Chapter 4: Confronting money laundering in South Africa: An overview of challenges and milestones

CHAPTER 4 Confronting Money Laundering in South Africa

Monograph No 132, May 2007

CONFRONTING THE PROCEEDS OF CRIME IN SOUTHERN AFRICA
An Introspection

Edited by
Charles Goredema

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Background

The website of the East and Southern African Anti-Money Laundering Group (ESAAMLG) sets out the expected impact of adopting and implementing measures against money laundering and the financing of terrorism. As part of the argument for advocating the implementation of a three-year strategic plan covering 2005 to 2008, ESAAMLG (2005) claims that1

[t]he benefits of implementing these measures are great and include the increased stability of a country’s financial sector, the potential for increased credit-worthiness and greater investment, as well as providing law enforcement with additional tools in order to protect countries from the negative effects of crime and the activities of criminal syndicates. These measures will lead to the financial institutions and others becoming more robust and better able to participate in the global financial and trading systems.

This claim, which has an implicit development orientation, addresses itself to four sectors – policy makers, law enforcement agencies, financial institutions and the public, and assigns to each a stake in combating money laundering. At the same time, it sets benchmarks for evaluating the impact of the measures comprising the strategic plan. Rather controversially, the statement appears to attribute financial instability and other manifestations of the development crisis to criminal syndicates, specifically to money laundering. It is not the purpose of this chapter to debate the validity of what is certainly a questionable assertion.

South Africa’s initiatives to address money laundering date back to the 1990s, while measures to combat funding of terrorism are more recent. This chapter reviews developments in establishing systems to combat money laundering and the financing of terrorism since 2004. The strategic plan offers a convenient backdrop, partly because the plan is due for implementation during a period that overlaps with the survey period and partly because South Africa has played a critical role in ESAAMLG since its establishment.

The strategic plan can be seen as a source of some intermediate benchmarks for evaluating both the quality and, to a limited extent, the performance of anti-money laundering measures adopted by ESAAMLG member states. The following can be distilled from the plan:

The measures against money laundering and the financing of terrorism provide law enforcement with additional tools to combat the negative effects of organised crime.
These measures will make financial and other institutions better able to participate in the global financial and trading systems.

Anti-money laundering mechanisms should be seen as part of broader initiatives against crime. It is now accepted that such initiatives are not likely to succeed unless they are systematic, strategic and sustainable.

The chapter does not just describe money laundering and terrorist financing but analyses the emerging infrastructure of ‘additional tools’ that have been specifically introduced to deal with money laundering, and considers their quality in the light of the available evidence of performance. It evaluates the emerging measures in the environment they are meant to impact on. It further discusses anti-money laundering measures as an element of strategies to combat organised economic crime against the recorded incidence of such crime and predicts the kind of outcomes these measures are likely to achieve.2

The challenges of confronting money laundering have been compounded somewhat by the relatively recent addition of measures to detect and disrupt the flow of funds to support terrorist activities. The Financial Intelligence Centre (FIC) has been mandated to monitor and enforce compliance with the legislation introduced for this purpose.

Analytical framework

For various reasons, the inauguration of the Financial Action Task Force (FATF) in 1989 is regarded as a watershed in anti-money laundering strategy. Among other accomplishments, the FATF is credited with lobbying successfully for a strategy underpinned by three complementary but distinct structural pillars: prevention of money laundering through financial institutions, retrospective enforcement of measures against money laundering and international co-operation.

The United Nations Security Council formally endorsed the FATF standards in Resolution 1617 (2005), ‘strongly’ urging all member states to implement the standards embodied in the FATF forty recommendations on money laundering and the nine special recommendations on terrorist financing.

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Prevention

The prevention pillar seeks to deter criminals from using individuals and institutions (in all sectors) for converting or moving the proceeds of crime. Reuter and Truman (2004) analyse the four constituent elements of prevention, which present themselves as obligations imposed on institutions that are likely to come into contact with the proceeds of crime. These elements are customer due diligence, reporting obligations, submission to supervision, and sanctions for non-compliance.

Enforcement

The primary objective of enforcement is to punish criminals who attempt to breach, or succeed in getting beyond, the preventive infrastructure. This pillar comprises:

criminalisation of certain underlying (predicate) activities;
an investigative infrastructure that complements detection by vulnerable institutions or provides forensic analysis by financial intelligence units;
asset tracing, seizure and confiscation of proceeds of crime through civil law action;
prosecution and punishment.

