Our last newsletter of 2022 begins with an update on (and some practical advice coming out of) the major legislative changes that we have been engaged with government over, in an effort to:
- avoid grey-listing of our country by the Financial Action Task Force (FATF); AND
- limit unnecessary, not useful and potentially harmful extra regulatory requirements which were being unilaterally imposed on the non profit sector.
We also report back on some recent community trustee training and deal with some practical advice on these topics:
- What is an ‘independent’ board member and why do we need some?
- Can government employees serve on the boards of non-profits?
- Can public benefit organisations purchase shares in (and receive dividends from) commercial companies?
We end with links to other places you can see our work (and that of others) – the Independent Philanthropy Association South Africa (IPASA)’s 2022 Annual Review of South African Philanthropy and Book Dash- “Matthew is Up” (and other books).
We hope that you find all of this information useful and, as usual, please feel free to send this on to anyone who you think might benefit from it. If you have been sent this by someone else and would like to receive future Briefs from us, click this link to subscribe. If you would rather not be sent these any longer, then please unsubscribe at the end of the email.
Keep the questions coming and send us suggestions for future topics – visit our website, hit the ‘contact’ tab, and enter your question into the ‘Contact Form’ space provided.
We wish you a proper rest and more gladness, less madness over the holiday season.
Chelsea, Dorothy, Bandile, Nicole, Janice, Lisa and Alison
THE OCTOPUS BILL UPDATE AND IMPACT
The dust has all but settled on the submissions and responses on “A” (for Alarming 😊) and then the updated, “B” version of the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill. We have taken to calling this Bill the ‘Octopus Bill’ because of its impact on multiple Acts, many of which affect the nonprofit sector. For the background, see https://ng olawsa.co.za/urgent-call-for-submissions-on-the-anti-grey-listing-compulsory-npo-registration-bill/ .
The most important result of our engagement has been the removal from the Bill of the proposed mandatory registration of all non-profits in South Africa. In the “B” version of the Octopus Bill (which we anticipate will be passed into law shortly) compulsory NPO registration has been limited to the ‘at risk’ category of non-profits, as per the proposed amendment to section 12 of the NPO Act:
(b) A nonprofit organisation must be registered under this Act if it—
(i) makes donations to individuals or organisations outside of the Republic’s borders; or
(ii) provides humanitarian, charitable, religious, educational or cultural services outside of the Republic’s borders.
TAKE-AWAYS FROM THE OCTOPUS BILL PROCESS FOR THE SECTOR AS A WHOLE
- Civil society, and all of it, needs to be able to speak to government and proposed changes with an informed, coherent and broad-based voice. We will not always agree on all aspects, but we should be more active in finding common ground and being able to show government departments and parliamentary committees the number and extent of organisations we speak for. In the process just ending, a fabulous effort was made around this in the very short time available. (When we complained that we had not had enough time for proper responses and were asked ‘but what would more time have allowed you to do better?’ our answer was – ‘consult more broadly, engage and inform more extensively, consolidate a joint response in a more considered fashion’.)
- Despite the short time given, when we apply ourselves to making practical, engaging and relevant responses, our voices are heard and even appreciated. Government is often disconnected from the reality of life and struggles in South Africa, and civil society is a very useful window to reality.
- The non-profit sector needs to have people who are dedicated to doing long-term, big-picture work on behalf of the entire sector on an ongoing basis. The Octopus Bill may have come at us suddenly, but there was, really, plenty of advance warning of the brewing FATF process. But there was no-one on the look-out on behalf of the non-profit sector with the spare time and energy to galvanise an earlier response or pro-active actions.
- Imagine a world where, instead of Treasury driving the FATF response, a collaboration of non-profits had already undertaken a detailed risk analysis, survey and research and had proposed an action plan and even a private Bill, if we thought it necessary. In our view, this is the main lesson to be learnt here, that there are opportunities to be more pro-active and to lead the way, and we need to lift our heads up long enough to spot them, and then work together to get them done.
