“Miracles” were to prevent a deficient SA from being…

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South Africa’s anti-money laundering and anti-terrorist financing legislation, and in particular the effectiveness of law enforcement enforcement, is to international standards what bumper stickers are to philosophy – a solid attempt, but which turned out to be completely insufficient, full of holes and in urgent need of a facelift.

Parliament has now pulled the handbrake on the national treasury, insisting on due process when treasury officials pushed the two South African funding committees to quickly pass far-reaching changes to the government’s timetables. Financial Intelligence Center Act 2001 (Fika).

The problem is best described in Treasury’s own words and emphasis:

“We are almost certainly heading for the GREYLISTED by the [Financial Action Task Force] next February 2023 UNLESS WE DO SOME MIRACLES.

“The implications: A GRAY LIST IS COMPARABLE TO A DEGRADATION OF RATINGS, particularly if SA is known not to try to remedy its shortcomings.”

Known around the world for its measured and diplomatic approach, the National Treasury is not used to shouting in underlined capitals. When it does, as in this latest presentation to reporters by interim chief executive Ismail Momoniat, it seems prudent to take it seriously.

The Financial Action Task Force (FATF) is an intergovernmental decision-making body fighting against all forms of money laundering and terrorist financing. It ensures a coordinated global response to prevent organized crime, corruption and terrorism.

Being on the FATF gray list means that a country’s shortcomings pose a threat to the international financial system and a serious blow to a country’s reputation. Such a country is then subject to increased surveillance and has to face negative economic consequences for trade and transactions with other countries.

Regulators in the US, UK and EU can also prevent their banks from transacting with banks from countries on the gray list. FATF gray list countries include Cambodia, Cayman Islands, Burkina Faso, Albania, Yemen, Pakistan and Syria.

The countries on the blacklist – at this stage only North Korea and Iran – are officially considered high-risk jurisdictions. The list is a warning of the significant danger of money laundering and terrorist financing that a particular nation holds in global transactions.

“Given the gray list we are facing, the sooner we do things, the better for us,” Treasury Momoniat said in an address to the joint meeting of the permanent and restricted parliamentary finance committees on June 15. .

Speaking virtually from Berlin where he attended a FATF meeting, Momoniat briefed the committees on proposed changes to Schedules 1, 2 and 3 of the Financial Intelligence Center Act 2001.

Momoniat accepted criticism from MPs that the Treasury should have given Parliament more time to follow “due process” rather than trying to force Parliament’s hand by taking a “rushed” decision.

But Momoniat reminded Parliament that the process of bringing South Africa into line with international standards began as early as 2015. The Treasury’s last briefing to Parliament was in February 2022.

It “was slow [process] with a lot of consultation,” Momoniat said. He pointed out that South Africa was “way behind” international standards to combat money laundering and the financing of terrorism.

Momoniat was kind enough not to also remind parliament that the ANC cabinet, justice group ministers and Zuma-era parliamentary committees were the stumbling blocks in leveling the legislation South Africa and the implementation of its application – at the time, mainly at the request of the Guptas and other cronies of Zuma.

How the FATF peer review rated SA

Through a FATF-facilitated peer review process, South Africa was assessed for a period in 2019 on its anti-money laundering and countering the financing of terrorism systems. This is a dual assessment of the adequacy of the South African legal framework and the effectiveness with which the legislation is implemented.

It didn’t go well.

“South Africa received a very poor rating,” the Treasury told parliament and reporters. Out of 40 ratings on the adequacy of legislation, half of South Africa’s ratings were rated as partially compliant or non-compliant.

South Africa’s three most critical weaknesses are:

  • Customer due diligence;
  • Terrorist financing offences; and
  • Targeted financial sanctions for terrorism and terrorist financing.

read in Daily Maverick: Red flag: South Africa’s terrorism-linked networks are a ticking time bomb

The FATF report found that South Africa has a “strong legal framework to combat money laundering and terrorist financing” but has “significant shortcomings in the implementation of ‘an effective system, including the inability to prosecute serious cases’.