International co-operation

Combating money laundering inevitably involves profiling and tracking unlawfully acquired resources. Typology studies have shown cross-border transmission to be a characteristic behaviour pattern of such resources. The source of dirty money is not always its destination, which makes it imperative for detection systems to work together in tracking its movement and location. The capacity of the infrastructure in South Africa to function in co-operation with relevant foreign systems is therefore relevant to this review.

Measures against terrorist funding

Despite the sustained efforts to integrate anti-money laundering with combating terrorist financing, the conceptual and practical distinctions between the processes involved lingers (Reuter & Truman 2004, p. 139–48). The point has been made often enough that the difference lies in the stage at which the concerned assets acquire a ‘dirty’ character. With money laundering as it is conventionally understood, assets tainted by their origins are converted by being used in the same manner as legitimately acquired assets, whereas with terrorist financing, the assets are only tainted by the intention to use them to commit terrorist acts, directly or otherwise. The existence of such an intention is often only inferred in retrospect, by which time the assets have been expended. If not used to support terrorist activities, the money never gets tainted and cannot be laundered. If the intended beneficiary of funds raised legitimately cannot be linked to terrorist activity, no offence arises. On this account, the prevalent approach in combating terrorist financing is to use lists of suspected terrorist organisations and then to trace any funds and other assets in which these organisations have or appear to have a beneficial interest.3Â This approach has not received universal approval, even within the FATF, because in some cases, organisations and/or individuals may have been placed on a list without having been proved either to exist as institutions or to be involved in terrorism.4

Notwithstanding unresolved conceptual arguments about the difference between them, measures against the funding of terrorist activities have been superimposed on the anti-money laundering infrastructure. The grafting process was accomplished in South Africa by the advent of the Protection of Constitutional Democracy against Terrorist and Related Activities Act (Act 33 of 2004), which became effective in May 2005. Colloquially referred to as POCDATARA, the Act adapts the framework around which anti-money laundering measures against tainted funds are constructed. The same measures relating to prevention, enforcement and international co-operation outlined above are applied to terrorist activities.

Impact: a brief situation report

African initiatives to combat the transfer of tainted funds through the economy are informed by a history of economic plunder and large-scale looting of resources at various stages of its history. Corruption, committed by imperial powers and indigenous elites alike, is at the centre of the adopted measures. Its enduring manifestation is capital flight from African countries to other parts of the world, predominantly western Europe. In the ultimate analysis, the success or failure of anti-money laundering measures should be measured against the extent to which they stem corruption and capital flight.

South Africa’s regime against money laundering and the funding of terrorism comprises a three-tier framework, constructed through primary legislation, regulations and sector-specific guidelines. The period reviewed was a predominantly formative one, hence the flurry of activity in all tiers.

By 2004, the criminalisation of money laundering was substantially complete. By mid-2005 provision of financial assistance to sustain terrorist activities was also criminalised. In response to the legislation, various institutions set about making innovations to procedures to prevent the laundering of tainted funds. Particular focus was on the banking sector. Feedback from the FIC indicates a high level of compliance by banks by the middle of 2006.

Feedback from the law enforcement agencies, with which the FIC is mandated to work closely, tends to reflect the impact made by the centre in the economic crime environment. In terms of the Financial Intelligence Centre Act (FICA), the FIC directs reports of suspicious transactions considered to warrant further investigation to any of the following:

the South African Police Service;
the Directorate of Special Operations (Scorpions);
the Asset Forfeiture Unit (AFU);
the South African Revenue Service;
the intelligence agencies; and
the exchange control department of the South African Reserve Bank.

The release of official crime statistics for 2005–6 by the South African Police Service in September 2006 prompted much debate about the high levels of crime. Commentators and the business sector drew particular attention to increases in violent crimes. Equal attention does not appear to have been paid to commercial and economic crimes. In this regard, police information needs to be supplemented by data from other sources, particularly because of significant under-reporting of such crimes. The period 2004 to 2006 experienced a generally high level of economic crimes committed using violence, most notably armed robbery. The most problematic kind of armed robbery was that of vehicles transporting cash, which saw a spike of 74% between 2005 and 2006.