- Being more pro-active can start now. We could:
- drive greater participation in the survey and risk analysis already undertaken by Treasury;
- commission and conduct our own research and analysis;
- come up with our independent recommendations on appropriate and implementable steps to meet the ongoing FATF requirements and standards;
- come up with our own set of risk factor ‘red-flags’ for organisations to watch out for and make sure that they do not fall prey; and
- develop materials and tools to allow non-profits to assess, evaluate and report on the identified risk factors and how, if they arose, they were dealt with.
The NPO working group is already engaging independently with various international FATF meetings and reviews of their proposed approach to the non-profit sector worldwide and invites interested organisations to join the network, support, assist and stay informed. Email email@example.com to get onto the mailing list and see the history of the work done at Inyathelo | The South African Institute for Advancement – NPO Amendment Bill.
TAKE- AWAYS FROM THE OCTOPUS BILL PROCESS FOR INDIVIDUAL ORGANISATIONS
- FATF has highlighted the risks of non-profit organisations being abused for money laundering, terrorist financing and other fraud. If you do not do already, make risk assessment a routine board topic and annual agenda item. Add to your risk register and evaluate the probability of and put in place mitigations against being abused for money laundering, terrorist financing or other fraud;
- Conduct background checks on existing and potential board members, to ensure that they all have the sorts of clean records required by the imminent updates to the Trusts, NPO or Companies Acts;
- To align with new requirements regarding disclosure on who controls organisations, make sure that, if the organisation has members, the member register is up to date. Also, if there are persons or organisations which appoint people to the board or who have veto powers, have the details of those to hand and up to date;
- If the organisation has beneficiaries or projects outside of South Africa and is not yet registered as an NPO, beat the rush and make an application now; and
- For organisations who may be behand with their NPO reports, catch up as soon as possible, as the long-overdue clean-up of the register will commence soon.
REPORT FROM THE WILDS OF NORTHERN KZN:
Wildlife Act Trust ( https://www.wildlifeact.com/ ) recently invited us meet with and train the trustees of various community trusts in northern KZN. We quite often train trustees, but this was our first opportunity to train community-based trustees and in isiZulu.
Bandile Khwela, one of the NGO Lawyers on our team ably ran the presentation and interactions- she had to present in isiZulu off of English slides, translate back and forth to keep us all on the same page, deal with tough questions and the trustee group issues and she handled it with an easy grace and humility which made us proud.
We felt privileged to work with so many who are leaders and activists in their communities, and to be delivering useful and empowering information made it all feel so worthwhile. There was a real thirst for knowledge, an amazing level of really active participation and some moments of real jubilation when ideas landed with clarity.
Thanks, Wildlife Act, for putting us in the room where it happened and to Ezemvelo and other partners for your hospitality and the generator which kept our colourful presentation powered.
WHAT IS AN INDEPENDENT BOARD MEMBER AND WHY DO WE NEED SOME?
A crucial component of credible governance is a measure of independence on the boards of organisations. The founding documents of organisations may call for a proportion (often the majority) of the board to be ‘independent’- but what does this mean?
The CIPC online system differentiates between executive and non-executive directors but the Companies Act does not define the difference between even these, and the term ‘independent director’ is used only in a subset of (not relevant to non-profits) Regulations to the Act and the definition there is not at all useful.
The common use of ‘independent’ comes from King IV (which uses both terms- independent and non-executive’). It is also used in the B-BBEE Codes, which require an independent Chair in broad-based schemes.
King IV defines independence as
“the exercise of objective, unfettered judgement. When used as the measure by which to judge the appearance of independence, or to categorise a non-executive member of the governing body or its committees as independent, it means the absence of an interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making.”
In other words, ‘independent’ goes further than ‘non-executive’ which just means ‘not a manager of the company’. A person can be non-executive (i.e. not a senior employee of the organisation) but still not be properly independent.
It is important to regularly evaluate the proportion of the board which are independent (using the King IV definition as a yardstick), to ensure that the desired balance is achieved and it is also necessary to, especially in the case of long-serving board members, determine whether they can still properly be classified as independent.
GOVERNMENT EMPLOYEES AS BOARD MEMBERS OF NON-PROFIT ENTITIES
We often come across instances where government employees who are involved or wish to be involved (in a volunteer capacity) as board members of an NGO, are informed that they are not permitted to do so.
