09 Mar 2007: ISS Today: South Africa: On Pension Fund Plundering Fields

9 March 2007: South Africa: On Pension Fund Plundering Fields

 

It has become virtually impossible to avoid traversing the tragedy unfolding around the Cape Town based asset management company Fidentia. (See the Weekend Argus - 24 February 2007; Sunday Independent; Sunday Tribune - 4 March 2007) The two court-appointed curators, forensic accountant George Papadakis and attorney Dines Gihwala, believe that while they have managed to trace all the corporate bodies set up by Fidentia chief executive J Arthur Brown, his associates and members of his immediate family, they concede that there are unaccounted for funds that appear to have been secreted off-shore. The curators’ report is expected at the end of March 2007.

 

As observed in the Mail and Guardian of 2 March 2007, the Fidentia case is symptomatic of a growing malaise in the form of the plundering of funds entrusted by pension funds and other investors to intermediaries. It follows in the wake of scams at Masterbond, Leisure Net and Soundprop. At about the time that the Fidentia scam was exposed, a prosecution was launched in a pensions fraud case against almost two dozen accused persons, including Alexander Forbes. After a postponement, it was ruled that the case would proceed in the middle of the year. It is bound to arouse a great deal of interest in the region and beyond, given the profile of Alexander Forbes, and the fact that it involves R800 million rand. In the meantime, that company’s subsidiaries in surrounding countries have circulated reassurances that the case will have no adverse impact on investors’ funds.

 

The cases involving misdemeanours with pension funds raise fundamental issues pertinent to the detection of fraud, corruption and money laundering by financial institutions. In view of the central role of these institutions in the management, stability and, indeed, the growth of the economy, it is imperative to instil discipline and integrity within them. If they are perceived to be susceptible to corruption and organised crime of the kind suggested by the revelations in the Fidentia and Masterbond cases, the fallout could be catastrophic. The enduring challenge for regulatory and law enforcement authorities is to predict and pre-empt the activities of rogue enterprises.  In this regard, three scenarios need to be distinguished.

 

The first of these is where the institution involved is either corrupt from inception, or subsequently corrupted by changes in ownership, management or in the operating environment. Such an institution is primed to be a vehicle for money laundering -- its use to launder proceeds of crime is thus inevitable. The second scenario involves an institution with “willing or rogue employees who provide (money laundering) services on an ad hoc and non institutionalised basis” (Reuter & Truman: 2004). In other words, the leadership of the institution is not corrupted, but corrupt insiders infiltrate the institution. The third scenario involves an institution that unwittingly facilitates money laundering, either because it does not have mechanisms to detect money laundering or because of dereliction in applying existing mechanisms.

 

The scanty facts in the Fidentia scam clearly define it out as the third kind of case, as the funds were allegedly laundered within its custody by the chief executive through his own investment ventures. It also appears that Fidentia was not the victim of infiltration by rogue employees acting on a frolic of their own. The curators’ report will provide a definitive indication whether this assessment is correct. If, as is argued here, Fidentia was primed to be a vehicle for money laundering, the implications for the erstwhile trustees and management are quite serious. One can expect the national Prosecuting Authority to get busy with the matter quite soon, perhaps soon after the parliamentary finance portfolio committee hearing on the saga scheduled for next week. Watch this space.

 

The quest by the Financial Intelligence Centre (FIC) to enlist greater intervention by supervisory bodies in detecting money laundering becomes easier to appreciate in the light of the ongoing pension fund cases. The FIC has proposed that greater authority be extended to supervisory bodies, such as the Financial Services Board, enforce compliance with anti-money laundering and anti-terrorist funding regulations. Whether such authority would he facilitated the earlier detection of the true character and motives of Fidentia is a matter of speculation.

 

Charles Goredema, Organised Crime and Money-laundering Programme, ISS Cape Town