The proceeds of commercial fraud also pervaded the criminal markets. No precise figures are available, but information from surveys during this period indicates a high level of losses to key sectors. A 2005 survey of 100 companies in South Africa by PriceWaterhouseCoopers found that 83% of them had been subjected to economic crime.5Â At the end of 2004, South African companies were reported to be losing ZAR40 billion (about US$6,452 billion) per year to white-collar crime. In 2005 this figure was reported to have doubled.

The scale of economic and commercial crime has yet to be measured. Regardless of this, anti-money laundering institutions in South Africa would be interested in the destination of the proceeds of the known crime. Of particular importance is whether such proceeds passed through institutions that are obliged to be vigilant about money laundering. They would be highly concerned if any such institutions actually facilitated the concealment of proceeds of crime.

An analysis of the nature and magnitude of the threat to an economy emanating from money laundering activities should draw a distinction between three kinds of scenarios (Reuter & Truman 2004, p. 132–3). The first is where the institutions involved are either corrupt from inception or are subsequently corrupted by changes in ownership, management or economic environment. Such institutions are primed to be vehicles for money laundering and their use to launder proceeds of crime is thus inevitable. The second scenario, as stated by Reuter and Truman (2004), involves institutions with “willing or rogue employees who provide [money laundering] services on an ad hoc and non institutionalised basis”. In other words, the leadership of the institution is not corrupted, but corrupt insiders infiltrate the institution. The third scenario involves institutions that facilitate money laundering transactions unwittingly, either because they do not have mechanisms to detect them or because of dereliction in applying existing mechanisms.

The challenge for law enforcement and regulatory authorities is to come up with reliable indicators to determine each kind of threat. The evolving practice is to attempt to do this though analysing suspicious transaction reports (STRs).

The South African FIC has been receiving information, primarily in the form of reports of suspicious transactions from financial and non-financial institutions, since 2003. The reports are followed up and analysed and, if necessary, they are passed on to investigating agencies. Between April 2005 and March 2006, the FIC received 19,793 STRs, of which 94% were received from financial institutions (FIC 2006). These include banks, brokers, foreign exchange dealers, insurance providers, investment managers and services and money remitters.

The rest came from other sectors, particularly casinos, estate agents, coin dealers, companies, accountants and auditors, attorneys, car dealers and individuals. Since opening its doors, the FIC has received more than 44,000 suspicious transaction reports. If the flow of reports witnessed in the first three years was maintained, the FIC was expected to have received a further 12,000 reports by the end of 2006.

The FIC attributes the steady increase in the number of reports to a number of factors, singling out:

regular contact and feedback sessions with the accountable and reporting institutions;
development of a reporting tool to simplify reporting, by enabling batches of reports to be submitted electronically;
increased profiling of obligations through the media; and
regular compliance initiatives such as presentations to various reporting institutions and sectors.

It also concluded that accountable and reporting institutions may have “consolidated their compliance and reporting environments” (FIC 2006).

Figure 1: STRs received by the FIC

While the volume of reports has steadily escalated, the quality may not be adequate to enable the kind of analysis advocated above, or to distil indicators to facilitate the analysis. Indeed, the FIC may not regard that kind of analysis as necessary, notwithstanding its implications for policy making.

In the absence of threat-type indicators, one is left to refer to anecdotal occurrences that have exposed vulnerabilities in South Africa.

The most glaring forms of money laundering that emerged in the period under review involved companies that were either set up as vehicles for pilfering public funds, or were captured after to their formation and diverted to fraudulent enterprise. The theft of large sums of investment deposits and pension funds represents predicate criminal activity that continued to occur almost at regular intervals. The most recent example (at the end of 2006 and continuing into early 2007) was the abuse of pension and retirement funds by Cape Town-based Fidentia Asset Management. Of an asset base of about R2.2 billion, more than R650 million is alleged to have been used in private investment ventures under the control of the chief executive officer but inconsistent with the interests of investors. The Financial Services Board launched an investigation, which had yet to be concluded at the time of writing. A curator was appointed to attempt to salvage some value for investors.

Fidentia followed in the wake of similar large scams Masterbond and LeisureNet, and numerous ‘pyramid schemes’. It emerged almost simultaneously with the launch of the prosecution of the management of nine pension funds and another large asset firm, Alexander Forbes, on multiple counts of fraud and money laundering in Johannesburg.

There were just over 45 money laundering cases prosecuted between 2004 and 2006. There has not yet been a conviction of an intermediary for ‘professional’ money laundering.

