Is South Africa a transit hub for dirty money and organised crime?

By Xolisa Phillip, in Johannesburg
Posted on Wednesday, 3 November 2021 16:08

Former South African President Jacob Zuma speaks with his legal counsel in court during his corruption trial in Pietermaritzburg
Former South African President Jacob Zuma speaks with his legal counsel in court during his corruption trial in Pietermaritzburg, South Africa, October 26, 2021. Jerome Delay/Pool via REUTERS

How state capture, a cash economy, and weakened law enforcement compromised South Africa’s financial system during the presidency of Jacob Zuma. The country has been given 18 months to address these deficiencies, but will it make it? What plans is South Africa making to counter money launderers and terrorist financiers?

“The bottom line or the key question is: Does crime pay in South Africa?” says the National Treasury’s Ismail Momoniat on observations contained in the Financial Action Task Force (FATF)’s latest report.

Momoniat, the deputy director-general responsible for tax and financial sector policy at the National Treasury; Errol Makhubela, the acting chief director for financial markets and stability; and Ngoni Mangoyi, spoke to The Africa Report in a wide-ranging interview recently, about some of the findings in the mutual evaluation report on South Africa.

During the mutual evaluation, the task force team assessed the strengths and weaknesses of the South African financial system’s measures for anti-money laundering, counter‐terrorist Financing (CFT) and combatting the financing of proliferation (AML/CFT/CFP).

The team was led by the IMF and included officials from FATF member states as well as the Eastern and Southern Africa Anti-Money Laundering Group. The evaluation of South Africa began in April 2019 and was wrapped up in May 2021, while the mutual evaluation report was published in October.

Key weaknesses identified include:

  • Illicit flows leaving the country for financial safe havens such as Hong Kong and Dubai.
  • In turn, the country is a haven for illicit flows from other African states.
  • South Africa’s predominantly cash economy.
  • Local law enforcement authorities lack the capacity to investigate complex financial crimes.
  • The absence of a risk-based framework to deal with AML/CFT/CFP.

“Most of the recent illicit flows were from state capture,” says Momoniat, adding, “the flows don’t go to the rest of the continent. The money goes to Hong Kong, Dubai etc. Our system of anti-money laundering was very weak during the years of state capture.”

Some observers have pointed out that the mutual evaluation of South Africa began in 2019, a year after former President Jacob Zuma was forced out of the highest office. Zuma’s presidency was synonymous with the rise of the Gupta brothers, whose influence on the country’s political elite was the primary driving force behind state capture in South Africa.

An inference has also been made that the FATF mutual evaluation report on South Africa reflects the reality of the eight to nine years of Zuma’s two terms. During the state capture years, South African politicians were often bribed in cash by the Guptas and others.

Testimony given before the ongoing Zondo Commission of Inquiry into State Capture has revealed the extent and the depth to which South African politicians were unduly influenced during the state capture years. The Gupta brothers fled South Africa before the commission was established and have set up camp in Dubai.

Africa’s favourite dirty-money haven

Outside of its own borders, “we are [also] a problem for the rest of Africa because a lot of money from other countries on the continent – to escape bad governance and paying tax – finds its way into South Africa. We are also beneficiaries, in a sense, of such illegal flows,” Momoniat said.

The report noted that South Africa’s geographic location and its advanced economy made it a prime spot on the continent for “foreign proceeds of crime from the region being laundered in or through the country.”

[…] South Africa’s law enforcement agencies lack the skills and resources to investigate money laundering or terrorist financing proactively.

Moreover, those factors – location and sophisticated financial infrastructure – also rendered South Africa vulnerable to being used as a transit route for illicit goods and people smuggling. Furthermore, “foreign proceeds come predominantly from fraud, corruption and bribery, illicit drugs, and tax crimes.”

Most concerning is the fact that those foreign proceeds often come in the form of hard cash, which is “laundered using cash, banks, and legal persons, as well as virtual assets,” according to the report.

“On regulating the cash in our economy, we clearly need to do something, but being a developing country, a lot of people work in cash,” Momoniat says.

For Momoniat, the biggest issue is that there were many red flags, “but it takes time for the wheels of justice to turn. That is one of the fundamental problems we are facing.”

“The other issue we have on the continent is that the anti-money laundering systems are also weak in most African countries. In fact, that is one of the problems. When South African banks operate in the rest of the continent, the standards that apply vary,” Momoniat said.

“That was the problem with the correspondent banks issue in the US, and other banks started withdrawing from developing countries. Money laundering does not have a developmental approach,” he says.

While the core South African banking system has sophisticated mechanisms to deal with issues and to identify things, on the edges, things are less tracked. “It is then about getting to the periphery of the non-financial sector, which isn’t regulated, that … becomes much harder,” says Momoniat.

The report also found that most authorities that have AML/CFT responsibilities are yet to apply a risk-based approach, to which Momoniat says: “On the risk-based approach, that point is correct.”

Developing a response to deficiencies

South Africa has 18 months to address the deficiencies identified in the FATF mutual evaluation report.

In terms of the National Treasury, “we play a coordinating role,” Momoniat tells The Africa Report. “We’ve looked at all the weaknesses that have been identified. We’ve looked at the way FATF does a mutual evaluation. Our approach has been that a lot of those weaknesses, to the extent that we accept them, are more general weaknesses.”

The National Treasury director-general chairs an interdepartmental committee on AML/CFT/CPF, which “is overseeing and coordinating a comprehensive response and the follow-up actions to be taken, based on the recommendations contained in the report,” the Treasury says in a statement.

The National Treasury plays this role because the minister of finance is responsible for the Financial Intelligence Centre (FIC) and oversees South Africa’s relationship with FATF.

The FIC produces operational financial intelligence. This intelligence is given to law enforcement agencies for use in investigations on predicate crimes and to trace criminal assets, “but South Africa’s law enforcement agencies lack the skills and resources to investigate money laundering or terrorist financing proactively,” says the report.

“Over and above the interdepartmental committee, … there is also what we call the Fusion Centre, which is based at the FIC. That is where we have expertise coming from various departments and agencies – such as the Hawks, the South African Revenue Service – where they share information and prioritise cases,” Makhubela says.

“Some of these cases, of course, involve illicit financial flows, but also, all types of money laundering cases. It is all about having a structure which enables the sharing of information and prioritising those particular cases and making it a point that cases go all the way,” says Makhubela.

“On the interdepartmental committee, there was an action plan developed within [the] government. It guides all government departments and agencies on how to respond to the findings of the mutual evaluation report so that we can see how we can improve our system,” Mangoyi says.

“What it [action plan] does is that if something falls under the Treasury, then between the Treasury and the FIC we know what to do from the action plan,” says Mangoyi.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options