As many of us were putting the champagne bottles on ice in preparation of the countdown to the new year, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, No. 22 of 2022 quietly sneaked through the door on 29 December 2022. Makes one think of a courageous mouse sneaking past a cat getting his beauty sleep before the party. Considering the fast-approaching effective date for many of the significant provisions of this Act, being 1 April 2023, it is high time for the cat to shake off the last side-effects of the new year’s festivities and to catch a serious wake up call.
The reasoning behind the General Laws Amendment Act, which we will refer to as the GLA Act for the sake of brevity, cannot really be challenged. It is critical for the country, its economy and its people to limit the risk of being grey listed by the Financial Action Task Force (FATF) in the coming weeks. While we can have a healthy debate on many aspects of the topic, this is the reality that we face and that we need to find effective solutions for. It does seem as though the threat of grey listing may have been one of the key drivers behind the GLA Act and, as indicated, the good intent must be accepted.
It is the ‘effectiveness’ of the proposed statutory interventions that however calls for some interrogation. To explain the main objective of the GLA Act in simple terms, one can probably say that it boils down to a responsibility on organisations such as companies, trusts and certain non-profit organisations to find the actual ‘human face’, the flesh and blood, behind the legal persons and the different kinds of interests held in such legal persons. For this reason, the concept of ‘beneficial owner’ that is defined in a manner that drills down to the human being ‘benefitting’ from the actual interest in the organisation features strongly in the legislation.
It is also for this reason that the 65 sections of the GLA Act result in various amendments to a list of fairly important statutes forming part of the regulatory universe within which commerce in South Africa operates:
- Trust Property Control Act of 1988
- Non-profit Organisations Act of 1997
- Financial Intelligence Centre Act of 2001
- Companies Act of 2008
- Financial Sector Regulation Act of 2017
The purpose of this short exposé is not to go into the minute detail of the required amendments, nor is it to provide a clear and infinitive answer as to whether the activities that will now be required by law are all in fact doable or how it should indeed be approached. It is early days and time will tell in some instances. However, on a quick glance, it cannot be ignored that there are several potential practical realities and challenges that may limit the effectiveness of what the GLA Act intends to achieve. At the same time, 1 April 2023 is fast approaching as already alluded to.
The main purpose, thus, is to sensitise the reader who may be involved in companies, trusts and voluntary associations in South Africa to the need for proactive consideration of the implications for each organisation and to timeously implement the required systems and processes to ensure compliance with the law, whatever our personal view may be regarding the soundness behind all of it.
In short, the most significant amendments and possible challenges, where relevant, can be summarised as follows:
- Trust Property Control Act:
For the first time, the concept of ‘beneficial owner’ will now feature in the statute that has governed trusts in South Africa since 1988. Not only will many, if not most, trusts be required to identify the actual beneficial ‘beneficiary’ (owner) of the trust, but the Master will be required to maintain a register of such beneficial ‘ownership’ of trusts and make this information available on request. While this will be a new concept for many trustees to get to grips with, the bigger concern is probably the ability of the Master’s Office to effectively manage the collation, retention and publication of the information. It is an unfortunate reality that the Master’s Office does not have a sterling record when it comes to systems, processes and effectiveness, to put it mildly.
The intention is also, similar to the proposed interventions for companies, to prevent certain individuals from being appointed as trustees. For this reason, the Trust Property Control Act will now introduce specific grounds for disqualification to be appointed as trustees, very similar to the grounds for disqualification to be appointed as a director of a company in this country which, by the way, will also be expanded on as part of the required amendments to the Companies Act.
Sanctions for non-compliance include penalties to a maximum of R10m and imprisonment for 5 years, or both. Non-compliance for this purpose relates specifically to a failure in maintaining the required information on beneficial ownership as well as the failure to make the required disclosures to accountable institutions.
