Grey-listing: The writing was on the wall

By Corrie Kruger

SOUTH Africa is the author of its own misfortune.

The Zondo Commission laid bare the country’s vulnerability to illegal fraudulent activities on a mammoth scale.

It is estimated that State Capture resulted in a cash outflow of R60 billion.

Furthermore, we are currently dragging out the investigation on the Phala Phala scandal involving the ultimate political-connected person.

The Reserve Bank, the Hawks and all the organs of state should be in full force, but we see extraordinarily little consequences.

It has been nine years after the Gupta plane landed at Waterkloof. It has been seven years after the Hawks started investigating corruption at Prassa.

The cases of corruption at Eskom consist of 110 reported by Eskom to the police and further external reports of at least a further sixty.

This is all over and above the ongoing saga to get ex-president Jacob Zuma to have his days in court.

The main domestic proceeds-generating predicate crimes are tax crimes, corruption and bribery, fraud, then trafficking in illicit drugs, and environmental type crimes.

As a large economy and a regional financial hub for sub-Saharan Africa, South Africa has a notable exposure to the threat of foreign proceeds of crime generated in the region being laundered in or through the country.

MUTUAL EVALUATION REPORT OF SOUTH AFRICA

This assessment led by staff of the International Monetary Fund and adopted by the Financial Action Task Force (FATF) at its June 2021 Plenary meeting (full report consists of 258 pages and can be viewed at treasury.gov.za).

SA fared worst in "arrangements around legal persons".

This involves poor or no information and transparency around the beneficial ownership of companies and trusts; a weak ability of both private parties and authorities to determine the involvement of people in money laundering; and the absence of a reliable system to identify politically exposed people.

South Africa has yet to develop coordinated and holistic national Anti-Money Laundering and Combating of Financing of Terrorism (AML/CFT) policies informed by Terrorist Fighting (TF) Money Laundering (ML) risks, though some existing policies or measures mitigate some aspects of the risks identified.

However, significant ML risks remain unaddressed for beneficial owners of legal persons and trusts, cross-border movement of cash, and criminal justice efforts are not yet directed towards effectively combating higher risks such as ML related to corruption, narcotics, and tax offences

The threats arising from proceeds of foreign predicates are understood only to an extremely limited extent.

The authorities’ understanding of foreign terrorist fighters (FTFs), Terrorist Fighting (TF) threats is underdeveloped and uneven with the supervisors being the most unsensitised.

The authorities identify TF risks as mainly stemming from international terrorism but lack due appreciation of those from domestic terrorism.

There is widespread use of cash and a large informal economy including informal cross-border remittances in the region which often involve physical cash movement.

Banks offer a diverse suite of products and services and function as the main entry point of the financial system including from abroad.

Insufficient Beneficial Ownership (BO) transparency is an acute vulnerability as companies and trusts are often misused for ML or to conduct predicate crimes, making attorneys and trust and company service providers inherently vulnerable to misuse.

SA also got the lowest possible score on the prevention, monitoring and prosecution on terrorism finance.

"The mutual evaluation report made forty recommendations that would assist in getting South Africa to be aligned with international measures of combating money laundering and financing of terrorism. South Africa was found to be lacking in 20 areas

THE IMPACT OF SANCTIONS ON THE ECONOMY

The South African Reserve Bank Financial Stability Review of 2022 commented that “grey-listing” would carry the following consequences:

Consequences include: Higher transactional, administrative, and funding costs for domestic banks; Restrictions on cross-border transactions, which will affect imports and exports, leading to a decline in GDP.

Reputational damage to South Africa’s financial system could have negative capital and currency implications; and it may lead to the inability of South African banks to maintain corresponding banking relationships with offshore institutions.

Grey-listing by the FATF would raise SA's risk profile, place a question mark over its financial regulatory bodies and attach a higher risk premium to corresponding relationships between SA banks and international financial institutions.

The extent to which transactions will be affected is clear from the following numbers: South Africa had a total export of 89,395,988.33 in thousands of US$ and total imports of 88,037,490.93 in thousands of US$ leading to a positive trade balance of 1,358,497.41 in thousands of US$. GDP of South Africa is 351,431,649,241.44 in current US$. South Africa services export is 14,726,970,847.55 in Bop, current US$ and services import is 15,672,815,965.59 in Bop, current US$. South Africa exports of goods and services as percentage of GDP is 29.85% and imports of goods and services as percentage of GDP is 29.35%.

The Financial Intelligence Centre (FIC) faces budget cuts over the Medium-Term Expenditure Framework (MTEF) of R25.3 million in 2021/22, R33.6 million in 2022/23 and R26.8 million in 2023/24.

The FIC requires a minimum 43 additional permanent employees, at an estimated initial cost of R48.3 million that will carry through over the MTEF period.

Twenty of these positions are currently filled by critical fixed term contracted employees who cannot currently be permanently appointed, due to financial constraints.

The FIC's main organisational challenges continue to be funding, recruitment of specialist skills and the retention of employees in critical positions.

The report states that the SAPS: DCPI only had around 2,000 out of 5,000 positions in its special investigative units occupied as of the on-site.

Reporting on international funds transfers Section 31 of the FIC Act requires that accountable institutions report to the FIC when funds are moved electronically across the borders of South Africa on behalf, or on the instruction of another person.

This reporting stream will be called international funds transfer reports (IFTRs).

