Illicit Financial Flows: FIC's Role & Concerns

1. FIC presentation to Joint Committees: Illicit Financial Flows 15 March 2017

2. Scope of presentation The FIC and why does IFF concern it Progress since our last meeting Action on Panama Papers Inter-departmental and intergovernmental Cooperation

3. The FIC and why does Illicit financial flows concern it Legislative mandate The FIC was established in terms of the FIC Act 38 of 2001 (as amended) and complements the Prevention of Organised Crime Act, No. 121 of 1998 (POCA) and Protection of Constitutional Democracy Against Terrorist and Related Activities Act, No. 33 of 2004 (POCDATARA). The FIC was established to: Receive, process and analyse transactional data Identify the proceeds of unlawful activities Combat money laundering activities and financing of terrorist and related activities Exchange information with law enforcement and local and international agencies Supervise and enforce compliance with the FIC Act, and to facilitate effective supervision and enforcement by supervisory bodies.

4. The FIC and why does Illicit financial flows concern it Operational functions of the FIC Receives financial transaction reports and data from scheduled entities Processes and analyses transactional data to develop financial intelligence products The information it develops is made available to a variety of stakeholders including: Supervisors, Law enforcement, Intelligence Services and the South African Revenue Service, in order to facilitate the administration and enforcement of laws of RSA Exchanges information with similar bodies in other countries Monitors and gives guidance to accountable and reporting institutions, supervisory bodies and individuals regarding their performance and compliance with the FIC Act The FIC is not an investigative authority

5. The FIC and why does Illicit financial flows concern it Growth in reporting In the period April 2011-March 2015 the FIC: • received 26,6 million transactions reports from Accountable Institutions. • initiated and disseminated 3,908 financial intelligence products to law enforcement and other partner authorities for investigation, with an estimated value of R96.97 billion; • responded to 7,753 requests for information concerning domestic and international criminal investigations, in 50 different crime categories; • produced 107 affidavits to support various types of judicial action by the state; and • R794 million worth of suspected proceeds of crime was blocked by the FIC.  In the 2015-16 financial year period • 34,255 Accountable and Reporting Institutions registered as at end March 2016 • 9,494,717 reports were made to the FIC by Accountable Institutions; • 2,490 products were disseminated in the financial year, estimated value of R58,94 billion. These represent potential illicit financial flows!

6. The FIC and why does Illicit financial flows concern it FIC ran a research project 2011-2015 to understand: Relationship of the licit to the illicit economy How the illicit economy generates proceeds and enables money laundering, ie what part of the illicit economy is illegal Identify the major crime types generating proceeds Flows of proceeds of crime and destinations Led to interrogation of virtual currencies (Bitcoin and the Blockchain) The research was also intended to find answers to: How could FIC interventions assist policy development, How to support Supervisory bodies and the coordinated efforts of law enforcement authorities, security agencies, and SARS Better understand the value chains linked to crime types Develop a description and definition of Illicit economy

7. The FIC and why does Illicit financial flows concern it The FIC has not yet settled on a narrow definition The FIC is focused on identifying the proceeds of crime and helping to track the movement of such proceeds Therefore the FIC needed to clarify and develop a working definition for the Illicit Economy which encompasses all illegal (and illicit) economic activities (monetary and non-monetary) escaping government, law enforcement agencies and regulators observation, regulation and taxation. Needed to distinguish between the legal, illicit (but not illegal) and illegal nature of the problem at hand. Only the ILLEGAL component of the problem can be addressed within the criminal justice space Other components of the “illicit economy” and IFFs, including matters such as mispricing, transfer pricing and base erosion and profit shifting (BEPS) needs research, monitoring and policy development by relevant roleplayers

8. Illicit Financial Flows: the Landscape Formal Economy:Official/Formal Authorized Intended VisibleTransparentObservedReported RecordedFirst Formal EconomyTaxed, monitored, included in GNP Legal/LicitRegulated Laws, Rules, RightsRegulations &Enforcement Penalties govern Formal Agents engaged in Production & Exchange Informal Economy/SectorNot taxed, monitored, included in any GNP, Unreported Employment(e.g. Spaza Shops, Shebeens, Taxis ARS, Hawala, Barter, Cash, DIY, Self-Employment, Payment in Kind, etc.) Grey Market/Economy:Unofficial/Unauthorized Irregular/Unintended HiddenShadowInformalUnobservedUnreported UnrecordedSecond/Parallel Opaque Unofficial Legitimate Unofficial Illegitimate Criminal Acts(e.g. ML/TF, Counterfeits, ID Theft, Hacking, 419/Phising) Unreported Economy(e.g. Tax Gap) Informal Agents Circumvent, Escape & Excluded from the Institutional Systems of Laws, Rules, Rights, Regulations & Enforcement Penalties Illicit Economy:Unofficial/Unauthorized Irregular/Unintended/Hidden/Shadow/MirrorInformal/Clandestine Underground/Subterranean Illegal UnobservedUnreported UnrecordedSecond/Parallel Unrecorded Economy(e.g. Income/Production Accounts, Social Grant Corruption, Budget Deficits, TBML) Informal Economy(e.g. Contraband, Piracy, etc.) Illegal Economy (e.g. Drugs, Arms, Organized Crime, Sanction Busting, etc.) Government Corruption, Bribery, Illegal Tender Practices, Nepotism, Patronage, etc.) Illegal/IllicitUnregulated

9. Progress since our last meeting The FIC participated in an ad hoc group with other government departments to evaluate the extent of illicit financial flows as this relates to proceeds of crime in SA. The FIC is undertaking a review of the list of scheduled institutions towards the strengthened reporting from such institutions in sectors susceptible to being abused for the laundering and illicit financial flows. Areas of focus include • Professional Accountants, • Virtual currencies exchanges and • Trusts service providers The FIC is partnering with the Department of Home Affairs, SARS Customs and the SAPS, in a Task Team which has been established to conduct a pilot project for the cash declaration reporting at ports of entry and entry.

10. Action on the Panama Papers The FIC analysed the information released in the Panama Papers The FIC took steps to engage its Panamanian counterpart on this issue It made the relevant information available to the appropriate law enforcement agencies using S40 of the FIC Act Took steps to enforce compliance with FIC Act by accountable institutions that facilitated the creation of the Offshore accounts mentioned in the Panama Papers Conducted compliance inspections, accompanied by the Law Society of SA and Financial Services Board • Inspections confirmed that all required documents/ information for identification and verification of clients were obtained in line with the applicable Regulations No issues or non compliance requiring criminal action were identified and The matter remains an ongoing concern, but is not a topic of current operational focus

11. Inter-departmental and intergovernmental Cooperation Improving Capacity Nothing to Report Inter-department Relations Access to beneficial ownership and shareholder information remains a challenge. This matter will receive attention: Companies registration – CIPC – Department of Trade and Industry Trust formation – Masters Office - Department of Justice and Correctional Services The pilot project on implementing cash declaration has become a matter of urgency, based on the frequency of large cash seizure occurring at our ports.