The Law Society of South Africa (LSSA) has called for clearer legal thresholds and procedural safeguards to govern the Financial Intelligence Centre’s proposed power to conduct lifestyle audits, although it supports the use of these audits in combating corruption and money laundering.
Briefing the Standing Committee on Finance during public hearings on the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill on 11 August, the LSSA also raised concerns about expanded information-sharing powers, beneficial-ownership reporting, company deregistration, and administrative fines, as well as amendments that would widen the scope of financial-sector regulation.
The LSSA was one of eight stakeholders that briefed the committee.
A significant proportion of the presentations focused on the Bill’s proposed changes to the regulation of non-profit organisations (NPOs), including expanded monitoring and enforcement powers, administrative sanctions, and the proposed appeals mechanism. The LSSA also addressed these provisions, but its submission covered a broader range of amendments across the Nonprofit Organisations Act, Financial Intelligence Centre Act (FICA), Companies Act, and Financial Sector Regulation Act (FSRA).
Lifestyle audits require clearer safeguards, LSSA says
Ncumisa Siya Sotenjwa, senior manager at the LSSA, said the Society supported measures to combat money laundering and terrorist financing and regarded the proposed alignment of the legislation governing NPOs, financial intelligence, companies and financial-sector regulation as long overdue.
However, it believed several provisions raised constitutional, practical, and administrative-law concerns.
The Bill would empower the FIC to conduct lifestyle audits in pursuit of its statutory objectives. It could also audit persons referred to in Schedule 3A to FICA, or other categories prescribed by the Minister of Finance, at the request of an organ of state, public entity, or municipality if the FIC reasonably believes the requesting entity is “affected by or has an interest in” the information obtained through the audit.
Clause 14 would allow an authorised FIC representative, subject to the existing requirements in section 27A, to access specified records kept by or on behalf of an accountable institution for use in conducting a lifestyle audit.
Sotenjwa said the LSSA regarded lifestyle audits as an important tool in combating corruption and money laundering. However, the Bill did not provide a detailed framework governing when an audit could begin, who could be subjected to one, the evidentiary threshold that would have to be met, notice to affected people, their opportunity to respond, or available appeal and review mechanisms.
The absence of these elements could raise concerns relating to the constitutional rights to privacy and just administrative action, together with the provisions of the Promotion of Administrative Justice Act (PAJA), the LSSA said.
It recommended that the FIC should conduct a lifestyle audit only where there were reasonable grounds, based on lawfully obtained information, suggesting a material discrepancy between a person’s known lawful income and identified assets, expenditure, or financial activities.
The LSSA also proposed an express provision requiring lifestyle audits to be conducted subject to the Constitution, PAJA, and the Protection of Personal Information Act (POPIA).
Access to and sharing of information
The LSSA also raised concerns about the Bill’s proposed expansion of the information the FIC could obtain and disclose.
Clause 9 would allow the FIC to request information from organs of state, public entities, and municipalities, request access to their databases, and have regular access to information contained in statutory registers maintained by them.
Separately, clause 19 would allow the FIC to share information obtained through certain lifestyle audits, and information generated by analysing it, with specified bodies. Information could be given to an organ of state, public entity, or municipality if the FIC reasonably believes it is relevant to the exercise of that body’s powers or performance of its functions under any law, and that the body is affected by or has an interest in the information.
The LSSA said the proposed information-sharing power was potentially excessive and went beyond the Financial Action Task Force’s requirements. It recommended replacing the phrase “has an interest in” with wording that would permit disclosure where a body “requires the information for the lawful exercise of a statutory power or performance of a statutory function”.
Sotenjwa said this would be consistent with terminology commonly used in legislation governing access to and the protection of information.
Transition needed for seven-year record retention
Clause 10 would extend from five to seven years the minimum period for which accountable institutions must retain records relating to the establishment of business relationships, specified transactions, and transactions or activities that gave rise to a section 29 report.
Although the LSSA supported the extension, it said the Bill contained no transitional provision. This could create uncertainty about whether existing records that had already been retained for more than five years would become subject to the longer period and whether the amendment would apply only prospectively.
The LSSA recommended that an appropriate transitional provision be included in the Bill.
Beneficial-ownership reporting and CIPC enforcement
The Bill would require prescribed “obliged entities” to report material discrepancies between beneficial-ownership information they are required to obtain under FICA, or otherwise obtain in carrying out their duties, and the information in the Companies and Intellectual Property Commission’s beneficial-ownership register.
It defines an “obliged entity” as any category of persons prescribed by the Minister.
The LSSA said this definition was overly broad because it would enable the Minister to create categories of regulated entities through regulations. It recommended limiting the power to categories of accountable institutions, supervisory bodies, or other persons that regularly obtain beneficial-ownership information.
The LSSA also noted that the Bill would require discrepancies to be reported but would not expressly require the CIPC to investigate them, correct its information where necessary, or notify affected companies.
It recommended that the CIPC should be required to notify an affected company, give it an opportunity to respond, determine the matter within a prescribed period, and correct its records where necessary.
