Dealers in high-value goods may soon be accountable institutions under FICA
In our recent article, we discussed that South Africa has until the end of February 2023 to meet a tight deadline to amend its Financial Intelligence Centre Act, 2001 (“FICA”) or face the consequences of its financial institutions being added to a grey list by the Financial Action Task Force (“FATF”) alongside countries such as Yemen, South Sudan, and Haiti.
The FATF’s mutual evaluation of the country identified significant weaknesses in the country’s anti‐money‐laundering and counter financing of terrorism systems. National Treasury has noted that the Prudential Authority, Financial Sector Conduct Authority, and Financial Intelligence Centre (“FIC”) are working closely with the South African Revenue Service (“SARS”) to prevent illegal financial transactions and flows, including regulating transactions in sectors prone to illegal activities, such as the scrap steel market.
It is therefore not surprising that on 21 July 2022, the Standing Committee on Finance released the draft amendments to the Schedules 1, 2, and 3 of FICA (the “FICA Schedules”).
If these draft amendments are passed in their current form, a number of entities would become accountable institutions and have to comply with stringent obligations, including:
- customer due diligence;
- reporting; and
- documenting their compliance measures in a risk management and compliance programme (“RMCP”).
Included in the list of entities are persons who carry on the business of dealing in high-value goods in respect of any transaction where such a business receives payment in any form to the value of ZAR100,000 or more. This is regardless of whether the payment is made in a single operation or in more than one operation that appears to be linked.
Of relevance in interpreting these provisions we turn to the “FATF Recommendations, the international anti-money laundering and combatting the financing of terrorism and proliferation (AML/CFT) standards, and the FATF Methodology to assess the effectiveness of AML/CFT system”. Recommendation 12 mandates that the requirements for customer due diligence, record-keeping, and paying attention to all complex, unusual large transactions apply to dealers in precious metals and dealers in precious stones.
The Consultation Paper on the Amendments to the FICA Schedules issued by the FIC refers to the FATF standards and notes that criminals can potentially use any high-value goods to launder illicit funds. However, some high-value goods dealers are more vulnerable to being misused for money laundering or the financing of terrorism than others, such as:
- dealers in precious metals and stones (e.g., jewellers):
- antiques and collectibles;
- fine art; and
- aircraft, boats, and luxury motor vehicles.
The Consultation Paper goes on to provide that “[a] proposed category of high value goods dealers will be focussed on the retail sector as the risk of money laundering and terrorist financing lies in this area. Consultation with, amongst others, the Diamond Council and the Jewellery Council has confirmed the view that the risk lies in the retail sector as compared to the manufacturing or wholesale sector in so far as trade in precious metals and stones is concerned.”
The proposed high-value goods category will also include the categories of business that are currently referred to in Schedule 3 of FICA, namely, Krugerrand dealers and motor vehicle dealers.
The inclusion of a category aimed at high-value goods is in line with the approach followed by foreign jurisdictions. The 4th Anti-Money Laundering Directive (“AMLD4”), adopted by the European Union on 20 May 2015, applies to persons who trade in goods to the extent that payments are made or received in cash in an amount of EUR10,000. Likewise, in the United Kingdom, high-value dealers (classed as persons who accept cash payments of EUR15,000 or more in exchange for goods are subject to the money laundering regulations, 2007. However, unlike the focus by foreign jurisdictions on cash payments, the draft amendments to the FICA Schedules will apply to payment in any form in excess of the ZAR100,000 threshold, with additional reporting requirements applicable to cash payments.
The publication of the draft amendments to the FICA Schedules comes shortly after the promulgation on 8 June 2022 of the domestic reverse charge regulations on “valuable metal” relating to gold-containing material (the “DRC regulations”). The DRC regulations is a mechanism aimed at curbing value-added tax (“VAT”) refund fraud involving illicit gold trading in the second-hand gold market but also apply to certain historic mine dumps.
The fraudulent scheme is similar to ‘missing trader’ or ‘carousel’ VAT fraud found in the European Union and elsewhere globally involving the theft of VAT from a government by fraudsters who exploit VAT rules. Missing trader fraud generally involves a trader charging VAT on the sale of high-value goods and absconding with the VAT instead of paying the VAT to the revenue authority. A stand-off usually ensues between purchasing vendors claiming VAT refunds and the revenue authority disallowing the refund claims over whose responsibility it was to scrutinise whether the supplier was a bona fide business.
In South Africa purchasers are also facing the brunt of SARS’ enforcement action by having to fend off allegations of wilful blindness and flouting robust supplier due diligence, notwithstanding that such due diligence is not currently required by legislation. It is therefore significant that the draft amendments to FICA include high-value goods dealers transacting above the specified threshold of ZAR100,000 per transaction as this is seen as a clear signal to precious metals suppliers to toe the line.
The draft amendments will provide a much-needed regulatory framework to guide transacting parties in adequately vetting who they do business with. Unfortunately, the proposed legislation is entirely misdirected when taking into account where the due diligence risk lies when dealing with missing trader fraud. FICA predominantly requires suppliers to validate their customers (i.e., downstream due diligence), whereas an inherent feature of VAT refund fraud is unscrupulous suppliers requiring upstream due diligence by a customer.
FICA does not apply both ways. The efforts to be expended by high-value goods suppliers complying with FICA will therefore serve little purpose in curbing illicit activities in high-value goods supply chains aimed at defrauding the fiscus and more work is needed in this area.
The Standing Committee on Finance has invited comments on the draft amendments to the FICA Schedules until 12 August 2022. Public hearings are scheduled for 16 August 2022.
If the amendments are passed, dealers in scrap metal, precious metals and precious stones (e.g., jewellers), antiques and collectibles, fine art, aircraft, boats, luxury motor vehicles and Krugerrands would certainly become accountable institutions. Without further amendments to the Schedules or guidance from the FIC it also seems fair to conclude that all other dealers in any item that is valued in excess of ZAR100,000 would become accountable institutions too.
ENSafrica can assist clients with FICA training, preparation of their RMCPs and legal advice.
Executive | Banking and Finance
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