Why state capture could see SA greylisted

Just over three months ago, Cyril Ramaphosa

The commission estimated the state haemorrhaged R57-billion during the Gupta era. More than 97% of that was taken from state-owned entities  Eskom and Transnet.

“Tracing the flows of state capture proceeds of crime has revealed the existence of widespread sophisticated money-laundering networks operating within South Africa,” the final Zondo report noted.

“The money-laundering networks used by the Gupta enterprise were complex, well-established and embedded in the pre-existing milieu of criminality and wrongdoing.” 

If money laundering is to be brought under control, Zondo said, it is essential that those participating in these networks are prosecuted. The commission could not prescribe how best to target money laundering, however, it noted that doing so would take a coordinated approach by the law enforcement agencies and the regulators. 

The commission also said there is a need to investigate the current system for reporting suspicious transactions. Inaction, the commission noted, suggests the system is either flawed or the Financial Intelligence Centre (FIC) and enforcement agencies are not implementing it.

Last year, banks reported over 394 000 suspicious transactions and more than 4.85-million cash transactions to the FIC, according to the Banking Association of South Africa

On the sector’s role in correcting the wrongs of state capture, the association’s managing director Bongiwe Kunene noted that, while banks have a duty to report suspicious transactions, they cannot investigate and prosecute. 

“Banks have noted the recommendations of the Zondo commission … and will engage with the relevant regulators, authorities and government to strengthen the country’s anti-financial crime and terrorism funding capacity, as required.”

As Kunene’s response implies, a lot leans on the state’s ability to prosecute financial crimes.

Work is underway to make the country’s anti-money laundering legislation more robust, with the country’s lawmakers labouring to pass the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill and the General Laws Amendment Bill before February, when the FATF will decide South Africa’s fate.

But, as Momoniat pointed out in parliament in August, the legislation is only part of the story. The big challenge, he said, will be to demonstrate that law enforcement agencies are able to identify, investigate and prosecute financial crimes. 

“We will have to show, as a country, that they are investigating the crimes and that it doesn’t matter who is responsible, whether you are a minister, you are a president, you’re a public servant, whether you are Steinhoff, whether you are Tongaat,” he said. 

“In all of those cases, there needs to be a sense that they are getting properly investigated without fear or favour. Secondly, to the extent that, in some of them, there are prosecutions, that people are prosecuted, that the cases generally are successfully done so.”

Olwethu Majola, an attorney who specialises in financial crime mitigation, agreed that a lot is resting on South Africa demonstrating that law enforcers are up to scratch.

The state capture saga, she said, exposed the scale of South Africa’s money-laundering problem.

“But I think we can all accept that the problem has always been there … We have now come to a point in which the system has matured and people should be held accountable,” Majola said.

“There was a point when it was enough to just have legislation. Now, there is a gradual, global movement that recognises it is not enough to have legislation. It is about asking: ‘What are you doing with that legislation?’”

Inadequate implementation, she noted, is also linked to the state capture phenomenon. 

“The [FATF] report noted that state capture has hollowed out a lot of state institutions, so we no longer have the expertise to identify, investigate and prosecute. 

“You find that a lot of the cases that could have seen people being prosecuted for money laundering have not happened,” Majola said. “Because the expertise and the knowledge isn’t there, there is a focus on other crimes, like fraud and tax evasion.”

The government is not blind to the capacity problems at law enforcement agencies. Recently, justice minister Ronald Lamola noted that, in an effort to rebuild the NPA, 1 717 vacant posts had been filled and more than a thousand new staff members recruited.

The government, he said, is building a multi-disciplinary anti-corruption law enforcement agency with highly skilled prosecutors, intelligence capacity, forensic depth and digital forensic capabilities.

Michael Marchant, head of investigations at Open Secrets, said it was a pity that Zondo did not make any recommendations about law enforcement agencies, considering the extent to which they were eroded during state capture. Open Secrets is a non-profit that investigates private sector economic crimes.

The private sector, Marchant noted, will act in its own best interests — and money laundering can be very lucrative, especially for the banks. 

“It’s so important to recognise that banks are not going to regulate themselves out of this system. That’s not where the issue lies. You have to have some kind of an effective enforcement mechanism,” Marchant said.

This makes having a robust public sector very important. 

“It is really up to that cohort of bodies, the FIC, the Reserve Bank, Sars, the NPA and the Hawks, and coordination between them and resourcing them. I think that’s the answer.”

Last month, Brian Molefe and Anoj Singh, who Zondo identified as key players in the alleged capture of Eskom and Transnet, were arrested on charges relating to the latter entity. 

The pair were arrested alongside Regiments Capital directors Niven Pillay and Litha Nyhonyha, who have been charged with fraud, corruption and money laundering.

Just over three months ago, President Cyril Ramaphosa received the final volumes of the Zondo report.

Among many other things, the state capture saga laid bare the flaws in South Africa’s anti-money laundering framework, which the government has sought to correct through eleventh-hour legislative amendments. 

But, with the country’s greylisting looming, the question remains whether crime fighters can prove they have what it takes to bring the perpetrators of financial offences to book.

October 2022 marks a year since the Financial Action Task Force (FATF) published its evaluation of South Africa’s anti-money laundering and counter-terrorist financing measures. 

In it, the international financial crimes watchdog pointed to a number of holes in the country’s framework and efforts to combat money laundering — the process of concealing the origin of funds obtained through illicit activities — despite its financial system being highly vulnerable to these crimes.

South Africa failed in 20 of the 40 FATF standards and in all 11 of the measures to combat money laundering. 

