Illicit Financial Flows - Part III: Laws And Institutions (Continued)

Introduction

This final part of the three-part series on illicit financial flows (IFFs) will continue to examine institutions responsible for combating IFFs. Of these, law enforcement agencies such as the South African Police Services (SAPS) and the National Prosecuting Authority (NPA) stand out: it is through these agencies that criminal investigations are conducted with a view to convicting those involved in perpetrating IFFs. Other institutions, such as the South African Reserve Bank (SARB) play an important role, particularly in identifying IFFs and referring cases to the SAPS and NPA. The purpose of this brief is to explore the relative success or failure of this system in achieving measurable outcomes.

Law Enforcement Authorities

If the end goal in addressing IFFs is prosecution and recovery of lost funds, then the SAPS and the NPA have a crucial role to play. Other institutions which may be in a position to identify IFFs cannot themselves take steps against the perpetrators in terms of the criminal law. The extent of the latter’s powers is to report the wrongdoing and provide available information to the police and prosecutorial authority.

The main involvement of the SAPS with respect to IFFs comes from the Directorate for Priority Crime Investigation (colloquially referred to as the Hawks). Upon receiving a report from another agency –the Financial Intelligence Centre (FIC) for example – the Hawks will investigate in order to obtain evidence necessary to secure a conviction. The role of the reporting institution is limited to providing corroboration for the version put up by the police following their investigation.

But investigating IFFs is difficult. While in some cases an illicit flow can be in the form of cash in a suitcase heading for a flight, in others, there can be a high level of technical sophistication. Perpetrators often expend vast resources to remain undiscovered. There have been a number of indications that the police have been overwhelmed, lacking the knowledge and resources to effectively tackle IFFs.

The extent of the SAPS’s lack of preparedness to deal with IFFs was apparent from its input at a joint meeting of the Standing Committee on Finance and the Portfolio Committees on Trade and Industry and Mineral Resources held in March 2017. At this meeting, the head of the Commercial Crimes Unit of the Hawks, Major-General Alfred Khana, reported that the Hawks was not in a position to provide statistics relating to the investigation of crimes relating to IFFs. The reasoning for this appeared to refer to the fact that reports were sent to different departments within SAPS. The Chairperson of the Standing Committee on Finance, Mr YunusCarrim, issued a stern rebuke.[i]

Even following the reprimand from the Committee, there appear to be no consolidated statistics on the number of referrals made by the likes of the FIC and SARB and the subsequent investigations. The information relating to prosecutions is similarly patchy. Piecing together information gleaned from public statements from relevant officials, it appears the outlook is not promising.

In early August 2017, then-Finance Minister Mr MalusiGigaba had stated in a written parliamentary response that only 733 of the more than 5 200 cases (14%) referred by the FIC to law enforcement agencies were investigated in the past six years.[ii] At a finance committee meeting held on 30 August 2017, it was reported that of 121 referrals from the FIC to the Hawks, only 23 dockets were opened – but none of these cases was found to fall within the scope of “illicit financial flows”.[iii][iv]

In October 2017, SARB reported that it had handed 41 cases of exchange control contraventions for further investigation and prosecution over the past five to six years. Of this, only one case was prosecuted – although that case related to bribery of an official and not an exchange control offence.[v]

Later that year, the Hawks reported that of 60 cases it had dealt with regarding illicit financial flows, three cases had been finalised in court, six either closed or withdrawn while 38 cases were still under investigation. When pressed about the long time period for investigations, it was reported that Major-General Khana stated:

“Investigation can be time-consuming and this is something that needed to be taken into consideration. [The Hawks] was contemplating a meeting with the South African Reserve Bank as this would be important in getting to the bottom of the challenges. There are technicalities involved in some of the cases of illicit financial flows and there are small issues considered for the case to be classified as illicit financial flow. There is a problem of capacity within the unit dealing with illicit financial flows and most of the staff is being poached by the private sector where they get better salaries.”

2017 was certainly not a good year for the Hawks with regard to the investigation of illicit financial flows. But even in 2018, the Chairperson of the Finance Committee Mr YunusCarrim identified the Hawks as “the weakest link in a very weak chain”.[vi]

The prosecution side of law enforcement did not fare much better, with Mr Carrim chastising the NPA in August 2017 for its low rate of prosecutions. In response, a representative of the NPA outlinied various challenges, including:

• A lack of collaborative coordination between various stakeholders, increasing the time required to conclude cases;
• Skills were required for highly specialised cases, such as cases of base erosion and profit shifting;
• The efforts of the NPA were being judged unfairly, in that it was “being measured in terms of the number of successful prosecutions and convictions. However, successful outcomes were not necessarily a reflection of the effort exerted”.

