Financial Intelligence Centre Act

What is the Financial Intelligence Centre Act?

The Financial Intelligence Centre Act (38 of 2001) – hereinafter FICA – came into effect in 2003 to combat various financial crimes such as money laundering, fraud, tax evasion, terrorist financing and identity theft. South Africa enacted the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022, which came into effect on April 1st 2023. These amendments aimed to align South Africa with international standards set by the Financial Action Task Force (“FATF”) in tackling money laundering and terrorism financing. 

To whom does The Act apply?

FICA is only applicable to accountable institutions. Accountable institutions include, but are not limited to, financial service providers, banks, attorneys, estate agents and trust property administrators. 

What is the purpose of The Act?

In addition to containing multiple control measures aimed at facilitating the detection and investigation of terrorist financing and money laundering, The Act also imposes specific obligations on accountable institutions that relate to commencing a business relationship with a client as well as during the business relationship lifecycle. This involves, amongst other factors, the need to “Know Your Client” (KYC) – that is, to establish and verify each client’s identity before the commencement of a business relationship or completion of a transaction. 

As a result of the amendments, the FICA-mandated identification and verification processes are still applicable, but accountable institutions must now as well evaluate the risk of money laundering and terrorism funding in relation to their offered client services. 

Note that the General Laws Amendment Act does not amend the scope of application, but it does however alter the former ‘rules-based approach’ to the new ‘risk-based approach’. The term ‘risk-based approach’ refers to the process by which an accountable institution recognizes, evaluates, and comprehends the risks associated with money laundering and the financing of terrorism to which such institutions are exposed. It also describes the appropriate application of measures to counteract such risks. Each accountable institution is required to create, maintain, and implement a Risk Management and Compliance Program (RMCP) that includes these measures and their implementation. RMCPs have to specify the systems that the responsible institution will use to achieve the above.

Consequences of Non-Compliance with FICA include:

• Financial Penalties – the severity and duration of non-compliance determines the implemented fines.

• Legal Sanctions – criminal prosecution by regulatory authorities for financial crimes.

• Reputational damage – negative publicity erodes customer retention and business relationships.

• Increased monitoring and oversight – heightened scrutiny and monitoring adds operational burdens, diverting resources away from core business activities.

• Diminished investor confidence – signals a lack of governance, risk management and regulatory adherence.

The amendments also imposed the following duties on accountable institutions which include:

• Implementing customer due diligence measures, including identifying beneficial ownership and persons in prominent positions.
• Adopting a risk-based approach to client identification.
• Enforcing financial sanctions and complying with UN Security Council resolutions.

• Issue directives and register accountable and reporting institutions.
• Defining roles and responsibilities of supervisory bodies through written arrangements.
• Granting inspection powers to the Centre and supervisory bodies.
• Regulating certain court applications.
  
• Imposing administrative sanctions by the Centre and supervisory bodies. 
  

In conclusion, the Financial Intelligence Centre Act (FICA) is a pivotal piece of legislation in South Africa aimed at combating financial crimes such as money laundering, terrorist financing, and fraud. The recent amendments introduced in 2023 further strengthened its effectiveness by transitioning from a rules-based to a risk-based approach, requiring accountable institutions to evaluate and manage the risks associated with their client services. Key obligations include implementing customer due diligence measures, adopting risk-based client identification, and enforcing financial sanctions. Non-compliance with FICA can lead to severe consequences and it is imperative for accountable institutions to adhere to FICA's requirements to mitigate these risks and ensure a robust financial system in South Africa.