The findings put South Africa at risk of landing on the grey list, which would put it under increased monitoring by the FATF. A number of commentators, including lawmakers and South Africa’s biggest banks, say this could have dire consequences for the country’s already hamstrung economy, by raising its risk profile and hampering investment and international financial transactions in the country.

A sophisticated network

The FATF conducted its evaluation of South Africa in 2019, a year that acting treasury director general Ismail Momoniat has called “a particularly bad year for us”. 

Ramaphosa had only been president for a year and his administration had taken over after a period marked by state capture, which hollowed out a number of state institutions, including the National Prosecuting Authority (NPA).

The FATF made a number of references to state capture in its report, noting that the period “helped to generate substantial corruption proceeds and undermined key agencies with roles to combat such activity”. 

In his series of state capture reports, chief justice Raymond Zondo gives an idea of just how much money was syphoned away from the state through what eventually became a sophisticated money-laundering network. The network was allegedly designed to benefit the politically connected Gupta family

The commission estimated the state haemorrhaged R57-billion during the Gupta era. More than 97% of that was taken from state-owned entities Eskom and Transnet.

“Tracing the flows of state capture proceeds of crime has revealed the existence of widespread sophisticated money-laundering networks operating within South Africa,” the final Zondo report noted.

“The money-laundering networks used by the Gupta enterprise were complex, well-established and embedded in the pre-existing milieu of criminality and wrongdoing.” 

If money laundering is to be brought under control, Zondo said, it is essential that those participating in these networks are prosecuted. The commission could not prescribe how best to target money laundering, but noted that doing so would take a co-ordinated approach by law enforcement agencies and regulators. 

The commission also said there is a need to investigate the current system for reporting suspicious transactions. Inaction, the commission noted, suggests that the system is either flawed or that the Financial Intelligence Centre (FIC) and enforcement agencies are not implementing it.

In 2021, banks reported over 394 000 suspicious transactions and over 4.85-million cash transactions to the FIC, according to the Banking Association of South Africa

On the sector’s role in correcting the wrongs of state capture, the association’s managing director Bongiwe Kunene noted that, while banks have a duty to report suspicious transactions, they cannot investigate and prosecute. 

“Banks have noted the recommendations of the Zondo commission … and will engage with the relevant regulators, authorities and government to strengthen the country’s anti-financial crime and terrorism funding capacity, as required.”

Eroding enforcement 

As Kunene’s response implies, a lot leans on the state’s ability to prosecute financial crimes.

Work is underway to make the country’s anti-money laundering legislation more robust, with the country’s lawmakers labouring to pass the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill and the General Laws Amendment Bill before February 2023, when the FATF will decide South Africa’s fate.

But, as Momoniat pointed out in parliament in August, the legislation is only part of the story. The big challenge, he said, will be to demonstrate that law enforcement agencies are able to identify, investigate and prosecute financial crimes. 

“We will have to show, as a country, that they are investigating the crimes and that it doesn’t matter who is responsible, whether you are a minister, you are a president, you’re a public servant, whether you are Steinhoff, whether you are Tongaat,” he said. 

“In all of those cases, there needs to be a sense that they are getting properly investigated without fear or favour. Secondly, to the extent that in some of them there are prosecutions, that people are prosecuted, that the cases generally are successfully done so.”

Olwethu Majola, an attorney who specialises in financial crime mitigation, agreed that a lot is resting on South Africa demonstrating that law enforcers are up to scratch.

The state capture saga, she said, exposed the scale of South Africa’s money-laundering problem.

“But I think we can all accept that the problem has always been there … We have now come to a point in which the system has matured and people should be held accountable,” Majola said.

“There was a point when it was enough to just have legislation. Now, there is a gradual, global movement that recognises it is not enough to have legislation. It is about asking: ‘What are you doing with that legislation?’”

Inadequate implementation, she noted, is also linked to the state capture phenomenon. 

Rebuild

“The [FATF] report noted that state capture has hollowed out a lot of state institutions, so we no longer have the expertise to identify, investigate and prosecute. You find that a lot of the cases that could have seen people being prosecuted for money laundering have not happened,” Majola said.

“Because the expertise and the knowledge isn’t there, there is a focus on other crimes, like fraud and tax evasion.”

The government is not blind to the capacity problems at law enforcement agencies. Earlier in September, Justice Minister Ronald Lamola noted that, in an effort to rebuild the NPA, 1 717 vacant posts had been filled and more than a thousand new staff members recruited.

The government, he said, is building a multi-disciplinary anti-corruption law enforcement agency with highly skilled prosecutors, intelligence capacity, forensic depth and digital forensic capabilities.

Michael Marchant, head of investigations at Open Secrets, said it was a pity that Zondo did not make any recommendations about law enforcement agencies, considering the extent to which they were eroded during state capture. Open Secrets is a non-profit that investigates private sector economic crimes.

The private sector, Marchant noted, will act in its own best interests — and money laundering can be very lucrative, especially for the banks. 

“It’s so important to recognise that banks are not going to regulate themselves out of this system. That’s not where the issue lies. You have to have some kind of an effective enforcement mechanism,” Marchant said.

This makes having a robust public sector very important. “It is really up to that cohort of bodies, the FIC, the Reserve Bank, Sars, the NPA and the Hawks, and co-ordination between them and resourcing them. I think that’s the answer.”

In August, Brian Molefe and Anoj Singh, who Zondo identified as key players in the alleged capture of Eskom and Transnet, were arrested on charges relating to the latter entity. 

The pair were arrested alongside Regiments Capital directors Niven Pillay and Litha Nyhonyha, who have been charged with fraud, corruption and money laundering.