*This post is updated as and when information changes or regulations are added. Latest Update: 04/22/2020.
In this post we tell you all about how financial services companies can operate lawfully and safely during the lockdown. We are all aware of the lockdown currently implemented in South Africa due to the COVID-19, and even though we are in a lockdown, we should not confuse this period for a complete shutdown for financial services. Businesses that produce, distribute and deliver essential services are allowed to continue operations if necessary, whilst adhering to the correct health and hygiene procedures during this time.
There was a release of a third amendment which brings greater clarity to what is regarded as essential services in the financial sector. This amendment is the third amendment to the Regulations to the Disaster Management Act 2002, published by Government Notice No 318 of 18 March 2020, as amended by Government Notice No 398 of 25 March 2020 and Government Gazette Notice No 419 of 26 March 2020 (Regulations).
What is regarded as essential services in the financial market?
Essential Services in the financial market includes the following services necessary to maintain the functioning of a financial system as defined in section 1(1) of the Financial Sector Regulation Act, only when the operation of a place of business or entity is necessary to continue to perform those services:
What is our interpretation of FSP's rendering services during lockdown period?
We would argue the services that FSP's render fall under the essential services definition as mentioned above and can therefore continue operations if necessary to service current clients. This does not mean you should go out and canvass for new clients face to face. The essential services exemption is there to assist current clients in need that have no other option but to see you in person - i.e. vulnerable persons and those of little means. The FSP needs to have a CIPC certificate to continue operations and the staff need a permit issued by the FSP itself if they are traveling to and from clients.
Important information for FSP's during this lockdown period:
Where do I request a permit issued by the CIPC for my FSP?
The permit for an FSP to render essential services can be requested online, and is issued by the CIPC. Follow this link to request a permit or click on the "Request a CIPC permit" button below: bizportal.gov.za/essential_service.aspx
Where do I get a permit for the staff of my FSP if they are traveling to clients?
The permit to render essential services for staff of an FSP can be issued by the FSP. Use the form in this link, or click on the "Issue a Permit for my staff" button below: guideline_permit_essential_services.pdf
Are there any exemptions to provide relief to my FSP during the pandemic?
Annual Financial Statement submission dates are usually 4 months after the financial year end, it has now been extended by 4 months, therefore submissions are due 8 months after your FSP's financial year end.
An exemption for compliance with Financial Soundness Requirements was also issued and can be summarised as follows:
GENERAL SOLVENCY REQUIREMENT (Assets must exceed Liabilities)
Exemption: Liabilities may exceed Assets by no more than 20%
Applies to: All Cat 1’s / Cat 2 / Cat 4
WORKING CAPITAL REQUIREMENT (Current Assets must exceed Current Liabilities)
Exemption: Current Liabilities may exceed Current Assets by no more than 20%
Applies to: Cat 1 Holding Funds / Cat 2 / Cat 4
LIQUIDITY REQUIREMENT (Maintain Liquid Assets equal or greater than X/52 weeks of Annual Expenditure)
Exemption: The Liquid Assets may not be less than 50% of the specified Liquidity Requirement:
If you decide to rely on the exemption for Financial Soundness Requirements, there are certain conditions to be met. For more details, please refer to FAIS Notice 21/2020 on the FSCA website.
Note that there are also no Compliance Reports due for 2020.
Practical measures you must comply with
The FSCA and Prudential Authority also issued a joint Directive to state that those financial services businesses that are operating need to comply with the following:
"Financial institutions are hereby directed as follows:
A head of a financial institution must, where that head determines staff as essential as contemplated in Regulation 11B(2), endeavour to limit these members of staff to as small a number as possible and, as far as possible, enable remote working, including working from home to support essential services.
A financial institution must take appropriate precautionary measures to reduce the risk of exposure, transmission and spread of the COVID-19, including to limit the number of staff required to be at offices in order to provide the elevant required essential financial services to a minimum and must put appropriate measures in place to promote minimum physical contact between staff, by-
A financial institution must-
A financial institution must develop and implement an infectious disease preparedness and response plan that can help guide protective actions gainst COVID-19, which must include plans and policies aimed at compliance with this Directive.
A financial institution must identify a workplace coordinator who will be responsible for COVID-19 related issues and their impact at the workplace and for timeously responding to the Authorities upon request for information."
