There have been no criminal prosecutions for money laundering of financial institutions and very few of other “enablers” such as lawyers and accountants. There have been regulatory fines but it is not clear that these are enough to deter banks and other financial players from making their anti-money laundering compliance regimes a box-ticking exercise rather than a meaningful one. This new Sanctions and Money Laundering Bill enables the government to introduce regulations that would create new civil penalties and criminal offences for money laundering, but the threshold for the latter is low (a maximum three-month sentence for a criminal conviction).
Using such powers to enable the government to introduce criminal offences by regulation is problematic, and goes against convention. It would be better for the government to accept or introduce an amendment to the Bill to introduce a “failure to prevent” money laundering offence such as in the Bribery Act and now for tax evasion that would ensure that such an offence was introduced by primary legislation.
But my main focus today is whether this Bill will help deal with the massive money laundering being organised from the very top of government in South Africa, the Presidency itself, the subject of my oral question on 19 October and my letter to the Chancellor of 25 September. South Africa is the victim today, but unless we deal decisively with the financial crime implications for Britain as well, next there will be another sovereign country and yet another – with dire consequential instability for Britain and the global economy. In which case sophisticated criminal networks, like the Guptas and the Zumas, will have the last laugh.
Non co-operation is no longer an option
Corruption within, and money laundering from, a monopoly capital elite around the President’s family in South Africa – painful for me to witness having been active along with my parents in the anti-apartheid Struggle – show that winning the war against financial crime will require co-ordination, influence, action and accountability between multijurisdictional law enforcement agencies. Money laundering is a key enabler of organised crime, allowing criminals to transmit multibillion-pound illicit funds into the legitimate economy, undermining its integrity and public trust.
But confronting this is difficult, partly due to fragmented information-sharing arrangements, across borders, and between banks and law enforcement agencies. It’s all very well to develop better protection for our own country as this Bill purports to do, but without simultaneously enhancing cross-border co-operation, we will not win the war against financial crime.
In regular visits to South Africa – most recently last month – I have been stunned by the systemic transnational financial crime network facilitated by an Indian-South African family, the Guptas, and the presidential family, the Zumas. If there had been more proactive and genuine co-operation between the multijurisdictional law enforcement agencies and within and between the banks, which have been moving money for the Gupta/Zuma laundering network, the devastation wrought on South Africa could have been significantly reduced, and perhaps the financial institutions involved may have been able to better mitigate their exposure.
Consider an example of the devastation of cross-border money laundering caused to South Africa, which may have been stopped had there been more rapid collaboration and goodwill between the relevant law enforcement authorities and the banks, including in Britain.
The Free State, one of nine provinces in South Africa, is marked by miles of flat, rolling grassland and crop fields and is the country’s granary, responsible for 70% of total national maize production. Britain has played a defining part in the history of this province as it marked one of the most contested spaces during the late 19th century/early 20th South African Wars involving the British Imperialists, the Afrikaner Nationalists and the Basotho people.
Today, the Free State is one of the poorest in South Africa. Nearly one in two of the people are unemployed and nearly two thirds of the people live below what is called the “upper bound poverty line”. More than half of the people in that province survive on one meal a day, tens of thousands of children go to school hungry, if they’re fortunate enough to be in school, and over half of the province’s children drop out of school before obtaining their matric (roughly our equivalent of A-levels), primarily because their daily focus is on survival.
Therefore when, in February 2013, the Free State government announced that they would spend about £18-million (R340-million) to build a dairy farm in a small Free State town called Vrede, which would be part-owned by 80 impoverished beneficiaries, the local community felt a sense of hope. Some of these individuals even sold off their own livestock – in many cases their only assets – in anticipation of their participation in the project. Indeed, this kind of public-private partnership is a commendable and deeply necessary model of economic empowerment to redress the profound racial inequalities generated by the apartheid state, which continue to reverberate throughout South Africa.
But what the people of Vrede didn’t know was that this project, and therefore their village, would become the scene of a transnational money laundering crime, committed by collaborators from within the Free State government on the one side, and the now notorious Guptas on the other side.
In essence, this criminal network used these 80 people and their families as pawns in a swirl of international money laundering, which involved some British and other financial institutions. The laundering operation went like this:
Step 1: In May 2013, three months after the Free State government announced the dairy farm project, a company called Estina, ostensibly the vehicle for the 80 beneficiaries, but which was actually linked to the Guptas, was handed a farm to begin building the dairy. Estina’s sole director was an IT salesman with no farming experience. The project was not put out to public tender.
Step 2: The government almost immediately transferred about £6-million to Estina.
Step 3: Instead of investing this in the farm, Estina transferred most of this money to a Gupta company in the United Arab Emirates (UAE) called Gateway Ltd. Gateway is registered in Ras al-Khaima (RAK), one of seven emirates making up the UAE, and a highly secretive offshore company jurisdiction. At the time, Gateway held its account with British Bank Standard Chartered, which the bank has subsequently closed.