The first thing to be noted, here, is that anyone who is engaged as a full-time employee with any entity, government or not, is required to devote their full time and attention during business hours to the work for which they are employed. So a full-time employee who wishes to serve on the board of a non-profit must make sure that the meetings take place after hours, or must take leave in order to attend meetings. They will also have to be sure, in terms of the fiduciary duty that they owe to their employer, that there is no material conflict of interests between their service on the board and their duty as an employee, such as would impact upon their ability to carry out their employment duties.
The central piece of legislation dealing with the question of government employees being directors of companies is the Public Service Act, 1994 (Act No. 103 of 1994).
Relevant extracts are as follows:
- Section 2(1) “…this Act shall apply to or in respect of officers and employees whether they are employed within or outside the Republic, and in respect of persons who were employed in the public service or who are to be employed in the public service.”
- Section 30(1) “No employee shall perform or engage himself or herself to perform remunerative work outside his or her employment in the relevant department, except with the written permission of the executive authority of the department.” ( Department means a national department, a national government component, the Office of a Premier, a provincial department or a provincial government component)
- Regulation 2016, Chapter 2 of the Act deals with public servant conduct, financial disclosure, anti-corruption and ethics management and in particular
- part 13 (b) on ethical conduct states that an employee shall: “not engage in any transaction or action that is in conflict with or infringes on the execution of his or her official duties”
- And part 13(c) says an employee shall: “not conduct any business with any organ of state or be a director of a public or private company conducting business with an organ of state, unless such employee is in an official capacity a director of a company listed in schedule 2 and 3 of the Public Finance Management Act”(ie a State Owned Entity-SOE).
Section 30(1) echoes what is already in our common law around the duty to your employer as an employee. And it prohibits government employees from doing any work for remuneration outside of government, except with express permission. Volunteering is permitted.
Crucially part 13(c) specifically refers to a prohibition on being a director of a public or a private company. A non-profit company is neither a public nor a private company, so falls outside of this prohibition. (The previous iteration of the non-profit company, which was the section 21 company was a public company as defined in the 1973 Companies Act, and there may be those who do not understand the shift which occurred with the new Companies Act.
An important note to be made here is that the Public Service Act makes no direct mention of employees being trustees of trusts or committee members of voluntary associations. As trusts can be family or business trusts, this is a gap in the law which should be filled. The exclusion of voluntary associations, however, which are non-profits, is in line with the exclusion of non-profit companies from the list in 13(c).
From a strictly legal perspective there is no prohibition on a government employee serving in a voluntary capacity (i.e. for no pay) as the director of a non-profit company (or trustee of a trust or committee member of a voluntary association). However, there may be government departments which have internal protocols which are stricter than these provisions or which are based upon a misunderstanding of the law and the nature of a non-profit company.
CAN PBOS BUY SHARES IN COMPANIES TO GET DIVIDENDS?
We are often approached by organisations which are approved by SARS as public benefit organisations (PBOs) which have been invited to participate in, or have themselves put together share ownership structures where the PBO is going to be buying shares in a for-profit company. These are generally to generate an alternate source of revenue for the PBO and sometimes these arrangements are part of a B-BBEE ownership structure, and the PBO, as a Specialised Enterprise with a nice B-BBEE rating, is included partly because they bring that to the table.
The question we are asked is if the PBO can use its funds (saved up or, often, loaned to it) to purchase these shares. Usually there is an anticipation of dividends being declared, generating funding for the work of the non-profit.
To answer these questions, we need first to look at the primary principle around use of funds is in section 30(3)(b)(ii) which states that a PBO is:
“prohibited from directly or indirectly distributing any of its funds to any person (otherwise
than in the course of undertaking any public benefit activity) and is required to utilise its funds solely for the object for which it has been established” (my emphasis)
- no transaction can be a disguised prohibited distribution; AND
- any transaction must be in (ultimate) pursuit of the objects of the organisation.
As long as the directors are happy that the proposed investment serves the object of the NPC, then that test is satisfied. If it is a ‘neutral’ investment and is entered into because it will generate funds better than your average investment, then it passes the test, as would any fundraising activity. If the share ownership structure is in a company or group of companies which is also pulling in the same direction as the NGO (building schools, creating employment opportunities, providing training etc), then even better to satisfy this test.
