Secondary

AML

Clock is ticking for SA to avert something ‘worse than junk status’

There will be dire consequences for the economy if South Africa’s measures to combat money laundering and terrorism financing are not brought up to international standards this year, the Financial Intelligence Centre (FIC) and National Treasury told Parliament’s Standing Committee on Finance this week.

The FIC and Treasury briefed the committee on the Financial Action Task Force’s Mutual Evaluation Report, which was published in October last year. The FATF has 39 member countries. South Africa is the only full member from Africa.

South Africa’s poor performance in the peer review resulted in the FATF placing the country in its “enhanced follow-up process”, which means it must report to the FATF more regularly.

Furthermore, South Africa must file a report by the end of August showing that it has addressed all the deficiencies identified by the assessment report, said FIC director Xolisile Khanyile. If it does not, the country will be placed on the FAFT’s “grey list”.

Khanyile said “no investor” will risk bringing money into a country that has been grey listed.

National Treasury’s deputy director-general (tax and financial sector policy), Ismail Momoniat, told the committee that being grey listed will have a bigger impact on South Africa’s economy than a junk investment grade.

“The consequences will be too ghastly to contemplate,” he said.

Why SA failed the FATF’s review

The FATF’s assessment was based on:

  • Forty recommendations or standards that a country requires in order to have a comprehensive anti-money laundering/counter financing of terrorism (AML/CFT) framework. Compliance is based on a country’s AML/CFT legislation and systems. Each recommendation is rated as “compliant”, “largely compliant”, “partially compliant” or “non-compliant”.
  • Eleven immediate outcomes, which assess how effective a country is in implementing the AML/CFT measures. Compliance with each outcome is assessed as “high”, “substantial”, “moderate” or “low”.

In terms of the recommendations, South Africa was rated as complying with three, largely complying with 17, partially complying with 15, and not complying with five.

Treasury said these shortcomings were relatively easy to address because they can be fixed by changing laws and putting systems in place.

The main problem, Treasury and the FIC said, was that South Africa effectively failed the 11 immediate outcomes. It did not achieve a single “high” or “substantial” rating but had eight “moderate” and three “low” ratings. Treasury pointed out that “moderate” means an outcome is achieved to some extent, but major improvements are needed.

Phineas Moloto, the FIC’s senior legal and policy adviser, said if South Africa is placed on the FATF’s grey list, transactions emanating from this country will be deemed high risk. Foreign institutions, fearing sanctions by their supervisory bodies, will then have two options:

  • Apply enhanced due diligence measures, which will result in transactions taking longer to process.
  • If they believe their systems are not sufficiently robust to absorb the higher risk, they will stop processing transactions involving South African individuals and entities.

In addition, regional economic blocs, such the EU, and individual countries will put South Africa on their grey lists.

Combating of financial crimes is weak

Momoniat said the shortcomings raised by the FATF’s report did not only apply to money laundering but showed that the country was weak in dealing with financial crimes in general, whether this meant state corruption, procurement fraud or fraud in the private sector, such as VBS Bank and Steinhoff.

Implementing the report’s recommendations would enable the country to tackle public and private sector fraud effectively.

Weaknesses that had to be addressed for the country to address fraud adequately included:

  • The lack of forensic capabilities within the criminal justice system, which was hampering the prosecution of state capture cases.
  • Information was not being shared effectively between regulators, nor were regulators and law enforcement agencies working together as they should be.
  • Legislation needed to be strengthened around unexplained wealth. A related problem was how to monitor the cash economy.

He said the Interdepartmental Committee on AML/CFT, under the director-general of the National Treasury, was developing a plan to deal with the weaknesses identified in the FAFT’s report and with financial crimes in general.

There was “strong support” from the Cabinet to remedy all these weaknesses, as well as to broaden the authorities’ response to all forms of financial crime, including corruption.

Major shortcomings

Two major shortcomings highlighted during the presentation concerned beneficial ownership and the recovery of the proceeds of crime taken out of the country.

The FIC said “significant amendments” to legislation were urgently required so that the “real” owners of companies or the beneficiaries of trusts could be identified. Shortcomings with regard to beneficial ownership were also hampering efforts to trace people who were abusing trusts and companies, including those involved in state capture.

A “major criticism” of South Africa’s AML/CFT measures was that the authorities do not seek international co-operation to recover the proceeds of crimes either committed here or elsewhere in the world and that flowed through the country’s borders. South Africa was similarly tardy in not seeking international co-operation to trace and extradite those suspected of financial crimes.

Other shortcomings identified by the report were:

  • The lack of prosecutions for money laundering and terrorism financing.
  • Institutions have a “box-ticking”, instead of a proper risk-based, approach to client verification. This was hampering the ability to monitor individuals who were abusing the financial system.
  • The lack of legislation to regulate the trade of crypto assets.
  • There was little to demonstrate that institutions outside the financial sector were complying with AML/CFT obligations, and that there were no consequences for non-compliance.
  • The intelligence on terrorist financing was not being used to follow-up with prosecutions, and not enough was being done to trace the money being laundered from these activities.
  • The intelligence agencies were not doing enough to identify people raising funds in South Africa for terrorism.
  • South Africa was not effectively implementing sanctions on terrorist organisations.

Agencies need to work together

Meanwhile, NPA head Shamila Batohi has called for legislative changes relating to how Special Investigating Unit (SIU) cases are handled so that law enforcement and the criminal justice system work together effectively.

Briefing Parliament’s Standing Committee on Public Accounts this week, Batohi said that, with the SIU’s mandate to investigate with a goal of asset recovery, the burden of proof in such civil investigations was on a balance of probabilities. However, in the case of the NPA, in criminal investigations it was that of beyond reasonable doubt, “which is a much higher standard of proof”.

“In terms of SIU Act, they are mandated to refer cases to NPA. We need to change that in terms of legislation, because the NPA doesn’t do criminal investigations, although now, with recent proclamation of the Investigative Directorate, there are some matters that the NPA is dealing with.

“But most of the cases referred to NPA creates the impression that the cases are ready for prosecution, but that is not the case. We basically forward these matters to the DPCI (Hawks) to investigate … We did discuss with the SIU, who also sent cases to DPCI in order to expedite them.

“So, we do feel that changes are required in order to address this, so that referrals to NPA are not necessary, but referrals to investigative bodies such as ID or DPCI become the norm.”

Batohi said the NPA needed funding to acquire staff and resources.

Following reports that a public and private partnership to fund the NPA was in the pipeline, the prosecuting body wrote to Justice Minister Ronald Lamola and the department’s director-general, Doctor Mashabane, to draw up an oversight mechanism for donations that the NPA can receive in terms of skills and funding.

“Working through National Treasury, we need to put in place required safeguards to ensure that the NPA mandate is not compromised.”

Batohi said although there was still more work to be done, recent court cases on corruption in the private sector showed progress has been made three years after she took office.

“We are beginning to move slightly more quickly. Cases on private sector corruption, such as the Tongaat Hulett case in KwaZulu-Natal, is an indication that the wheels of justice are moving.

“What’s clear is that even though we are not where we want to be, we are far from where we started. We now have a full leadership team committed to the rule of law, accountability and ensuring we hold people accountable … not only on corruption but all cases the NPA deals with.”

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