Reformed: Mauritius cleaned up its act and turned itself around after being greylisted. Photo: Peter Kuchar
The English writer Samuel Johnson once remarked, “When a man is about to be hanged in a fortnight, it concentrates the mind wonderfully.” One way to look at the Financial Action Task Force’s (FATF’s) threat to greylist South Africa is that this could raise a sense of urgency about reforms and hasten the work to clean up corruption.
The task force is an intergovernmental body that acts to combat money laundering and terrorist financing and sets international standards for curbing illicit financial flows.
It was formed at the G7 Summit hosted in Paris in 1989 initially to combat money laundering as it related to illicit traffic in narcotics drugs. In the wake of the terrorist attacks on the United States in 2001, its mandate was widened to include counter-terrorist financing measures.
South Africa joined the FATF in 2003. In the same year, the Financial Intelligence Centre was established by an Act of parliament to function in line with emerging global best practices.
Countries that fail to meet FATF standards and lack robust measures to combat money laundering and terrorist financing risk being greylisted or, worse, blacklisted.
South Africa should not be facing this threat in the first place. That we are countenancing the prospects of greylisting is a sign of failure to act with speed in rebuilding key institutions and overcoming risks created by years of state capture.
It is also a wake-up call that we should never take the vitality of the institutions for granted and that bad leadership can do harm to society and the institutions that underpin it.
In 2015, the cabinet took a decision to establish an interdepartmental committee that would give effect to South Africa’s commitment to implement the G20 High-Level Principles on Transparency in Beneficial Ownership and to undertake a risk assessment of the country’s vulnerability to money laundering and terrorist financing as a result of the misuse of companies, trusts and foundations for illicit financial flows.
These high-level principles were adopted at the summit held in Australia in 2014. They were meant to be an expression of a strong commitment by G20 countries to take the lead in efforts to curb the use of corporate vehicles and other legal arrangements for illicit purposes. The hope was that other countries would follow suit. The G20 high-level principles were aimed at reinforcing the task force’s work in combating illicit financial flows.
These global standards imposed new regulatory norms for banks and non-designated financial bodies and professionals, for example, estate agents, dealers in precious metals, lawyers and accountants. It was not just the financial institutions that needed to strengthen their supervision of clients and financial transactions, but also those institutions that had intermediating functions in society and that could be used to conceal the proceeds of crime.
The interdepartmental task team that was to coordinate various agencies of government and external bodies affected by the new standards on beneficial ownership was established in 2016, a few months after the cabinet had taken the decision to expedite South Africa’s implementation of the G20 high-level principles.
During this time, I led a small technical team that supported the process of ensuring that South Africa had a clear view of the risks that faced it so that the government could take the necessary steps to overcome such risks.
Institutions such as the treasury, the Companies and Intellectual Property Commission, the South African Reserve Bank, the Financial Intelligence Centre, the South African Revenue Services (Sars), the National Prosecuting Authority, and various other agencies in and outside of the state participated actively in the process.
There was, however, a lingering cloud of mistrust over Sars given the leadership turmoil and factional tensions that tore that organisation apart at the height of state capture.
In short, the extensive risk assessment we undertook showed the country faced certain high risks regarding secrecy with beneficial ownership of legal entities, mainly companies and trusts.
There were other risks related to the poor legislative framework, weaknesses in operations, systems and resourcing capability of various institutions that played oversight roles, poor coordination among important government institutions and law enforcement agencies, and risks related to lack of access to, and sharing of, information among government agencies.
Sharing of information between Sars and the Financial Intelligence Centre was particularly poor, and the reason for this was largely to do with all the major political actors, and politically connected individuals, who were under suspicion of money laundering and the factionalised nature of Sars, which could not be trusted not to alert some of these individuals.
The Sars ship was steered by Tom Moyane whom the Zondo commission would later implicate in state capture activities.
There was also a strong pushback by some of the politically connected individuals against measures that were proposed by the Financial Intelligence Centre, which at the time was ably led by Murray Michell, especially those aspects that related to stringent due diligence requirements on politically exposed persons.
The FIC Amendment Act was finally signed by president Jacob Zuma in April 2017 after nearly a year of delay, and it only entered into force six months after it was signed.
State capture created so much damage and undermined the credibility of institutions. If South Africa was to be greylisted, that would be another reminder of how the state capture era posed grave risks to the country.
The good news though is that greylisting is not meant to be punitive, but corrective. It places the country under constant monitoring by the FATF until it addresses all its “strategic deficiencies”, especially weaknesses in its financial, regulatory and reporting processes and systems. If it happens, as it is likely, it should be seen as an opportunity to undertake deep financial and economic reforms.
Countries that were placed under the FATF greylist in early 2020, such as Mauritius, were able to get their house in order within 20 months. The Mauritian government undertook serious reforms that included risk-based supervision plans for the Financial Services Commission, ensured access to accurate basic and beneficial ownership information in companies and other legal entities, and bolstered the capacities of law enforcement authorities in conducting money laundering activities.
In the 2017 report that we produced as the technical team, we deemed South Africa’s risk profile as very high, meaning that urgent action needed to be taken to avoid any adverse findings by the task force. Importantly, we highlighted that there needed to be a sense of urgency in tackling various risks that we identified.
Some of the actions required included finalising legislative reforms, establishing new institutions, and strengthening coordination across relevant agencies and departments.
Further, we proposed that the country should have a register of beneficial owners of companies and other legal entities. There was much debate about whether such a register should be publicly available, which would help to enhance transparency and certainly demonstrate a clear intent on curbing the misuse of companies for illicit activities.
The very fact of having an accessible risk register on beneficial ownership is a powerful signal of the country’s commitment to curbing the misuse of legal entities for purposes of money laundering and other illicit activities.
Greylisting is not a death sentence for a country, but it should concentrate the minds nonetheless. As countries such as Mauritius have shown, rapid recovery is possible if governments take the right actions within clearly defined timelines.
Mzukisi Qobo is head of the Wits School of Governance at the University of the Witwatersrand.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.
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