On 11 ratings on the effectiveness of the implementation of legislationSouth Africa was rated very low on all of this.

Indeed, a scorecard on the work of the Hawks, police, intelligence agencies and National Prosecuting Authority, the FATF report indicates that South Africa is particularly struggling to detect and prosecute financing of terrorism.

The main findings of the FATF mutual evaluation report, for example, indicate that the authorities’ understanding of the risks of terrorist financing is “underdeveloped and uneven”. In addition, law enforcement “lacks the skills and resources to proactively investigate money laundering and terrorist financing”.

The FATF found that “South African authorities have identified limited Islamic State activities involving South African citizens and acknowledge potential sources of [terrorist financing] risks arising from the use of the country by terrorist groups”.

Momoniat summed up: “The low level of viable investigations and prosecutions related to the financing of terrorism in the country exposes [South Africa] be used by terrorist groups as a transit point and base for launching attacks in other countries.

Law enforcement is also very bad at investigating and prosecuting complex, cross-border money laundering schemes, the FATF peer review found.

When it comes to true beneficial ownership, things are just as stark. According to the FATF, law enforcement has no idea who actually benefits from opaque structures such as nonprofits, trusts and corporations. South Africa’s struggle to identify politically exposed persons who defend thieving politicians fits into this problem.

According to the FATF, one of the main reasons for South Africa’s terrible score is that money is king here.

And cash, it’s well known, has amnesia.

How to get out of this mess?

The National Treasury and the Financial Intelligence Center told parliament on June 15 that they were working on amendments to Schedules 1, 2 and 3 of the FIC Act. These, said Momoniat, would go a long way in bringing South Africa into line with FATF standards and were ready for adoption.

South Africa is nearing the end of a one-year observation period. If sufficient progress is not made after the one-year period, ending in October, an action plan will be drawn up and South Africa could be greylisted, warned Momoniat. This can happen as early as February 2023.

MEPs from the two finance committees, however, raised their eyebrows because they were asked to approve these amendments on the spot.

The Fica Amendments are designed to essentially include additional categories of institutions and businesses that will provide the Financial Intelligence Center with expanded powers to provide law enforcement agencies with detailed financial intelligence.

The game plan, Momoniat explained, is to cast the net on all financial crimes and develop the capabilities to deal with “complex financial frauds like Steinhoff and VBS Mutual Bank.”

Indeed, law enforcement, Momoniat stressed, needs to have better forensic intelligence and capabilities, and information sharing between different agencies should be a priority.

Significant changes suggested include amendments to the Companies Act and Trust Property Control Act to pierce the veil that hides ultimate beneficial ownership. Criminalizing the ownership of unexplained wealth and allowing the confiscation of such unexplained wealth should be another arrow in the quiver of law enforcement.

The proposed changes will also impact lawyers’ trusts, management of digital assets such as cryptocurrency, accounting and auditing professions, financial markets and banks, the insurance industry, providers of credit and financial services as well as merchants of high-value goods.

The latter will include businesses receiving payments in any form of R100,000 or more per item, including dealers in motor vehicles, gemstones and metals.

Yunus Carrim, chairman of the select finance committee, was quick to say that the committee could not receive the amendments and adopt them on the same day.

Said Carrim: “We all agree that we must avoid the gray list at all costs… [T]we must fight against money laundering and the financing of terrorism…

As for passing the necessary amendments, Cassim said “the best we can do is October, depending on the seriousness of what people are saying.”

Joe Maswanganyi, chairman of the standing finance committee, said it would be prudent for parliament to at least request written comments from the public.

“We’ll have to get it right as a legislative body… [I]It would be no use if we pass today and tomorrow the president is brought to justice.

The question anyone with a business in South Africa should now ask Parliament is: “How soon are you going to ‘get it right’ this time?” DM

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