STUART THEOBALD: Global money-laundering watchdog puts SA on notice

Damage wrought to the criminal justice system is ricocheting back into the financial system.

This column is was first published in Business Day. 

Through the crisis of state capture, it was the financial system that stood firm. While our criminal justice system was bent to the will of the corrupt, it was the closing of bank accounts on concerns that they were being used to launder criminal proceeds that put an end to the Gupta money machine.

There were desperate attempts to overcome the resistance put up by the financial system. Bank branches were invaded in efforts to intimidate the banks, dressed up as protests. The campaign to nationalise the Reserve Bank was used as a Trojan horse to weaken the apex bank’s supervision of the financial system (including rejecting the Guptas’ efforts to buy a bank and freezing their efforts to externalise loot). Ultimately, it was to no avail.

But now, the damage wrought to the criminal justice system is ricocheting back into the financial system. The Financial Action Task Force (FATF), a global money-laundering watchdog, has put SA on 18 months’ notice that it will be grey listed as a lax money-laundering and terrorist financing territory if it doesn’t get its act together. In a 240-page peer review report published to little fanfare earlier this month, it said SA does a good job capturing intelligence on what goes through the financial system but fails to use this in prosecuting money laundering and terrorist financing.

This is very serious criticism that has important consequences for the financial system. If SA is grey listed, it will complicate its interaction with the global financial system. It will be another blow after the loss of investment grade last year, making SA’s financial institutions even harder for the rest of the world to do business with. Other regulators, particularly the EU, require their financial institutions to treat grey-listed countries and their financial institutions with extra care. That means higher costs when foreign counterparts agree to do business with them at all. As SA’s financial system acts as a regional hub in Africa its status as a clean jurisdiction is critical to its competitiveness.

International actors

While the task force review criticises several aspects of SA’s approach, its main complaint is that there is little investigation and prosecution of money laundering and terrorist financing directly. It notes that while the police and SA Revenue Service routinely use financial intelligence in investigating and prosecuting crimes, they do not use this information directly to identify and prosecute money laundering and terrorist financing. Money laundering is not a primary objective in such cases — it is secondary to other cases that they are working on. In other words, SA’s criminal justice system will throw money laundering on top of the other commercial crimes it prosecutes but does too little to investigate it in its own right.

This is a worry because it means the only money laundering that is prosecuted is “self-laundering” — cleaning money from one’s own crimes — while third-party money laundering, particularly on behalf of international actors, is ignored. That leaves SA open to being used by thriving money launderers acting on behalf of international criminal clients.

Non-financial institutions that handle money such as estate agents, attorneys and trust service providers are particularly criticised, but even the Reserve Bank’s Prudential Authority is noted as having deficiencies in some areas. Regarding recommendations, the focus is on the criminal justice system, particularly giving the Hawks more staff — especially financial investigators and forensic accountants.

There are also several recommendations to aggressively investigate and prosecute crimes linked to state capture. Some of the recommendations will be politically difficult, such as to remove the time limit on the definition of politically exposed people in the Financial Intelligence Centre Act. Parliamentarians will be required to amend legislation to make their own lives more difficult.

Political commitment

SA is now on notice to implement the recommendations fast. This adds to the pressure to repair the criminal justice system post-state capture. That has been a project since President Cyril Ramaphosa took office, but the urgency is now even more apparent. The progress achieved so far does not give much faith it can meet the task force’s expectations in the next 18 months.

This matter must be urgently addressed by the cabinet. It would do well to look at Mauritius. The island nation managed to get itself removed from the task force’s grey list last week after a Herculean national effort to implement a long list of FATF regulations. As soon as it was grey listed in March 2020, it made a high-level political commitment to address the issues flagged by the FATF and tackled them with gusto, setting itself a September deadline, one it met. Of course Mauritius, given its ambitions to become a regional financial centre, would now see its competitive position substantially enhanced were SA to be grey listed.

SA must avoid grey listing completely by rapidly embracing the FATF recommendations. It must be a national project with the imprimatur of the highest political office and will require co-ordinated action across regulators and the criminal justice system. SA’s financial services industry, the one sector to have grown employment and export revenue over the past two decades, depends on it.

Theobald is chair of research-led consulting company Intellidex.