Some top bankers believe it’s already too late for SA to fix the issues raised by the Financial Action Task Force (FATF).  If the country is grey-listed, the consequences would be dire.

By Jaco Visser

The SA government is scrambling to fix legislative shortcomings in how it deals with money laundering and terrorist financing.

It might be too little too late though, as the deadline for the government to show it is serious about these issues is just weeks away.

During the penultimate week of August, the Cabinet approved legislation which aims to beef up how SA’s criminal justice system deals with money laundering and terrorist financing. The international, Paris-based Financial Action Task Force (FATF) – to which SA is a signatory – indicated that the country will be placed on a “grey list” if it didn’t act on recommendations to tighten the fight against money laundering and terrorist financing.

Ending up on the FATF’s “grey list” means that financial institutions, especially banks, in other countries must deal more circumspectly with their peers in a grey-listed nation. This will add more, and expensive, layers of red tape on all transactions – even simple payments across borders.

As the experience of Pakistan — which has been on and off the FATF’s “grey list” since 2008 — has shown, being lax on money laundering and terrorist financing is a costly affair.

Pakistan, according to research by Tabadlab, took a $38bn (R646bn) hit to its economy between 2008 and 2019. The report showed that foreigners were wary to invest in the country, while exports declined and local investment slumped.

As it is, the imminent grey listing of SA has the country’s bank chiefs worried, even if some are still hopeful that the nation can avoid being placed on the FATF’s “grey list”.

“It remains possible for SA to progress on implementing FATF’s recommendations before this coming October, and this progress might be sufficient to prevent grey-listing, although that isn’t the most likely outcome,” says Sim Tshabalala, CEO of Standard Bank.

“If and when we are grey-listed, the faster we can make progress, the better, because this will hasten our return to being fully compliant with FATF’s requirements.”

Fast-tracking new laws

That may explain why National Treasury is now rushing two pieces of legislation through Parliament. The first is the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill, which was passed by Cabinet in August. This bill addresses 14 of the 20 issues highlighted by the FATF that needs to be urgently addressed.

Important changes in the bill include the identification of trust beneficiaries through mandatory disclosure to the Master of the High Court offices across SA. This will entail a total overhaul of the Master’s MASETI DATA system, which captures trust, estate, curator, insolvency and guardian details.

It’s an immense project, since the current database consists of ad hoc Excel sheets with data. A search on them is more difficult than finding a needle in the Drakensberg Mountains. In addition, “the information … is made available for the convenience and assistance of the public”, with the disturbing caveat that “it is not complete and the accuracy has not been verified.”

On the flipside, the Companies and Intellectual Property Commission (CIPC) has an advanced central database where you can search for companies and obtain details about company directors. To this, the bill aims to add beneficiary or shareholder information, where natural persons are involved.

The second piece of legislation is the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill, which was published for comment in May last year.

The problem, however, is that bill has yet to be enacted by Parliament. This piece of legislation deals with serious issues raised by a 2018 visit from the UN Counter-Terrorism Committee Executive Directorate. Among these were the fact that money launderers could be sentenced to longer incarceration than terrorist funders and the lack of administrative sanctions for violating asset-freezing orders.

Treasury now says the aim is to get both bills through Parliament before the end of the year. These pieces of legislation aim to address some of the 12 priority actions identified by the FATF when it visited SA in October last year.

The actions proposed by the FATF include the development of policies to address higher risks for beneficial ownership (such as trust beneficiaries), the use of cash (especially across borders), third-party money laundering (where money is laundered through a proxy), and foreign predicate crimes (those which are a component of a more serious crime, such as the laundering of money obtained through the sale of illegal arms).

Sloppy enforcement

Getting the policy issues right, through enacting legislation, is the easier thing to do; getting the country’s law enforcement agencies to actually enforce the laws is quite another story.

FATF’s report proposed providing the police’s priority crimes directorate, the Hawks, with “more staff, especially financial investigators and forensic accountants, so that it can better use financial intelligence and place more emphasis on proactively identifying and investigating money laundering cases.”

Here, the NPA seems to be moving far too slow.

Mthunzi Mhaga, spokesperson for the NPA, says that between the beginning of the year and end of July, there has been one indictment drafted in a case of terrorist financing, whereas there have been 49 cases involving money laundering.

Following the release of the Zondo Commission’s State Capture Report earlier this year, an increase in the number of indictments against perpetrators of wholesale corruption against the fiscus may be expected. Certainly, if indictments are issued with speed, and the accused hauled into the dock, it would greatly improve SA’s image as a country that doesn’t tolerate money laundering.

But it is on the terrorist financing front that much work lies ahead.

In July, SA was named in a report on funding the Islamic State in Iraq and the Levant (ISIL) by the chairperson of the UN’s Security Council.

That report said one country had “highlighted the emerging importance of SA in facilitating transfers of funds from ISIL leadership to affiliates in Africa. The Monitoring Team is aware of several large transactions totalling more than $1m.”

This isn’t simply an academic concern involving a movement miles away, since ISIL is now suspected to be involved in the insurgency taking place against the Mozambican government in that country’s northern Cabo Delgado province.

The UN’s Analytical Support and Sanctions Monitoring Team, which gathers intelligence on terrorist funding, pointed out that “Ugandan and Kenyan expatriates also generate wealth in countries such as SA, and launder proceeds, which sometimes involve large transactions,” to the Allied Democratic Forces (ADF) which are fighting the Democratic Republic of the Congo’s (DRC) government.

Both these issues, with money apparently flowing through SA to the DRC and Cabo Delgado, are tainting SA’s image as a reliable international partner in fighting money laundering and terrorist financing.

Responding to why there aren’t more prosecutions for terrorist financing, the NPA’s Mhaga says that while “there are always challenges investigating these matters”, all law enforcement agencies take this seriously.

“There are … various ongoing investigations. Unfortunately, due to the nature of these cases we are unable to further elaborate on these cases or share the strategies adopted in dealing with these cases,” he notes.

Nonetheless, the need to move fast in addressing the FATF’s concerns about SA’s enforcement (or lack thereof) is clear: it will cost the country dearly, in terms of investments, transactional costs and reputation, if it ends up on the “grey list”.

As Michael Sassoon, CEO of Sasfin says: “although the timelines imposed by FATF are tight,  SA must demonstrate progress by an urgent focus on enforcement”.