A lot has recently been said in the media about the possibility and impact of the Financial Action Task Force (FATF) greylisting South Africa this month.
The fact is it is no longer relevant that we were greylisted, as new measures were legislated in late December 2022, to strengthen South Africa’s anti-money laundering and terror financing legislation, in an attempt to prevent a potential greylisting.
Few are aware of what is expected of them as a result, and even fewer are aware of the massive penalties for non-compliance – a fine not exceeding R 10 million or imprisonment not exceeding five years, or both.
Most of the amendments are effective from April 1, 2023, therefore, not a lot of leeway is provided by the government for trustees and service providers to get their act together.
What does a “beneficial owner” mean and why has it become relevant in South Africa?
The word “beneficial owner” is used by the FATF to identify a “warm body” who financially benefits from transactions. The FATF requires disclosure of these warm bodies to relevant institutions. Beneficial ownership transparency is one of the measures being used to combat financial crimes such as the financing of terrorism, money laundering, and tax evasion.
A beneficial owner is an individual who gets to enjoy ownership benefits even though the title to some form of the property is in the name of another individual. It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.
It is clear from the experience of countries implementing beneficial ownership registers that in order to be effective, registers must cover all types of legal entities and arrangements (including trusts).
The FATF believes that the persons should be identified and reported on.
The FATF issued a guidance document on transparency and beneficial ownership, in October 2014. Recommendation 24 applies broadly to “legal persons”, meaning any entities, other than natural persons, that can establish a permanent customer relationship with a financial institution or otherwise own property, unlike Recommendation 25, which specifically deals with “Enhancing Transparency of Legal Arrangements”, which includes trusts.
The universal standards and recommendations for the collection and disclosure of beneficial ownership have been supported by FATF, the G7 (an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the UK, and the US), the G20 (an intergovernmental forum comprising 19 countries and the EU; South Africa is the only African member of the group), the International Monetary Fund (IMF), the UN, and the World Bank.
Under the FATF Recommendations, South Africa, therefore, has committed to implement beneficial ownership transparency, and also has commitments through the G20, the Open Government Partnership, the UN Convention Against Corruption, and the National Anti-Corruption Strategy.
Over the years, South Africa has ticked some of the international compliance tick boxes – for example, its laws provide for access to databases such as trust registers (with the Master of the High Court) and company registers (with CIPC). In particular, “PAIA” (the Promotion of Access to Information Act 2 of 2000) provides for the constitutional right to access information in the form of records held by public and private bodies.
Unlike popular belief that “beneficial ownership” is a term recently introduced into South African law, the following timeline demonstrates the implementation of the concept of beneficial ownership:
⦁ 2015 – The government commits to the high-level principles of beneficial ownership transparency set by G20.
⦁ 2016 - The government approves the setting up of the Inter-departmental Committee on Beneficial Ownership Transparency to develop and carry out a National Implementation and Action Plan to ensure the realisation of the G20 High-Level Principles, provide progress reports, and develop a definition of “beneficial owner”.
⦁ 2017 – The Financial Intelligence Centre Amendment Act introduces a legal definition of “beneficial owner” as “in respect of a legal person, means a natural person who, independently or together with another person, directly or indirectly (a) owns the legal person; or (b) exercises effective control of the legal person”. It also adds additional due diligence measures relating to legal persons, trusts and partnerships separately.
⦁ 2020 – Beneficial ownership transparency is committed to, in the 4th OGP National Action Plan.
⦁ 2020 – The Anti-Corruption Task Team publishes the National Anti-Corruption Strategy, with a focus on Beneficial ownership transparency (pillars 1 and 3)
⦁ 2020 – The IMF Covid-19 Rapid Financing Instrument loan of $4.3 billion includes beneficial ownership transparency commitment in procurement.
⦁ 2021 - The FATF mutual evaluation report requires South Africa to address certain areas of technical compliance, the beneficial ownership of legal persons, and reporting of, and transparency around suspicious transactions.
⦁ March 2022 - The Revised FATF standard requires beneficial ownership information collected to be verified for accuracy and placed in a centralised register or an alternative mechanism that allows for a similar degree of access to information by competent authorities.
⦁ August 2022 – The National Treasury tables General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill in Parliament.
⦁ December 2022 – The government enacts General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022.
It is more important than ever that trustees understand the onerous requirements of the role they play in trusts. They have the duty to meet the new requirements. If they fail to comply, they may be fined and/or imprisoned.
Trustees, therefore, have to ensure that proper digital systems are implemented to have information handy in electronic format.
Phia van der Spuy is a chartered accountant with a Master’s degree in tax, a registered fiduciary practitioner of South Africa, a chartered tax adviser, a trust and estate practitioner and the founder of Trusteeze®, the provider of a digital trust solution.
BUSINESS REPORT