According to reports, South Africa scored moderate to low levels of effectiveness in the 10 requirement areas and low compliance levels in the 40 areas of technical compliance (such as wire transfers, reporting of suspicious transactions and transparency, and the beneficial ownership of legal persons).

Thus, there are deficiencies which require South Africa to undergo an enhanced follow-up process.

The NPA has suffered from major resource and staffing constraints, which is now hopefully being addressed by the establishment of the NPA: ID, and an increased budget allocation for hiring of prosecutors.

RECOMMENDATION 12: POLITICALLY EXPOSED PERSONS

Financial institutions should be required, in relation to foreign politically exposed persons (PEPs) (whether as customer or beneficial owner), in addition to performing normal customer due diligence measures, to:

(a) Have appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person.

(b) Obtain senior management approval for establishing (or continuing, for existing customers) such business relationships.

(c) Take reasonable measures to establish the source of wealth and source of funds; and

(d) Conduct enhanced ongoing monitoring of the business relationship.

The requirements for all types of PEP should also apply to family members or close associates of such PEPs.

Countries should constructively and effectively execute extradition requests in relation to money laundering and terrorist financing, without undue delay. Countries should also take all measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations.

Countries should:

(a) Ensure money laundering and terrorist financing are extraditable offences.

(b) Ensure that they have clear and efficient processes for the timely execution of extradition requests including prioritisation where appropriate. To monitor progress of requests a case management system should be maintained.

(c) Not place unreasonable or unduly restrictive conditions on the execution of requests; and

(d) Ensure they have an adequate legal framework for extradition.

Countries should ensure that designated law enforcement authorities have responsibility for money laundering and terrorist financing investigations within the framework of national AML/CFT policies.

Countries should ensure that competent authorities have responsibility for expeditiously identifying, tracing, and initiating actions to freeze and seize property that is, or may become, subject to confiscation, or is suspected of being proceeds of crime.

Because the FIC relies on the information and data in Suspicious Transactions Report) STRs filed by business to conduct its work, the reports must be filed no later than 15 days of becoming aware of the suspicious transaction or activity.

The FIC uses these reports to conduct analysis and develop financial intelligence reports proactively and reactively.

The FIC disseminates financial intelligence reports to law enforcement and prosecutorial authorities for their investigative work and their applications for asset forfeiture. In the 2018/2019 fiscal year, the FIC received 288,434 STRs from a broad range of businesses.

The measures which South Africa has put in place to promote transparency and BO of legal persons and arrangements address only to a limited extent the main vulnerabilities that allow abuse of legal persons and trusts for ML/TF

CONSEQUENCE MANAGEMENT (OR THE LACK THEREOF)

The largest corporate scandal and resultant loss of capital which we had to endure is the Steinhoff debacle. Whilst we are still waiting for the consequences to play itself out the JSE has made a finding relating to the previous CFO. The JSE accordingly decided to impose the following penalties on La Grange:

• A public censure and a fine of R1 million for Steinhoff’s consolidated financial statements for the 2015 and prior financial periods and for the fifteen months ended 30 September 2016 which did not comply with IFRS and was incorrect, false and misleading in material aspects.

• A public censure and a fine of R1 million for Mr La Grange’s breaches of the Listings Requirements in respect of the Steinhoff at Work Transaction; and

• Immediate disqualification from holding the office of a director or officer of a listed company for a period of 10 years for failing to fulfil his duties and responsibilities as the CFO with the necessary due care and skill.

This censure and fine is glaringly insufficient and the JSE has missed an opportunity to set an example.

CEO Mike Brown told the Zondo commission that as a result of their closing of the accounts, the bank came under pressure from senior ANC officials, including Mosebenzi Zwane and other Cabinet Ministers.

The way Nedbank dealt with Transnet and the Gupta /Baroda Bank in relation to the purchase of the locomotives and thereafter the arrangement of interest rate-swops, is mind boggling.

On both occasions, the bank that agreed to the interest rate swop was Nedbank.

There is no man as blind as a man that does not want to see.

According to reports, other traders in the market expressed the proposed rates and fees as “excessive”, “a rip-off”, “laughable”, “unimaginable” and “an end game to extract ludicrous fees”.

Despite the circumstances, it is incomprehensible, even inexplicable, that Nedbank decided to continue acting as Baroda’s correspondent bank.

Nedbank only terminated this relationship in 2018, long after widespread reporting had indicated that Gupta companies dominated Baroda’s South African business.

The Reserve Bank has slapped them over the wrist with a small fine, (R35m) for offences and shortcomings, which is, less than Brown’s salary.

One can only wonder if they appreciate the value of money. His total remuneration for the fiscal year 2021 was R39, 306,000 and in 2019 amounted to R53,000,000. The CEOs of the other large Banks are on similar packages.

Properties belonging to several people implicated in the multimillion rand "blue lights" tender were seized following a court order.

The seizure included assets of former acting national police commissioner Khomotso Phahlane and former deputy national police commissioner Bonang Mgwenya – We have seen a preservation order to freeze the luxury property of Vhutanda Investment whose sole director is a former chairperson of the National Lotteries Commission (NLC), professor Alfred Nevhutanda.

News just out is that Brian Molefe has been arrested Regiments Capital directors Niven Pillay and Litha Nyhonhya, former Transnet chief executive Brian Molefe and former chief financial officer Anoj Singh appeared at the Palm Ridge Specialised Commercial Crimes Court on 29 August 2022

The ordinary citizens have had enough. Perhaps we are now getting there.

* Corrie Kruger is an independent analyst.

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