In 2018, the focus appears to have been concentrated on the illicit tobacco trade, with the Finance Committee not engaging on IFFs generally with the same degree of scrutiny as in 2017. However, some promising improvements have emerged from the NPA’s 2017/2018 Annual Report[vii], including that the serious commercial crimes conviction rate of 94.1% exceeded the target rate, and that 911 convictions were obtained from 968 verdict cases. Further, a conviction rate of 97.3% was obtained in tax cases, also exceeding the target by 7.3%. 145 convictions were obtained in 149 verdict cases.

While any improvement is to be lauded, these are small victories – on the whole, law enforcement mechanisms are missing the mark when it comes to IFFs. One can only hope that new strategies, such as cooperation with other agencies tasked with fighting IFFs, will yield better outcomes.

The Proposed Inter-ministerial Committee and Other Institutions

While the FIC, SARS, SAPS and the NPA are essential links in the chain in combating IFFs, collaboration with other agencies is vital. There has been a persistent call by Parliament’s standing committee on Finance for the establishment of an inter-ministerial committee focused solely on IFFs – one that combines the efforts of the above four agencies as well as SARB, the Asset Forfeiture Unit, the National Treasury, the Department of Trade and Industry (DTI), and the Department of Mineral Resources. This call was reiterated in May 2018 – while the Committee acknowledged “it is the President that decides on Inter-Ministerial Committees” it recorded its belief that “the Minister needs to actively pursue the possibility of this” and report back to the Committee.[viii] That report is still awaited. Nevertheless, acting commissioner for SARS Mark Kingon reported in May that an “inter-agency working group” had been established and was working together.[ix] Whether this arrangement is the envisaged inter-ministerial committee, or whether it has been formalised by setting out specified mandates, performance targets, and the like, is not yet clear.

Even so, other agencies in government are taking steps where they can in the fight against IFFs. In 2017, the DTI stated that it was initiating a process of amending the Companies Act regarding disclosure of remuneration in that shareholders will have to vote on the directors’ remuneration policy. Further, it would include an obligation to disclose the beneficial owners of shares when filing annual returns.[x] A Bill concerning proposed amendments to the Companies Act was published for public comment on 21 September 2018 appears to address these points.[xi]

SARB is another institution that has been active – and vocal – regarding IFFs. SARB Deputy Governor Kuben Naidoo explained the role that it plays in fighting IFFs – firstly, to “assess the compliance of banks with the provisions of the Financial Intelligence Centre Act and the relevant regulations”, and secondly, to “[enforce] the remaining foreign exchange controls and regulations in terms of the Currency and Exchanges Act of 1933, a function delegated to [SARB] by the Minister of Finance”.[xii] He emphasised that when faced with potential exchange control contraventions, SARB can follow an administrative process with a view to determining a sanction, but ultimately, it cannot take any decision to prosecute. That power lies with the NPA. Once again, the low rate of prosecutions was identified as a gap in efforts to stem illicit financial flows.

One would expect that the Special Investigations Unit (SIU), an organ of state mandated investigate “serious malpractices or maladministration in connection with the administration of State institutions, State assets and public money”[xiii] would play a leading role in efforts to curb IFFs. However, the involvement of the SIU in such cases appears to be limited at this stage. In 2017, a Memorandum of Understanding was signed between the NPA and the SIU to enhance cooperation and avoid duplication of efforts in investigations[xiv] but it is not clear whether this has extended to IFFs. The SIU’s 2017/2018 annual report made no reference to investigations on this issue[xv].

Looking Ahead

An easy conclusion to be reached from this brief series is that fighting IFFs is a complex and demanding endeavour. There are myriad factors at play that can make the task seem insurmountable: definitional uncertainty, the need for cooperation with foreign countries (who may actually benefit from IFFs), the challenges of eradicating illicit trade, and the difficulties in distinguishing legal tax avoidance from tax evasion, to name but a few. Then, there are many constraints on the local agencies that bear the responsibility to stamp out IFFs from South Africa – inadequate legislative regimes, shortages of funds and skilled manpower, institutions mired in internal conflict and mismanagement, and the “silo effect” of failing to collaborate.

It is not possible here to suggest a solution that will be a silver bullet to this vexing problem. However, one solution proposed by so many people involved in fighting IFFs seems like such low-hanging fruit it is remarkable that it has taken so long to get off the ground: that is, a forum for inter-agency collaboration. Surely, this is one way to avoid duplication of efforts, to consolidate information gathered, and to share expertise (and in so doing perhaps enable the strengths of certain institutions to compensate for weaker ones). This is the intervention most sorely needed at this stage.

Cherese Thakur
Legal Researcher
cherese@hsf.org.za

[i] He noted the extreme disorganisation of the SAPS in advance of the meeting, recording that “with 48 hours to the start of this meeting, SAPS was still arguing continually that it had no idea what to do about the briefing”, and noting his disappointment at SAPS’s inability to provide a report or answer questions. See https://pmg.org.za/committee-meeting/24175/ (accessed on 20 September 2018).