Step 4: Once the funds were in Dubai, the Guptas engaged in a classic laundering cycle – transforming illicit money into ostensibly legitimate assets. In arguably the most eye-watering example, they transferred over £2-million of the Estina dairy money, in two separate tranches, through two shell companies, ultimately consolidating it in their Standard Chartered account for another one of their UAE-based companies, called Accurate Investments (the bank has since closed this account too).
Step 5: They then transmitted this money into an entity called Linkway Trading (banked with the State Bank of India) back in South Africa.
Step 6: Once in Linkway, the Guptas used these funds to pay for a lavish four-day family wedding where, among other extravagances, over £1,000 was spent on chocolate truffles, £120,000 was spent on scarves for guests, and £20,000 on fireworks.
At about the same time that the Guptas were celebrating at the wedding, veterinarians in the town of Vrede were called to the dairy farm because of the reeking stench of dead animals. They found at least 30 cows that had been buried in a ditch having died from “an unknown condition that could be caused by malnutrition”, according to their report.
Five months after he was elected President, on 17 September 1994, Nelson Mandela stood in front of an audience in the Free State and said:
“Freedom should … be understood as the transformation of the lives of ordinary people in the hostels and the ghettos; in the squatter camps; on the farms and in the mine compounds. It means constant consultation between leaders and members of their organisations; it demands of us to be in constant touch with the people, to understand their needs, hopes and fears; and to work together with them to improve their conditions.”
I have detailed the Vrede dairy example, because many of us do not fully appreciate the destitution caused by money laundering. But it almost always requires the complicity, whether witting or unwitting, of financial institutions – in this case, some of those are headquartered in Britain like Standard Chartered which I am grateful is now being investigated along with HSBC and the Bank of Baroda by the Serious Fraud Office, the Financial Conduct Authority and the National Crimes Agency following my request to the Chancellor. The success of these criminal networks also relies on the action or inaction, co-operation or non co-operation, of the relevant law enforcement authorities. And almost always, it is the poorest who bear the brunt.
In my letter to the Chancellor on 25 September requesting that he investigate UK bank exposure to the Gupta/Zuma network, I listed the 27 entities and individuals, among others, involved in this Vrede Dairy farm tragedy. And it is by no means the only example of the devastation wrought on South Africa by the Zuma/Gupta network.
But the Vrede Dairy criminal catastrophe proves that the laundering was effected through a transnational triangulation between South Africa, the UAE, and British and other global banks. Therefore, the success of our law enforcement authorities in first, protecting our country from the proceeds of ill-gotten gains entering our financial system, and by association, second, protecting more vulnerable developing nations from falling victim to extractive criminal networks, depends on genuine and proactive co-operation and collaboration between the relevant law enforcement agencies in the concerned jurisdictions.
Familiarising myself with the Vrede Dairy Farm tragedy, what struck me time and again is why an internationally respected bank like Standard Chartered would open bank accounts for shell entities registered in a free trade zone, such as Ras al-Khaima (known as RAK), whose primary attraction is as a highly secretive offshore jurisdiction? Shell companies, by virtue of their ownership anonymity, such as those used by the Guptas in the Vrede Dairy tragedy, are generally classic vehicles for money laundering and other illicit financial activity. According to the Financial Crimes Enforcement Network, shell companies “typically have no physical presence other than a mailing address, employ no one, and produce little to no independent economic value”.
The Financial Action Task Force (FATF), established in July 1989 at the G-7 Paris Summit, has consistently warned that free zones could be used for illicit trade and money flows that fall below the radar of regulatory authorities. We know that free zones have become an increasingly popular mechanism for the UAE and other countries looking to lure international investment and boost foreign trade, but the question for us is whether we are ensuring that our financial institutions are facilitating, whether inadvertently or not, their misuse by those interests attempting to move illicit funds from one part of the world to another in order to facilitate money laundering, Mafia crime and terrorism financing?
There are disturbing questions around both the complicity, whether witting or unwitting, of UK global financial institutions in the Gupta/Zuma transnational criminal network, and also, about these institutions’ “wilful blindness” to the reality that the laundering process most often necessitates financial systems with lax regulation and controls. Unless we urgently find ways to leverage our respective capabilities to co-ordinate and influence action between the law enforcement and banking sectors domestically and globally, we cannot win.
I have received new information, which is still being corroborated, that the Gupta-Zuma network may be using the global metal recycling sector – some of the company names I have received have a UK presence – to launder the proceeds of their corruption. Indeed, this preliminary information suggests that, as South African banks have shut down Gupta accounts in response to the financial crime risk they pose, so the family has simply shifted their laundering machine into the metal recycling sector, using intermediaries within these companies in South Africa, the Middle East, possibly the UK and Hong Kong, to move their funds for them.
My question therefore to British-based financial institutions is whether their compliance departments are applying the necessary forensic eye to this “secondary-layer” threat – as primary accounts are shut down, so the illicit funds must find alternative channels – and are law enforcement agencies and regulators applying their minds, sharing information insofar as they can, and acting?
