AML, South Africa - Recovery Mode (Money Laundering Bulletin)

                            Cartoon courtesy of Stidy (copyright)

 

Money Laundering Bulletin: Already seeking to rebuild state institutions and public confidence after the Zuma era, South Africa's government now has an up-to-date mutual evaluation report from the Financial Action Task Force to guide its upgrade of the anti-money laundering regime. Paul Cochrane reports from Pietermaritzburg. 

South Africa has a lot to do to improve its regulatory oversight and more effectively tackle money laundering, which its Financial Intelligence Centre (FIC - the financial intelligence unit) readily admits as it reflects on the country's latest Financial Action Task Force (FATF) mutual evaluation report (MER), released in October (2021)

Thin blue line

The key findings are nothing new: law enforcement, for example, has been hollowed out over the past two decades, especially under former President Jacob Zuma, between 2009 to 2018, according to Open Secrets, a Cape Town-based non profit investigating economic crime linked to human rights violations.

FATF noted that the South Africa Police Service’s (SAPS) Directorate for Priority Crime Investment (DPCI, also known as the Hawks) currently has 3,000 vacancies in its notionally 5,000-strong special investigative team.

“The DPCI is a small unit within the police, and they have lost a lot of people. You see cops from 1994 that have never promoted while others are jumping through the hoops with no qualifications. There was a really good anti-narcotics police unit, and that whole branch of expertise has disappeared,” said a former law enforcement officer, now working as an anti-corruption advisor, who wanted to remain anonymous.

Open Secrets believes the lack of manpower in enforcement is undermining the fight against financial crime. SAPS has a headcount of 187,358 for a population of 58.8 million people despite having one of the highest crime rates in the world, according to the Global Initiative’s Global Organised Crime Index. South Africa's ratio is around 288 policemen per 100,000 citizens, against a global average of 340, according to the UN. “It is one of the most fundamental problems, with massive gaps in the system. Even when cases are identified they are not pursued,” said Michael Marchant, Open Secrets’ head of investigations.

The shortfall is readily admitted by the FIC. “The persons lost have been detrimental to the DPCI’s [work]. They have largely moved to the private sector for more lucrative pay. This has increased reliance on the private sector for work that should have been done by the government,” Christopher Malan, executive manager of the FIC's compliance and prevention division, told MLB.

The impact shows in the number of money laundering convictions: 333 between 2016 and 2021, according to the National Director of Public Prosecutors (NDPP) office. This represents an increase on the previous decade (1999-2009) when there were just 16. Out of the 83,869 reported cases of commercial crimes for the 2019/20 period, the NDPP secured 760 convictions; no figures were released on laundering convictions in the period.

“There is certainly a disconnect between the high number of cases and money laundering convictions. Every investigator should know that when investigating commercial crime, money laundering is standard [goal of the investigation], but that’s not the case,” said the former law enforcement officer.

Terrorist financing and hub status

The record on countering the financing of terrorism (CFT) is particularly woeful, with the FATF report noting that South Africa has only prosecuted one person since its last MER, in 2009.

Asked about the current terrorist financing caseload, Pieter Smit, executive manager of the FIC’s legal and policy division, said there were “more prosecutions than just one” underway. He said FATF’s conclusion that South Africa had a weak perception of its terrorist financing exposure was contentious. “We do believe we have a good understanding of that risk, and to what extent it is happening, but we were unsuccessful in convincing the FATF assessors on that point. A lot of the information is based on sensitive intelligence, so there’s a limit to what can be discussed in a public report. Maybe we made an impression that very little is happening,” Smit told MLB.

The truth is, said Marchant, that South Africa faces numerous financial crime risks, from organised crime to narcotics, to wildlife trafficking, fraud and corruption, with exposure to ML and TF intensified by the fact the country is a regional banking hub for Southern Africa.

“I don’t think there’s any doubt we are a hub for a lot of money in the region, given the developed financial system. The growth and inter-meshed nature of criminal networks and syndicates with the global drug trade and organised crime, and links to police corruption, is a massive problem,” said Marchant.

Smit acknowledged that the FATF report was “spot-on” about South Africa's need to bring “understanding risk into the policy process, the better shaping of future decisions, where policy should be going and [how] resources [are] allocated.” He added: “One specific factor is understanding South Africa’s position as a regional financial hub. That has not received adequate attention in the past, and what that means for cross border [financial] flows into the sub-Saharan region,” he said.