It appears that in the immediate future more focus will be given to the unwitting money laundering institutions, which in a sense are the soft target for law enforcement. In a discussion document inviting submissions on several proposed changes to the existing anti-money laundering regime, the FIC drew attention to the absence of effective regulatory powers for supervisory bodies and pointed out that there were6Â

certain structural deficiencies concerning the supervision of compliance with the FIC Act. These deficiencies impact on the proper administration of the FIC Act, and are limiting the effectiveness of the framework to combat money laundering and terrorist financing, particularly in the compliance and enforcement areas. The current deficiencies should therefore be addressed.

Supervisory bodies are an integral part of the preventive infrastructure of the current anti-money laundering regime. To enable them better to regulate accountable institutions (financial and non-financial) – in other words, to compel them to exercise vigilance and diligence – it is proposed that these bodies be strengthened through a raft of third-tier legislation. Along with conferring greater authority to enforce compliance with anti-money laundering and anti-terrorist funding regulations, the legislation will impose on them the responsibility to contend with indifference and in some cases, resistance to implementing such regulations.

The issue which arises is whether supervisory authorities are to have access to more information on which to base decisions to intervene. In other words, will supervisory bodies be entitled to receive STRs? Or will they be privy to reports submitted to the FIC? The proposed new powers are expected to evoke mixed reactions, as some supervisory bodies have tended to be wary of taking on a more intrusive law enforcement role.7Â

Financial sector: challenges and performance

The predominant challenge for financial intermediating institutions, such as banks, is detecting suspicious origins of funds. While the methods by which ‘dirty money’ is acquired differ from case to case, the factors influencing the decision by a criminal on whether to use banking services appear to be universal. Generally, a big-time economic criminal is not likely to use banking services which are proximate (geographically or in terms of time) to the source of the dirty money. A transnational drug trafficker is unlikely to deposit the proceeds directly in a bank in the jurisdiction where the drugs have been sold. He will rather use the proceeds to purchase marketable commodities, export them, and only come into contact with a bank to deposit the proceeds of the sale of the imported commodities. The bank is therefore unlikely to be the first point of contact with the dirty money. It is difficult, if not impossible, for it to perceive the complete transaction or series of transactions preceding its contact with the criminal. As the FATF observed in 2005, “each jurisdiction might hold a part of the evidence or intelligence impacting on the transaction. Therefore obtaining an overall view of particular operations from beginning to end is made more difficult” (FATF 2005).

One of the lingering issues in anti-money laundering in South Africa is the degree of market penetration by financial institutions. For instance, the higher profile accorded to banks in preventing money laundering is premised on the assumption that they occupy a front-line role in detecting transactions involving the proceeds of crime. The extent to which this is true depends largely on the nature of the banks’ presence in the susceptible market. Progress has been registered in this regard. Commercial banks in South Africa introduced a regime of low-cost banking accounts specifically designed for previously unbanked South Africans. In August 2006, it was reported that in 18 months, the Mzantsi accounts, as they are collectively called, had acquired 3,3 million new account holders.8Â This represents a significant inroad into the economically active population that is not exposed to banks. It can be assumed that the mandatory due diligence processes required by FICA occurred, producing valuable data for future implementation of anti-money laundering measures.

Alternative remittance systems

A discussion of money laundering in a multi-cultural developing economy should necessarily include the issue of alternative remittance systems. After pondering the subject for long, the FATF described alternative remittance as

any system used for transferring money from one location to another and generally operating outside the banking channels. The services encompassed by this broad definition of alternative remittance range from those managed by large multinational companies to small local networks. They can be of a legal or illegal nature and make use of a variety of methods and tools to transfer the money. (FATF 2005)

A variety of methods and tools to transfer value, rather than just money, have long been in use in South Africa, given the relatively low level of penetration of the communities by formal retail banks and other financial services. Following democratisation in 1994, the resort to these methods increased with the growth in size of cross-border migrant communities from countries such as Mozambique, Angola, the Democratic Republic of Congo and Zimbabwe. Bank intermediation in the transfer of funds between the diaspora and home countries has tended to be low. As the FATF acknowledges, there is nothing inherently illegal about alternative value transmission. Where, however, exchange control or tax regulations are evaded, the transmission constitutes illegal placement or smurfing. Large-scale transportation of currency is still prevalent between South Africa and neighbouring countries. The rate of prosecutions is as low as the rate of detection.