The FSCA paused their compliance reports last year due to them not being done with the new format compliance reports. Although we do not have written confirmation or any notice to this effect - we've heard from some of their staff that it also affects AUM reports and Handover reports (still to be confirmed). And it does not seem that we have any news on new compliance reports for this year. However, there is some other news.
They are busy though, with onsite inspections. Some of our clients were recently inspected and only on FICA. From discussions with people in the industry they are doing inspections on a broad number of FSP's so you should be ready in case they come to visit you.
You should focus on your FICA compliance ASAP. If you do not have the basics in place your are at risk of being fined. Yes, several FSP's have recently been fined for not complying with even the smallest aspects of FICA after the inspections were conducted (none of our clients though).
Be ready for a FICA inspection - a few FSP's have been fined already
What do you need to have in place?
How will the inspection happen?
They will usually contact the Key Individual and inform them of the impending inspection. They will ask for certain documentation beforehand to peruse it before they visit you. They then provide you with a date on which they will arrive and state what you need to have ready on the day. You will likely not have a fun time during the inspection, but with our help we can make it a little less daunting.
This is a quick summary of what to look out for. If you need assistance please let us know - we are here to help.
Seeing your country being pulled down by corruption is hard for anyone. As compliance officers, it's even more difficult as we are often faced with situations where clients and other businesses are actually involved in this to some degree. I can tell you, from experience, that it is not something that one should take lightly. Let's take a look at the risks one faces with PEP's and what to do with them.
The FIC Amendment Act of 2017 still includes the concept of PEPs, however, the naming conventions have now changed to distinguish between foreign and domestic PEPs as follows:
What is the risk?
We must be able to identify PEPs because their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity (as one can see from the recent corruption scourge that plagued our country).
A high ranking South African government official opened a number of accounts with an overseas bank. However, his activity raised a number of concerns that the account was being used to launder the proceeds of corruption. The value of cash deposits into these accounts was inconsistent with the stated purpose of the accounts and the customer’s income. In addition, the official opened an offshore company in a “tax friendly” jurisdiction with himself as sole director and sole shareholder. The deposits paid into the company accounts were considerably more than expected and, contrary to what is expected of a functioning business, there were no outgoing payments. After a Suspicious Transaction Report (STR) was submitted, the individual was investigated and charged with money laundering offences and subsequently sentenced to prison.
Their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity.
What are the proposed controls?
Due to the susceptibility of bribery and corruption associated with PEPs, businesses often don’t want to do business with them, however this is an unintended consequence of the associated risk. Processes and procedures need to be in place to identify customers who are PEPs and when you identify a PEP you must follow your business procedures and compliance policies.
When looking at guidance from international bodies such as the Wolfsberg Group and the Financial Action Task Force, PEP relationships are considered higher risk and should ideally be subject to Enhanced Due Diligence (EDD) such as verifying their source of wealth, regular CDD/KYC reviews and the requirement for Senior Management to give their approval prior to entering into or maintaining the customer relationship. It can also happen that a PEP is not a customer of the accountable institution, but rather a related party such as a beneficial owner. The accountable institution needs to decide what its approach will be in these instances as well. This will usually be contained in the internal rules/policy/processes.
It is important to remember that categorising a customer as a PEP does not mean that they are, or have been, involved in any criminal activity. The can also be risk rated in terms of the accountable institution’s Risk Based Approach (RBA).
The FIC Amendment Act also requires that the following requirements be met for higher risk Foreign Prominent Public Officials and Domestic Prominent Influential Persons:
Risk rating your customers are very important in the new improved version of FICA and PEP's are certainly no exception. Do not take any chances and report any instances of proven or suspected criminal activity via the right channels. You would be doing yourself and everyone, for that matter, a great service.
The new amendments of FICA changes the compliance framework for accountable institutions to a great extent and we'll discuss some of the more pertinent items in this blog post.
Risk Based Compliance
According to the new requirements of FICA, accountable institutions now need to take a risk based approach to FICA and the implementation thereof. This includes:
One must also now be able to risk rate clients according to the risk that they pose with regards to being used for money laundering or to channel the proceeds of any crime. Certain customers and businesses are a lower risk than others and some are a higher risk. Some of the aspects that one can look at to determine the risk a client poses are:
Enchanced Due Diligence
by: Horizon Compliance team