The Bill would also allow the CIPC to deregister a company that, after a demand from the Commission, failed for two or more successive years to submit its securities register or register of beneficial interest.
The LSSA said deregistration could be disproportionate where the underlying failure was administrative. It recommended that the Commission should first issue a compliance notice, allow the company to rectify the failure, and give it an opportunity to make representations.
Failure to comply with a compliance notice issued for failing to submit the securities register or register of beneficial interest could result in an administrative fine not exceeding the greater of 10% of the company’s turnover during the period of non-compliance or the maximum prescribed by the Minister. The Bill provides that the prescribed maximum must be at least R10 million.
The LSSA recommended that the CIPC should have to consider factors such as the nature and duration of the contravention, previous offences, prejudice caused, and the company’s ability to pay.
Although the Bill would allow the Companies Tribunal to review an administrative fine, the LSSA said it did not expressly suspend payment while the review was pending. It proposed that payment should be suspended until the review had been concluded.
Financial sector provisions
The Bill would extend the FSRA to arrangements that are “similar in nature to” or have “similar outcomes” as specified financial products and instruments, irrespective of the technology used to provide them.
The LSSA said these phrases were too vague. It proposed referring instead to arrangements having “substantially the same economic function, risk profile, or consumer profile”, which it said would provide more objective criteria.
The Bill would also extend the obligation to comply with a financial sector regulator’s information request to significant owners and beneficial owners. The LSSA recommended expressly protecting legal professional privilege and constitutionally protected information.
It further proposed that a decision to institute an investigation should be in writing and state the grounds for suspicion, the scope of the investigation, and its statutory purpose.
NPO monitoring and sanctions
The LSSA raised similar concerns about the Bill’s proposed extension of the NPO Directorate’s monitoring and enforcement powers, an issue that featured prominently during the public hearing.
It said the Bill did not define the scope of inspections, access powers, or documentary requirements. It recommended that these powers should be clearly defined and should not authorise entry, search, or seizure unless permitted by law.
The LSSA also said the Bill would empower the director to impose administrative sanctions without specifying the factors to be considered, proportionality requirements, or the maximum sanctions that could be imposed.
It recommended that the legislation should address these matters and include mitigating and aggravating factors of the kind found in other regulatory statutes.
NPO sector calls for risk-based approach
Concerns about the proportionality of the proposed NPO framework were raised by several other presenters, who supported measures to strengthen the sector’s safeguards against terrorist-financing abuse while calling for a risk-based approach.
Feryal Domingo and Chelsea Swanepoel, presenting for the NPO Working Group, said the diversity of the sector made a uniform regulatory approach inappropriate. It includes organisations ranging from small, volunteer-led community associations to schools, clinics, faith communities, professional bodies, and large institutions operating internationally.
Although the Working Group welcomed the appeal procedure, the introduction of administrative sanctions, and the limits placed on sanctions, it said the effectiveness of the framework would depend on regulations that were not yet available and the Department of Social Development’s implementation systems.
It highlighted shortcomings in the department’s online registration system and the lack of comprehensive information about the sector. Better data collection, storage, and access, together with specialist expertise, would be needed to identify particular risks and apply appropriate responses, it said.
Eszter Rapanos, representing the Chartered Institute for Business Accountants, recommended that the criteria used to classify organisations as high, medium, or low risk should be published and reviewed every three years. She also proposed that the NPO Directorate should report to Parliament on how it exercised its powers.
Rapanos said responsibility for monitoring compliance should be separated from responsibility for deciding on sanctions. She also recommended requiring written reasons for sanctions and ordinarily suspending sanctions that restricted or stopped an organisation’s activities while an appeal was pending.
The legislation should distinguish deliberate wrongdoing from inadvertent conduct, she said, rather than potentially exposing an organisation that was unaware of its deregistration to the same provisions as someone who knowingly made a material misstatement.
Caroline James, representing amaBhungane, said the existing compulsory-registration provisions were too broad because they applied to NPOs making donations or providing specified services outside South Africa without differentiating between the risks associated with different jurisdictions.
She proposed limiting compulsory registration to organisations dealing with jurisdictions designated as presenting a high terrorist-financing risk. James also called for a costing exercise to determine the resources the Department of Social Development would need to administer the framework effectively.
She raised concerns about the independence of the Arbitration Tribunal because it was located within the department and recommended that the legislation require the tribunal to include members with legal and NPO-sector expertise.
Louise Bick focused on gaps in the collection and sharing of information about NPOs across the different regulators with which they interact. She also highlighted the limited regulation of online fundraising platforms and called for a formal mechanism through which members of the public could report suspected irregularities involving NPOs.
Dr Jeanne Nel, an academic at Monash University who presented in her personal capacity, said the NPO measures should be focused, proportionate and based on identified terrorist-financing risks. She proposed differentiating between cross-border activities according to the risks presented by the jurisdictions involved.
Nel also recommended that the Bill incorporate the FATF’s June 2026 humanitarian exemption, which is intended to prevent targeted financial sanctions from blocking funds, goods, and services needed for legitimate humanitarian assistance and basic human needs. She said its inclusion would close a technical-compliance gap while protecting legitimate humanitarian activity.