At the same time, the new requirements to prove identification through multiple documentation as a prerequisite to opening banking accounts is having an adverse impact on certain immigrant communities. It alienates them from both the mainstream financial service institutions and the tax system.

Somali refugees engaged in retail trading are unable to open banking accounts as they do not have identification documentation acceptable to banks. As a result, any takings are kept outside the banks, in private residences or pooled together in informal stokvels. The exclusion of these retailers from banks continues to expose them to crime, such as robberies and exploitation by protection rackets.

Further observations

The fault lines in the capacity to ‘follow the money’ in economic crime were identified in a seminal contribution by Professor Michael Levi. Commenting on the reasons for adopting a new asset confiscation regime in the Proceeds of Crime Act (2002) in England and Wales he attributed failures to:

moderate investigative knowledge, due to the inherent secrecy of the activities and inadequate resource allocation to financial aspects of crime;
inadequate co-ordination and intelligence exchange between police and the revenue department, due partly to legislative prohibitions on data sharing but also reflecting differences in cultural and policy objectives;
inadequate use made of suspicious transaction reports by the police and customs agencies due to a lack of resources and the inherent difficulty of following up many reports without contacting the accountholder for an explanation; and
inadequate powers to detain cash of unexplained origin other than drugs money at borders. (Levi 2003).

The infrastructure in South Africa has to be assessed in terms of the extent to which it meets the challenges identified above.

The Directorate of Special Operations (Scorpions) is the primary investigator of money laundering cases. It is also the primary prosecuting agency. To what extent does the existing investigative capacity address the identified fault lines?

There has been a marked improvement in the allocation of resources to investigating the financial aspects of crime. The budget of the FIC, which was originally in tens of millions of rand, now exceeds ZAR100 million annually. So do those of the AFU and its related Special Investigations Unit, as well as the Directorate of Special Investigations, itself a component of the National Prosecuting Authority.

The AFU describes itself as a “potent new weapon in the arsenal of the State in fighting crime”. It has grown from a small establishment of 24 staff members in 1998 to nearly 600 people, “consisting of mostly advocates, as well as a few seconded investigators and a number of admin staff members” and has “contributed to removing instruments used in the commission of crime as well as proceeds of crime from criminals and ... seized assets in excess of R1.25 billion” in nearly 1000 cases (Chinner 2005). It has claimed a success rate of more than 90% in these cases.

Can it be said that the incidence of money laundering has abated or increased since 2004? Or, to use the aspirations expressed in the ESAAMLG strategic plan, has the implementation of measures against money laundering enhanced the stability of the financial sector, and provided law enforcement with additional tools to protect the country “from the negative effects of crime and the activities of criminal syndicates”?

In the absence of uncontroverted figures on the magnitude of money laundering at the beginning of the period, it has become conventional to accept Finance Minister Trevor Manuel’s 2001 estimation that “anything between 2 billion and 8 billion US dollars are laundered through South African institutions every year.” (Manuel, 2001)

It is premature to judge the impact of the measures implemented to date on the scale of, on one hand, capital flight, and on the other, infiltration of dirty funds into the economy. There has certainly been a increase in the reported incidence of questionable (suspicious) transactions, but it cannot be inferred that this indicates an increase in the amount of unlawfully acquired funds entering the system. A proportion of STRs prompts successful money laundering investigations. The size of such proportion has not been determined yet.

Has the hand of law enforcement been strengthened as a result of the measures under discussion? This question can only elicit an ambivalent response. The agencies established with an anti-money laundering agenda have certainly been strengthened – but predominantly in their capacity to regulate the institutions required to report suspicious transactions. The FIC and the AFU, fledgling agencies in 2004, are now well established. The latter has demonstrated its capacity to act even against proceeds of crimes committed in foreign jurisdictions. Part of the reason for this is the resolution of the dilemma between criminal and civil forfeiture, achieved by the Prevention of Organised Crime Act (POCA) in 1998.

