Introduction.
In an era of increasing financial crime and illicit activities, strong regulatory frameworks are vital to safeguard the integrity of the financial system. In February 2023, the Financial Action Task Force (FATF) plenary decided to adopt the report evaluating South Africa's anti-money laundering and counter-terrorist financing (AML/CFT) measures, and officially greylisted the country.
The FATF outlines a comprehensive framework that nations should adhere to in order to combat money laundering and terrorist financing. In response to being greylisted, South Africa has set its sights on addressing the identified deficiencies in its AML/CFT framework.
As part of these efforts to enhance the financial integrity, the Financial Intelligence Centre (FIC) has recently introduced Directive 8, a comprehensive set of guidelines designed to strengthen AML measures and enhance compliance within the industry.
The Financial Intelligence Centre (FIC)
The Financial Intelligence Centre is the primary regulatory authority responsible for combating money laundering and terrorist financing in South Africa and was established in 2001 under the Financial Intelligence Centre Act (FICA). Most people may be familiar with this act; if you've ever tried to open a bank account or engage with other accountable institutions, you've likely been required to provide a number of documents for 'FICA purposes'.
The FIC serves as an intelligence-driven organisation that collects, analyses, and disseminates financial intelligence to relevant authorities. Its primary objective is to identify and prevent financial crimes that may threaten the country's economic stability and national security.
The FIC's regulatory approach focuses on promoting a risk-based approach to combating financial crimes. It collaborates closely with domestic and international regulatory bodies, law enforcement agencies, and financial institutions to enhance the effectiveness of AML efforts. Through its activities, the FIC aims to ensure that South Africa's financial system remains resilient, transparent, and free from illicit activities.
Introducing Directive 8.
Directive 8 of 2023 focuses on screening prospective and current employees for competence and integrity, while scrutinising them against applicable targeted financial sanctions lists. Let's delve deeper into the purpose, provisions, and importance of Directive 8.
Purpose of the Directive
The primary objective of Directive 8 is to mandate accountable institutions of FICA to implement rigorous employee screening measures and scrutinise employee information against targeted financial sanctions lists. By doing so, the FIC aims to identify, assess, monitor, mitigate, and manage the risks associated with money laundering, terrorist financing, and proliferation financing within the financial sector.
Effective Date and Non-Compliance
Directive 8 of 2023 came into effect on the date of its publication in the Government Gazette, which was on 31 March 2023. Failure to comply with this directive may result in the imposition of administrative sanctions, as outlined in section 45C of the FIC Act.
Directive Provisions
Directive 8, issued under section 43A(1) of the Financial Intelligence Centre Act, 2001 (Act 38 of 2001), applies to all accountable institutions operating within South Africa, listed in Schedule 1 - which includes most organisations working directly in - or dealing with, the financial landscape.
These institutions are required to conduct periodic screenings of both prospective and current employees in a risk-based manner set out in public compliance communication 55 (PCC55). This process ensures that individuals working within the financial sector possess the necessary competence and demonstrate unwavering integrity.
Upon receiving a notice from the Director under section 26A(3) of the FIC Act, accountable institutions must meticulously scrutinise the information of their prospective and current employees. This scrutiny aims to determine if any of these individuals are mentioned in the Director's notice, which could be related to financial sanctions.
Accountable institutions must establish and document the procedures for conducting the screenings and scrutinising employee information against targeted financial sanctions lists. These records must be maintained to demonstrate compliance with the directive.
Records pertaining to the outcomes of the screening and scrutiny process must be made available to the FIC or any supervisory body responsible for regulatory or supervisory functions related to the accountable institution. This step ensures transparency and accountability in the screening process.
Conclusion.
The FIC's Directive 8 of 2023 emphasises the importance of employee screening for competence and integrity while conducting meticulous scrutiny against targeted financial sanctions lists. By adhering to this directive, accountable institutions contribute significantly to the overall security and stability of the financial system in South Africa. Moreover, the directive promotes a culture of compliance, transparency, and accountability, ensuring that the financial sector remains resilient against the ever-evolving threats of money laundering, terrorist financing, and proliferation financing.
As financial institutions continue to prioritise robust risk management practices, Directive 8 serves as a crucial tool in safeguarding not only their own interests, but also the broader national and global financial ecosystem. By staying vigilant and proactive in implementing these measures, the financial industry can collectively contribute to a safer and more secure financial environment for all stakeholders.
Be sure to read our follow-up blog in this series, as we explore what steps the accountable institutions, such as financial service providers, estate agents, and attorneys operating in South Africa need to take in order to meet the requirements.