- Non-profit Organisations Act:
While most non-profit organisations (NPO’s) in this country were very willing to voluntarily register as a non-profit organisation in terms of the Non-Profit Organisation Act, this approach may now have to be carefully considered. Not only will certain NPO’s be required to register, but those that have registered will be required to provide prescribed information about the office-bearers, control structure, governance, management, administration and operations of the NPO. Such information will also have to be included in the register to be kept by the Directorate and be open for scrutiny by third parties.
The emphasis will shift from encouraging good governance practices to requiring good governance from registered NPO’s.
NPO’s that will be required by law to register, in other words have no option but to register, will be those with activities outside the borders of South Africa.
Similar to trustees, grounds for disqualification for a person to be appointed or continuing to act as an office-bearer of a registered NPO are being introduced. These grounds also serve as the basis for a removal of such office bearer.
- Financial Intelligence Centre Act (FICA):
Although the concept of ‘beneficial owner’ is well-known in the FICA environment, the definition is being amended to drill down to the absolutely final level of ‘beneficiary’ – the breathing, moving, thinking, living human being as alluded to earlier in this overview.
Concepts such as ‘politically exposed persons’ will now be distinguished from ‘politically influential persons’. The PEP versus PIP categories! Then there is also the ‘domestic prominent influential person’ and the ‘foreign prominent public official’ that will be defined differently going forward. In addition, a number of sections of the GLA Act addresses specific aspects of the Financial Intelligence Centre (FIC).
While most of the amendments to FICA can be said to speak more directly to the FIC, organisations in general will be well advised to understand the categorisation of individuals as alluded to earlier and the potential impact of such categories on the business and activities of the organisation.
- Companies Act:
Once again, ‘beneficial owner’ is introduced in the Companies Act in alignment with the definitions of the statutes already quoted. This is only the introduction into wide-ranging reforms aimed at revealing the natural person who ‘owns or controls the company’ to quote the actual wording of the GLA Act.
Forget for a moment the academic argument around the concept of ‘ownership’ of a company that warrants a thesis on its own. The frightening reality for many companies, especially listed companies with thousands and thousands of shareholders and beneficial owners, to be required by law to identify the natural persons in a sea of dematerialised entries will in all probability make many break out in cold sweat. For various reasons, it is just not doable in certain instances.
There is however a light at the end of the potentially dark tunnel and that is the fact that the newly introduced statutory requirement to ‘establish and maintain’ a register of beneficial interests relate to persons whose beneficial interest is equal to or in excess of 5% of the number of shares issued by the company. This should definitely bring some relief from the administrative burden and associated cost implications for companies. That having been said, there may still be challenges for companies, especially if facing foreign investors.
This is however not the end of the potential pain. Consider the impact on CIPC that very recently experienced major challenges in its noble attempts to improve its systems. CIPC will now be required to not only receive gigantic loads of information but also make this available to third parties, probably in a format that is ‘user-friendly’. Companies will be required to file both the share register as well as the register of beneficial interests together with its annual return. The fact that for listed companies this is probably outdated information at the time of filing, no one seems to be too concerned about at this point in time.
In addition to what is defined as ‘affected companies’, all companies will be required to capture information on beneficial ownership and provide specified information in this regard to CIPC even if not required to maintain a separate register.
Finally, the grounds for possible disqualification for a person to be appointed as a director or prescribed officer of a company will be expanded with additional grounds relating to crimes associated with money laundering, terrorist financing as well as a resolution of the UN Security Council.
- Financial Sector Regulation Act
Without going into too much detail, the main focus of the required amendments again relates to the matter of ‘beneficial owners’ and, in this case, the beneficial owners of financial institutions. Along the same theme, the objective is greater disclosure and transparency.
It is not only beneficial owners that feature strongly in the GLA Act but also a new list of offences with resultant penalties for failure to comply with the additional requirements. In addition to compliance being a non-negotiable for every law-abiding citizen and corporate citizen in this country, there are other persuasive reasons to proactively consider the potential implications of the GLA Act, including the practicalities and need for appropriate systems, processes and procedures. Definitely time to wake up and smell the coffee (or rather, the milk)!
Annamarie van der Merwe
FluidRock Governance Group
February 2023