The connection between assets and the crime from which they were produced makes it very difficult to conceive that their recovery can ever be regulated differently from the determination of the guilt or innocence of the alleged criminal. This obviously makes the efficiency and effectiveness of the recovery regime dependent on the efficiency of the rest of the criminal justice process, which, in turn, means that the fewer the number of convictions in corruption and economic crime cases, the smaller the level of recoveries. A system that is premised on economic justice, on the other hand, is more likely to recognise that organised crime and corruption, as well as the myriad other sources of criminal income, cannot be confronted only by the criminal justice system. The process of detecting and recovering criminal income is separated from the rest of the criminal justice process, especially from the criminal trial. The goals are to bring criminal income into the legitimate mainstream, if it is circulating outside; or, if criminal income has already penetrated the legitimate economy, the objective is to remove it from the possession or control of the suspect beneficiary, even though he/she may never be convicted of any crime. Asset seizure as an instrument of economic justice will easily use amnesties and taxation measures to mop up illicit income. Such measures have been used in South Africa without much controversy.

Asset forfeiture has not been indifferent to corruption committed abroad, as shown by the number of mutual assistance cases in which South Africa has been actively engaged. In February 2006, the AFU secured a court order to freeze a residential property belonging to a former Nigerian state governor, Diepreye Alamieyeseigha, on the Cape Town Waterfront. Alamieyeseigha had been charged with 39 counts of money laundering in Nigeria. An application to sell the apartment, valued at ZAR14 million (US$ 2.06 million) was granted by the High Court in Cape Town in late July 2006.

In mid-2006, the AFU secured an order from the Royal Court of Guernsey in the Channel Islands to freeze about ZAR1 billion (US$147 million) held in the name of a businessman who was charged with more than 300 counts of fraud, exchange control violations, tax evasion and money laundering by the South African authorities.9Â

Among the recoveries of proceeds of crime recorded by the AFU is that of about R10 million from two attorneys convicted of defrauding the Road Accident Fund.

In the Schabir Shaik case, the AFU also relied on a conviction as a basis for the application for confiscation of ZAR34 million (US$5 million). The court granted the application, which comprised several alleged benefits found to have accrued to the accused and the group of companies under his control on account of corruption, namely:

shares to the value of ZAR21million in African Defence Systems (ADS) held by the accused;
ADS dividends to the value of ZAR12.7million;
ZAR500,000 received by the accused’s Nkobi Investments for the sale of its shares in a company called Thint Holdings to Thales; and
ZAR250,000 paid by Thales to the accused’s Kobitech company as a ‘bribe’ for former Deputy President Jacob Zuma.

The court found that there was an “overwhelming possibility” that Shaik’s relationship with Zuma was the main reason for Thales to do business with Shaik.

South Africa has therefore had a relatively sensational experience with civil asset forfeiture. The AFU has enjoyed a high success rate. Some analysts have linked the motivation of the AFU to considerations of self-interest, in that the proceeds of crime can be used to augment the law enforcement budget. In fact, POCA established a Criminal Assets Recovery Fund, part of which can be used to fund the AFU.

In terms of enhancing capacity for international networking, success has been recorded. Since its formation, the FIC has established itself as an active player in the FATF, the ESAAMLG and the Egmont Group of financial intelligence units. It is able to access financial intelligence from more than 100 other repositories around the world, some of which can be shared with the AFU and the Directorate of Special Operations. The FIC has also entered into formal co-operation agreements, in the form of memoranda of understanding, with collegiate institutions in the region, for example with the Financial Intelligence Inspectorate and Evaluation Unit of Zimbabwe.

There is evidence of growing co-operation between other law enforcement agencies in South Africa and their counterparts. The AFU’s joint work with Nigeria’s Economic and Financial Crimes Commission is yielding results. Joint work is also occurring with the Financial Services Authority of Namibia in tracking down proceeds of crimes committed in Namibia.

Observations made about the way illicit funds behave raise another salutary lesson, namely that speed is essential. Reporting institutions should be able to quickly determine suspicious fund activity and report it. Thereafter, the authorities have to act speedily to freeze activity on suspect accounts, or stop suspect transactions, such as sales of real estate, pending investigation. Because of the potential for wrong decisions to be made with serious consequences for innocent parties, the capacity to investigate should be good. Inevitably, there will be legal challenges to freezing directives. The relevant authorities need the support of competent lawyers, and the funds to pay or hire them.

