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Know your employees: screening employees to mitigate against financial crimes

On 31 March 2023, the Financial Intelligence Centre (“FIC”) published 3 directives in terms of the Financial Intelligence Centre Act, 2001 (“FIC Act”). Directives 6 and 7 require accountable institutions to submit information regarding their understanding of money laundering, terrorist financing and proliferation financing risks. They must also provide their assessment of compliance with obligations in terms of FICA to the FIC by either 31 May 2023 or 31 July 2023, depending on the type of accountable institution, through a prescribed risk and compliance return.

Directive 8 requires accountable institutions to screen prospective employees and current employees for competence and integrity, as well as to scrutinise employee information against the targeted financial sanctions lists (“TFS Lists”), in order to identify, assess, monitor, mitigate and manage the risk of money laundering, terrorist financing and proliferation financing (“the Directive”).

The FIC is empowered to issue guidance notes and public compliance communications and directives. While the guidance is not law and merely expresses the FIC’s views on the interpretation of the relevant laws like the FIC Act, directives have the force of law.

Directive 8 was first published for public comment on 29 July 2022. The purpose of the Directive is to address the areas of concern highlighted in the Financial Action Task Force’s (“FATF”) 2019 Mutual Evaluation final Report, published in October 2021 (“2019 FATF Report”).

The FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against, amongst other things, money laundering and terrorist financing. Its recommendations are recognised as the global anti-money laundering and counter-terrorist financing standard. In the 2019 Report on South Africa’s anti-money laundering and counter-terrorist financing measures, the FATF noted that:

“South Africa has a relatively high volume and intensity of crime and more than half of reported crimes fall into categories that generate proceeds. The main domestic proceeds-generating predicate crimes are tax crimes, corruption and bribery, fraud, then trafficking in illicit drugs, and environmental type crimes. As a large economy and a regional financial hub for sub-Saharan Africa, South Africa has a notable exposure to the threat of foreign proceeds of crime generated in the region being laundered in or through the country. South Africa is exposed to TF risks associated with the financing of foreign terrorism, foreign terrorist fighters (FTFs), and potential domestic terrorism.”

On 24 February 2023, The Plenary (the decision-making body of the FATF) made several decisions including placing South Africa on the FATF’s Jurisdictions under Increased Monitoring, often referred to as the FATF’s “grey list”. This has various economic and reputational implications for companies which qualify as accountable institutions. The objective of the Directive is to form part of the responsive measures required to restore confidence in a country's ability to combat money laundering offences, especially after South Africa has been “grey listed”.

To combat money laundering and high-risk terrorist financing, the Directive focuses on employees, a pivotal aspect of the operations of any business. While the Directive places an increased compliance burden on employers who are accountable institutions, it should, together with other proposed reforms, assist in the drive to address the shortcomings in South Africa’s anti-money laundering legislation identified by the FATF.

In respect of the controls in place in respect of the FIC Act, the FATF noted that the FIC Act does not require accountable institutions to screen employees.

To remedy this identified shortcoming in the FIC Act, the FIC has now published Directive 8. Directive 8 applies to all accountable institutions which include financial institutions, legal practitioners, law firms, trusts, estate agents, insurers and others. The accountable institutions must screen prospective employees and current employees for competence and integrity periodically. They must provide for and record how they will conduct the screening and the review of employee information against TFS Lists and keep such records, which must be presented to the FIC upon request.

The FIC has simultaneously published a Public Compliance Communication 55 on Directive 8 (“PCC 55”), which guides how accountable institutions must apply and ensure compliance with Directive 8.

When applying Directive 8 and the PCC 55, employers are to ensure that they also comply with applicable labour laws and the Protection of Personal Information Act, 2013.

Screening for competence

Accountable institutions are required to determine whether an employee has the necessary skills, knowledge and expertise to perform their functions effectively. This may involve the employer reviewing the employee’s previous employment history, employment reference, qualifications and relevant accreditations.

Screening for integrity

Integrity relates to the honesty and moral principles of an employee. The screening may include checking an employee’s criminal record about crimes of dishonesty, money laundering or other financial crimes. More enhanced screening is recommended for roles that pose a higher risk.

Employees occupying senior management roles and any other employees who can make decisions that could alter the anti-money laundering, counter-terrorist financing and counter-proliferation regime of the entity, are considered to present a higher risk of money laundering, terrorist financing and proliferation financing. Therefore, employers must apply stricter screening procedures in respect of these roles.

The screening of employees must be conducted on an ongoing basis – and not only upon commencement of employment. In respect of high-risk employees, the FIC recommends that screening occur annually.

Accountable institutions are also required to check whether prospective employees appear on the TFS Lists before any appointment and to check the same in respect of current employees.

If an accountable institution fails to comply with this Directive, it may face an administrative sanction of a financial penalty not exceeding ZAR10-million, if they are a natural person, and ZAR50-million if they are a juristic person.

Directive 8 and PCC 55 became effective on 31 March 2023.

Employers of accountable institutions, must, without delay, review and update their current employee screening policies and procedures to ensure that they align with the requirements of Directive 8 and PCC 55.

Angela Itzikowitz

Executive | Banking and Finance

Era Gunning

Executive | Banking and Finance

Alex Taylor

Executive | Banking and Finance

Prencess Mohlahlo

Executive | Employment

Matlhatsi Ntlhoro

Associate | Banking and Finance