“Demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of terrorism financing activities in line with its risk profile.”
Of the eight areas of strategic deficiency that South Africa needs to address to be removed from the Financial Action Task Force’s grey list, the task of bringing fraudsters to book may turn out to be the hardest one for the country to address by 2025.
On 22 November, the Middelburg Specialised Commercial Crimes Court decided that the R2.2 billion fraud, corruption, and money-laundering case against former Eskom boss Matshela Koko be struck off the roll because of “an unreasonable delay in the completion of the investigation, after an inquiry in terms of section 342A of the Criminal Procedure Act”.
The former Eskom executive and seven other people were arrested by the Hawks and the National Prosecuting Authority’s Investigating Directorate (ID) just over a year ago on charges of fraud, corruption, and money laundering in connection with the awarding of a R2.2bn contract for the construction of Kusile Power Station.
Following the court’s decision, the NPA issued a statement saying the ID would continue investigating the case and would re-apply for the matter to be re-enrolled “within a reasonable period of time” and as soon as the outstanding aspects of the investigation had been completed.
“The delays were not anticipated at the time of the arrest of the accused, due to the complex nature of the case, the extent and the sheer volume, and the digital nature, of the evidence seized, in particular subsequent to the arrest and enrolment. Work on the compilation of the outstanding reports is ongoing,” the NPA’s statement read.
Louis Botha, senior associate: tax and exchange control at Cliffe Dekker Hofmeyr, says, broadly speaking, there are two challenges that the NPA faces when conducting investigations and prosecuting offenders in a large case such as this: capacity and expertise.
“The NPA is still very much in a process of rebuilding capacity, having more prosecutors, but also people who are skilled enough to prosecute these crimes,” says Botha.
Progress in addressing grey-list status
Moonstone spoke to Botha a few weeks after Finance Minister Enoch Godongwana delivered the Medium-Term Budget Policy Statement early in November. In his speech, Godongwana said, since February (when South Africa was grey-listed by the FATF), a large number of government departments and agencies – including the police, the Hawks, NPA, Special Investigating Unit, State Security Agency, the South African Reserve Bank, FSCA, and the South African Revenue Service (SARS) – have been working hard to address these deficiencies.
The FATF sets international standards, called the FATF Recommendations, aimed at preventing illegal activities. The global money laundering and terrorist financing watchdog monitors jurisdictions committed to the implementation of such recommendations through ongoing rounds of peer reviews called Mutual Evaluations.
In October 2021, the FATF published the Mutual Evaluation Report on South Africa, which showed poor results. In respect of technical compliance, South Africa was only fully compliant with three and largely compliant with 17 of the 40 FATF Recommendations, with 20 negative ratings achieved on the remaining recommendations. When it came to effectiveness of compliance, South Africa did not achieve any positive scores in the 11 Immediate Outcomes. Four months later, the FATF announced its decision to include South Africa in the list of “jurisdictions under increased monitoring”.
Read: FATF releases report on SA’s progress with addressing compliance deficiencies
Reporting back on South Africa’s progress, Godongwana said that at the FATF’s latest plenary meeting, it was noted that South Africa had addressed 15 of the 20 technical deficiencies in the country’s legal framework and were making good progress on 17 of the 22 effectiveness action items, “including two that are now deemed to be largely addressed”.
“However, there is also a significant amount of work that must still be done, particularly with regard to the investigation and prosecution of complex money laundering cases and terror financing, the identification of informal mechanisms for remitting money around the world, and the recovery of the proceeds from crime and corruption,” the minister said.
Botha says the bottom line is that although South Africa has improved, we are not off the grey list yet. And with that comes certain negative implications.
“For example, there could be potential issues with investment because there’s a trust issue. Foreign investors might be more reluctant to invest in South Africa because we may not be perceived as being compliant with and enforcing financial laws that curb, for example, money laundering, yet. It may also affect the way that we do business here on a daily basis.”
Consequences of remaining on the grey list
Monica Wu Yu, manager of forensics at KPMG, says the month before the grey-listing was announced, the firm’s discussions with a number of financial institutions revealed that the impact of the potential grey-listing in the capital market was starting to be felt, along with an increase in funding costs.
“Immediately after the announcement, the rand depreciated by 1.12% against the US dollar.”
Wu Yu is the author of the chapter “What does the future hold for South Africa now that we have been grey-listed?” in KPMG’s South African Insurance Industry Survey 2023 released in September.
Wu Yu says although the continuous depreciation of the rand is due to many other contributing factors, grey-listing adds weight to the burden of negative factors on the economy. She says this may be only the beginning of a negative long-term impact of the grey-listing.
“Disinvestment and de-risking by international investors and commercial partners are a costly process. Considering that some countries like Mauritius were able to be removed from the grey list in a relatively short period of time – for example, Mauritius took less than three years – investors may take a more passive approach to the grey-listing and observe the progress over remediation actions.”
Wu Yu says many actions have been taken since the grey-listing of South Africa. The Financial Intelligence Centre Act was amended in December 2022 with many enhancements, and the Prudential Authority has imposed actions and reporting duties on banks and insurance companies to strengthen the enforcement of different anti-money laundering and countering the financing of terrorism obligations.
“However, there is very little information and transparency on the co-ordinated actions that are being taken by government at the jurisdictional level.”
Wu Yu fears that the lack of transparency on a co-ordinated action plan is likely to lead to reduced levels of confidence by international investors, commercial partners, and counterparties. She says unless more progress is made, additional negative economic impacts may be observed in the coming years.
