institutions, to identify the natural person that owns or exercises control over the company.

Under section 56 of the Companies Act, a company is required to maintain a register of persons holding a beneficial interest of 5% or more of the company in a particular class of securities.

It is anticipated that companies may find it practically difficult to identify beneficial owners.

In addition to maintaining beneficial owner registers, a company also has to file the prescribed beneficial ownership information with the Companies and Intellectual Property Commission on a prescribed form and provide the prescribed information.

The Financial Sector Regulation Act 9 of 2017 (FSR Act) now defines a beneficial owner as a natural person that owns or controls a financial institution.

Section 159B of the FSR Act gives the relevant regulator (financial sector conduct authority or prudential authority) the power to issue standards in relation to beneficial owners of financial institutions.

In addition, section 159C of the FSR Act empowers the relevant regulator to issue written directives to beneficial owners if they have contravened, or are likely to contravene, a financial sector law.

Enforcement

Although the National Treasury has said South Africa’s financial sector is, on the whole, compliant with the FATF requirements, there are compliance concerns in the non-financial space (for example, estate agents, law firms).

It is anticipated that further enforcement and supervision, particularly of high-risk financial institutions, will occur in the foreseeable future and financial institutions should be prepared for it.