Sometimes when we are looking at business-like transactions for PBOs, I have someone pointing to the provisions of part (b) of the definition of ‘public benefit organisation’ which reads:
“ (b) of which the sole or principal object is carrying on one or more public benefit activities, where—
(i) all such activities are carried on in a non- profit manner and with an altruistic or philanthropic intent;
(ii) no such activity is intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation, otherwise than by way of reasonable remuneration payable to that fiduciary or employee;”
Now, first we need to note that ‘altruistic or philanthropic intent’ is a really fuzzy concept and hard to pin down.
Leaving that to one side, the important thing to note is that the ‘such activities’ in (b)(i) refers to the ‘public benefit activities’ in the previous line, which means that it is only the public benefit activities of the organisation which need to be carried out ‘in a non-profit manner and with altruistic or philanthropic intent’.
This makes room for the organisation to invest for a return, sell goods and services etc, as long as they all circle back to ultimately being in support of the objects of the organisation.
Trading, investing etc is not prohibited. And dividends received by PBOs are exempt from dividends tax in terms of section 64F(1)(c) of the Income Tax Act.
The Board will need to make certain, before it invests that:
- The ultimate aim of the investment is to support of the work of the organisation; and
- The investment is prudent and will not expose the organisation to undue risk (including reputational risk).
ANNUAL REVIEW OF SOUTH AFRICAN PHILANTHROPY : ARTICLE BY NICOLE
“To tackle the unprecedented challenges of this decade, we need to remember the roots of philanthropy. At the heart of the field is love for humankind.”
So says Thabang Skwambane, group CEO of Nahana Communications Group, and well-known local philanthropist and contributor to the Independent Philanthropy Association South Africa (IPASA)’s 2022 Annual Review of South African Philanthropy.
The IPASA Annual Review aims to provide valuable public information on the nature, scope, achievements and challenges of some of the many hundreds of philanthropic organisations active in South Africa and we are pleased to be one of the voices in this year’s Annual Review.
Nicole contributed an article dealing with the legal options and practical considerations for those thinking of setting up a philanthropic foundation.
A number of case studies in the IPASA Annual Review of South African Philanthropy provide insights into the nature and scope of philanthropic foundations that are active in fields ranging from early childhood, basic and higher education to community development, environment and climate change, food security, gender-based violence, health, job creation and social justice.
The hope is that the stories and perspectives in the 2022 edition of the Annual Review will inspire others across the country to make their philanthropic giving more strategic and impactful.
You can download a free copy of the Annual Review directly from the IPASA website https://ipa-sa.org.za/annual-review-of-sa-philanthropy/annual-2022-review-of-south-african-philanthropy/ or by contacting IPASA directly. For more information, email Louise Driver Louise@ipa-sa.org.za
PROUDEST PUBLISHING MOMENT – BOOKDASH DURBAN 2022
The mission of Book Dash is to make sure that every child owns a hundred books by the age of five.
On each single Book Dash day, ten teams of volunteer creatives (author, illustrator, designer and editor) work fast to turn enthusiasm, skills (and food) into beautiful African children’s books that anyone can freely access, print and distribute (see bookdash.org/books to read all of the books for free!)
The Durban 2022 event was sponsored by the Otto Foundation Trust and the Young Presidents’ Organisation (Durban Chapter) and hosted by TWIMS Kloof Campus on Saturday the 29th October 2022.
Nicole made the cut this year as an author and was so proud to be chosen.
Over the course of 13 highly intense hours in one day, writers, illustrators and designers are supported by Book Dash facilitators to complete a process that would usually take months.
Everything created on the day is a gift from these creatives, Book Dash and sponsors to the world. Since 2014 Book dash has published 176 books this way, and printed and distributed over 2.5 million copies to young children in every language across the country to own.
This is the Comrades of creativity and the books from the Durban event, including the one Nicole wrote, are here https://bookdash.org/events/28738/ and free to download, print and distribute in any way possible.
If you believe in books for children and want to do some holiday season giving with an impact, donate here https://bookdash.org/what-we-do/donate-to-book-dash/ or make over your MySchool card to them https://www.myschool.co.za/supporter/apply/