Karam Singh, Corruption Watch’s head of legal and investigations, in Cape Town, thinks law enforcement and regulators should be more active. “There’s clearly a lot of money that leaves the country, and is done through the facilitation of different financial intermediaries. It’s a very porous system. Dubai and Hong Kong would seem to be two of the big destinations,” he said.

Unenviable legacy

One of the top challenges South Africa faces is repairing damage done to state institutions by the Zuma government, which allowed private interests to profit from state capture and grand corruption. During Zuma’s second term in office (2014-18), the cost of state capture was estimated by South African news outlet the Daily Maverick at around ZAR1.5 trillion ($101 billion).

After Cyril Ramaphosa took over in February 2018, he launched numerous presidential Commissions of Inquiry, including the ongoing Zondo Commission into allegations of fraud, corruption and state capture, which is probing senior politicians (including Zuma), state-owned enterprises, and financial institutions.

The FATF report did not comment on the state capture cases, although clearly if embezzlement and corruption are proved in subsequent criminal trials, there will be proceeds of crime at issue - corruption is a predicate offence under South Africa's ML laws. “From looking at provided cases we observed a lack [of action] relating to the issue of state capture," an International Monetary Fund (IMF) official, who worked on the FATF report, told MLB, "which was surprising considering the alleged sums of money involved in some well publicised cases. This lack of focus had a material impact on our view of how effective the authorities were at pursuing complex money laundering cases and those involving larger sums being sent out of South Africa.”

Marchant questioned why SA financial institutions have yet to be investigated in relation to state capture. “You can pick out a whole host of case studies that shows banks were facilitating transactions that were outrageously irregular and suspicious, raising every red flag you could have. No bank has been called to account for larger state capture transactions – no fines, or criminal or civil action, or [questioning] at the Zondo Commission, to explain their role,” he said. 

Bankers' role

The FIC said South African banks could have raised more red flags over state capture.“We firmly believe banks could have done more but the context is very important,” said Malan. “The context now, importantly is about risk: we must push the entire regime towards a better understanding of risk.” Smit observed that “hindsight is always perfect,” and continued: “Maybe 10 years ago banks should have picked up on those transactions and should have reported them if they had the context we now have. Maybe if they did report them [at the time], the FIC didn’t have the context to understand what their suspicious transaction report (STR) meant when it landed in our IT system,” said Smit.

Marchant was blunter: “The banks went to the Zondo Commission, and said the African National Congress [ANC, the ruling party since 1994] tried to bully them, but on balance, those big banks enjoy a secure and powerful position, and could have done something. The banks waited until it became clear there would be catastrophic reputational cases, and one by one closed the accounts, and defended their position. It is quite clear they could have done that earlier,” he said.

Intelligence flow

There has, though, been no shortage of STRs filed. In 2020, 44,499 financial and non-financial institutions registered with the FIC submitted 394,709 STRs; banks were responsible for around 260,000. STR volumes have been high for years - in 2015/16 (under President Zuma), the FIC received 180,363 STRs. As with jurisdictions worldwide, South Africa has struggled to handle such numbers. “We have come to the realisation we cannot continue with the STRs system as we have for the last 10 years and expect better results in the next 10 years. We know how we want to take things forward in the future and respond quicker when alerts need to be going off and actions to be taken,” said Smit. “That change includes getting closer to the banking community and enriching their information with ours so that they can better report back to us.”

Indeed, by the end of 2019, the FIC had formed a partnership with the major banks, titled the South African Anti-Money Laundering Integrated Task Force (SAMLIT). “We hope that SAMLIT will be the bridge to truncate the time between reporting and converting the reports into intelligence,” said Malan.

Smit sounded a note of caution: "We need to recapacitate state organs that have been depleted or paralysed during the state capture period. The concern is that the rest of criminality goes on, with limited [enforcement] capacity if all the focus goes on state capture."

In the works

The government is expected to respond to issues raised in the latest FATF report through an amended Financial Intelligence Centre Act (FICA), already set to impose AML/CFT reporting requirements on traders in high value goods, from antiques to fine art and aircraft, as well as trust company service providers, said Marchant.

Beneficial ownership, meanwhile, is to be addressed as part of the Companies Amendments Act, introduced for comment in October 2021. Malan said a multi-tiered registry approach is to be adopted, rather than a national registry. 

The FATF findings are overall challenging for South Africa but “[W]e have a fully agreed action programme in place, that is acknowledged from the top, from the President, so serious action is underway,” said Smit.

 

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