My latest information (supplied as before by South African whistle-blowers deep inside the system and disgusted by the corruption at the heart of the state) suggests metal recycling is the latest conduit. But there may be other sectors these criminal networks are penetrating.
Unless we use the opportunity before us to crack down meaningfully on these criminals, they will always be one step ahead. Over the past few months, several multinational companies have either fallen or been massively contaminated as a result of their complicity in the Gupta scandal – Bell Pottinger, McKinsey, KPMG and SAP.
The US justice department and US Securities and Exchange Commission (SEC) is now investigating German multinational SAP after it apologised the other week “wholeheartedly and unreservedly” to the people of South Africa for paying over £6-million in kickbacks to Gupta companies as part of the their network of corruption headed by President Zuma and his family.
I believe it is a matter of time before financial institutions in South Africa, in the Middle East, in Hong Kong, the UK, and the US will be forced to answer hard questions about their own complicity. And they must. I am today sending a copy of this speech together with my letter to the Chancellor, to the US Ambassador to London, formally asking the US regulatory authorities to intervene as the FBI has already begun to do. I am also asking the UK Government to press the financial authorities in Hong Kong and Dubai to cut all links with the Guptas and Zumas. My Labour MEP colleague Neena Gill is raising the matter in the European Parliament, and Commissioner Pierre Moscovici has agreed to her request to investigate European Banks who may be involved. In parallel I wrote to EC President Juncker on 25 September asking him to act, but have not yet had a reply.
But it is not only financial institutions and governments which need to ensure they are above reproach. A number of other global firms – whether legal, auditing, forensic, or advisory in nature – have provided professional services to some of these complicit individuals, companies and institutions. These include UK-based firms such as Grant Thornton and Hogan Lovells, which have conducted forensic investigations at South Africa’s revenue service (SARS) under brief from its Gupta-aligned head Tom Moyane. Norton Rose Fulbright and Morrison & Foerster have assisted in the internal investigation at McKinsey into that company’s links to the Guptas. There are other examples. I am not suggesting that these firms are necessarily complicit in the corruption – in most cases they have been employed by the complicit companies (for example, Norton Rose and Morrison & Foerster by McKinsey) to try to surface the corruption.
However, I am suggesting that it is absolutely critical that all professional firms cut their contacts entirely with any individuals or entities associated with the Gupta or Zuma families, or their associates. Or at the very least – whatever pressure they may come under from their clients and whatever the cost is to their commission or fee – they must conduct themselves according to the highest professional standards, which most if not all have palpably failed to do so far, as we saw with KPMG, McKinsey and SAP. To its credit law firm Cliffe Dekker recently upheld the highest professional values by boldly exposing corruption and dishonesty by senior executives at the country’s power utility, Eskom.
As I stand here today, the 80 individuals who were supposed to benefit from the Vrede dairy farm are destitute. The complicity of our financial institutions in this, as well as the responsibility of law enforcers and regulators in all the concerned jurisdictions, should make UK Government Ministers and UK parliamentarians hang their heads in shame. Just as they were complicit in sustaining apartheid, so they are complicit in sustaining the corrupt power elite in South Africa now betraying the legacy of the anti-apartheid struggle.
I delivered last night to the Chancellor printouts of transactions handed to me, and named the British Bank concerned, and asked that he again refer these to the Serious Fraud Office, National Crime Agency and FCA for investigation.
This information shows illegal transfers of funds from South Africa made by the Gupta family over the last few years from their South African accounts, to accounts held in Dubai and Hong Kong.
The last columns of each sheet show the relevant banks involved. The records show all account numbers used. Many of the transactions are legitimate, but many certainly are not.
The latter illicit transactions were flagged internally as suspicious. But I am informed that they were told from the UK headquarters to ignore it. That is an iniquitous breach of FCA practice which I trust Ministers would never countenance and is an incitement to money laundering which has self-evidently occurred in this case, and also been sanctioned by a British Bank, as part of the flagrant robbery of South African taxpayers of many millions.
Each originating transaction would start with one bank account and then be split into a number of accounts a couple of times to disguise the origin. Undoubtedly hard questions will need to be asked of the facilitating banks, because they have aided and abetted the Gupta money laundering activities.
Can the Chancellor please ensure that such evident money laundering and illegality is not tolerated and that the Bank is investigated for a possible criminal complicity over this matter? Urgent action is needed to close down this network of corruption. DM
This is an edited version of a speech by Lord Peter Hain to the House of Lords on Wednesday afternoon.
Photo: Peter Hain, former leader of the House of Commons, speaks to reporters upon his arrival for the third day of the Labour Party conference, in Liverpool, Britain, 27 September 2016. Britain’s Labour Party annual conference 2016 takes place in Liverpool from 25 to 28 September 2016. Photo: EPA/JON SUPER
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