These may include:
- an increase in the regulatory burden imposed on both South African entities and their foreign counterparties and economic restrictions from international funders such as the International Monetary Fund or World Bank;
- restrictions imposed by individual banks and businesses in doing business with South African entities, leading to a loss of trading and business partners, as well as loss of financial flows;
- an increase in the cost of doing business and the cost of capital because of increased compliance requirements and restrictions imposed;
- a decrease in South Africa’s ability to remain competitive and in its ability to obtain foreign investment;
- macroeconomic impacts, such as on the exchange rate, interest rate and inflation, and negative effects on economic growth and employment; and
- reputational damage.
The pervasiveness of financial crime
As regulators intensify their efforts to get South Africa off the list by 2025, the Global Organized Crime Index 2023 has found that financial crime is the most pervasive illicit economy in the world.
According to the index, financial crimes ranked among the three most pervasive criminal markets in every continent except the Americas (where it is one of the five most prominent).
Read: Global crime index reveals ‘significant expansion’ of financial crimes
With the prevalence of financial crimes top of mind, Botha says South Africa has no choice but to address the strategic deficiencies as identified by the FATF if South Africa hopes to draw foreign investment.
“To move from being a developing to a developed country, you need more investment. And the only way you’re going to get that is to tick all these boxes. Foreign investors are going to look at us and say, well, you have these laws in place, or you don’t have these laws in place. It is a risk for us.”
One of the 12 findings in the FATF’s 2021 the Mutual Evaluation Report was that South Africa has suffered from a prolonged period of state capture, “which led to significant financial losses and undermined key agencies directed at combating such activity”.
Botha says, after the state capture and the Zondo Commission, it was all out there for the world to see.
“Getting our affairs in order, I think it’s unavoidable. The process might be a bit cumbersome, but it’s a matter of adjusting, and we’re not the only ones that are being affected. South Africa is a bit behind, but we’re not the only ones who have to comply with this and put laws in place,” he says.
NPA Amendment Bill – building prosecution expertise
In the meantime, the government is pushing ahead with improving the legislative environment in areas such as financial management and financial governance. Godongwana said these reforms would respond to the recommendations of the Zondo Commission, the Mpati Commission, and the Nugent Commission.
“I will shortly table an Omnibus Bill for public consultation, which will include key amendments to various pieces of legislation, including the Public Finance Management Act of 1999, Municipal Finance Management Act of 2003, and South African Revenue Service Act,” the minister said.
For Botha, key legislation at present is likely the National Prosecuting Authority Amendment Bill.
The Bill, which was passed last week by the National Assembly, amends the National Prosecuting Authority Act by providing, among others, for the establishment of an Investigating Directorate against Corruption (IDAC) as a permanent entity within the NPA. It also provides for the appointment of IDAC investigators to ensure greater investigative capacity and capability.
According to Parliament, this will enhance the NPA’s independence and ability to prosecute high-level crimes.
The Investigating Directorate was established by a presidential proclamation in 2019, meaning that it can also be disbanded at any time in a similar way.
“The National Prosecuting Authority Amendment Bill seeks not only to ensure its permanence but makes provision for the appointment of permanent investigators. It also establishes an appeals mechanism through the appointment of a retired judge,” Parliament said.
For those born before the turn of the century, what is being described in the Bill might remind them of the Scorpions, a specialised NPA unit formed in 1999 to handle high-level crimes such as corruption. The Scorpions used a “prosecution-led” approach, where investigators, analysts, and prosecutors collaborated closely on cases, leading to a conviction rate of more than 90%. Despite success, it was disbanded in 2009, criticised for blurring the “separation of powers” between investigators and prosecutors.
Botha says, from a prosecution perspective, this Bill is probably the most important.
“There’s a lot of expertise vested in that. Hopefully, there’ll be substantial progress on that between now and the 2024 Budget Review.”
The Bill will now be sent to the National Council of Provinces (NCOP) for concurrence. If the Bill passes through NCOP, it goes to the President for assent (signed into law).
SA’s chances of exiting the grey list
On whether South Africa will be able to leave the grey list by 2025 as planned, Botha says it will necessitate collaboration from all involved parties.
“Our National Treasury, the Ministry of Finance, have generally been quite good, consistent. Obviously, it’s not perfect, but there’s a reason why we have one of the most sophisticated financial systems on the African continent, and very advanced like any developed country. So, we have good people at Treasury who can push financial reform.”
He says the difficulty is prosecution.
“That requires action that is outside of Treasury’s control; it’s outside of a legislative process. It requires building capacity for prosecutions, improving expertise. That takes time.”
Botha points to Sars as an example. President Cyril Ramaphosa appointed Edward Kieswetter as the Commissioner of SARS with effect from 1 May 2019. His appointment kickstarted the process to rebuild the institution, with the aim of “transforming itself into a SMART Modern SARS”. However, Botha says it was only last year that SARS began to show visible signs of returning to its former glory.
“And by that what I mean is, they’re trying to stay ahead of the curve. Now nobody is necessarily the biggest fan of any tax collection agency, including SARS, but when they are curbing tax evasion, getting people to pay tax who weren’t, that’s what we want,” he says.
Botha says rebuilding the prosecution side will be no different.
“That will probably be the main things that require actual action and an involvement of institutions other than Treasury. I think it’s really going to come down to whether they can come to the party.”