Setbacks

In following the proceeds of crime, law enforcement suffered a setback in the case of National Director of Public Prosecutions v RO Cook Properties (Pty) Ltd; National Director of Public Prosecutions v 37 Gillespie Street Durban (Pty) Ltd; National Director of Public Prosecutions v Seevnarayan [2004] 2 All SA 491 (SCA). The respondent, who was liable to pay income tax, invested some of his income with insurance and investment company Sanlam. He used false names to avoid paying tax on the investment yields. The National Director of Public Prosecutions (NDPP) applied for the investments to be forfeited. The court of first instance did not grant the application in its entirety, but ruled that “the property retained as a result of unlawful activity referred to that portion of the property that would otherwise have been subject to tax”. At most this represented 40% of the investment yield concerned. The NDPP having appealed, the Court of Appeal took the view that there was no connection between the tax evasion and the interest earned, as “the interest did not accrue to him in consequence of his conduct in proffering false information to Sanlam, but from his conduct in making the investments. Nor did the interest accrue to him in consequence of his conduct in proffering false income tax returns.”10

While the legislative infrastructure in South Africa has built up a record of implementation, the perception persists that proceeds of unlawful activity are still attracted to South Africa, either in transit or to be integrated into the lawful sectors of the economy. Salter reviewed the position regarding the attraction which real estate holds for illicit income. By the admission of the FIC itself, more attention should be paid to anti-money laundering compliance by intermediaries involved in real estate transactions. The susceptibility of gambling outlets to the infusion and conversion of tainted funds continued to be a matter of concern in the period under review.

In an overview of the threat arising from money laundering (Goredema 2003), I drew attention to investment transactions, particularly in stocks, fixed property and tourism as being potentially attractive to proceeds of economic crime. The JSE Securities Exchange South AfricaÂ remains the largest in Africa, with a market capitalisation of US$409 billion in 2005 (Bond 2006).11 A significant proportion of transactions on the JSE involve foreign investors. Susceptibility to money laundering arises from vulnerability of the JSE to speculative investment conduct using tainted money. This might be in the form of the use of proceeds of fraud to trade in securities. In theory, investment intermediaries are supposed to ensure that funds with illegal origins are not so used, but this is quite difficult to do.

Notes

In connecting anti-money laundering to the integrity of the financial system, ESAAMLG echoes sentiments expressed in the Strategic Plan (for 2003 to 2008) of the Financial Crime Enforcement Network (FinCEN) in the United States.
Measuring performance is an important aspect of public policy. It is even more so in the case of innovative interventions such as structures to combat crime, given the significant cost implications of setting them up and maintaining them.
See the cryptic concession attributed to former US Treasury General Counsel David Aufhauser: “It was almost comical. We listed out as many of the usual suspects as we could and said, ‘Let’s go freeze some of their assets.’” (quoted in Reuter & Truman, p.144).
South Africa was caught up in a dilemma at the beginning of 2007, following the placement of two South African business personalities (the Dockrats) on a United Nations list of terrorist financiers. The listing was at the instance of the United States. The listed persons have continued to protest their innocence, causing the South Africa government to suspend action against them. The controversy was unresolved at the time of writing.
Examples are the Law Society and the Gambling Board.
Business Day, 30 August 2006.
Reported in the South African Sunday Times, 30 July 2006.
National Director of Public Prosecutions v RO Cook Properties (Pty) Ltd; National Director of Public Prosecutions v 37 Gillespie Street Durban (Pty) Ltd; National Director of Public Prosecutions v Seevnarayan [2004] 2 All SA 491 (SCA), paragraph 73.
The other significant sub-Saharan stock markets are in Nigeria, Kenya, Zambia, Mauritius, Ghana, Botswana and Zimbabwe.

References

Bond, P. 2006. Multinational capital’s responsibility for Africa’s resource extraction crisis. Open Space, 1(4), pp 12–21.

Chinner, R. 2006. Plea-bargaining, guilty pleas and section 204 witnesses: A potential asset forfeiture nightmare. Legal Updater, 2. Pretoria: Asset Forfeiture Unit.

ESAAMLG 2005. Strategic plan 2005–2008 [online]. Available from See also http://www.esaamlg.org/strategic_plan/index.php [cited 29 August 2006].

FATF 2005. Money laundering and terrorist financing typologies 2004–2005. Paris: Financial Action Task Force Secretariat.

FIC 2006. Annual Report 2005–2006. Pretoria: Financial Intelligence Centre.

Goredema, C. 2003. Money laundering in East and Southern Africa: An overview of the threat. ISS paper 69. Pretoria: Institute for Security Studies.

Levi, M. 2003. Criminal asset stripping: Confiscating the proceeds of crime in England and Wales. In A. Edwards and P. Gill, eds, Transnational Organised Crime: Perspectives on Global Security. London: Routledge, pp. 212–26.