Parliament has now pulled up the National Treasury’s handbrake, insisting on due process when Treasury officials pushed South Africa’s two financing committees to quickly adopt far-ranging changes to schedules of the Financial Intelligence Centre Act of 2001 (Fica).

The issue is best described in the Treasury’s own words and emphasis: 

“We are almost certainly headed to be GREYLISTED by the [Financial Action Task Force] next FEB 2023 UNLESS WE PERFORM A FEW MIRACLES.

“The implications: A GREYLISTING IS COMPARABLE TO A RATINGS DOWNGRADE, especially if SA is deemed not to be trying to address its deficiencies.”

Known worldwide for its measured and diplomatic approach, the National Treasury is not in the habit of screaming in underlined capitals. When it does, as in this latest presentation to journalists by Acting Director-General Ismail Momoniat, it seems prudent to take it seriously. 

The Financial Action Task Force (FATF) is an intergovernmental policymaking body combating all forms of money laundering and terrorism financing. It ensures a coordinated global response to prevent organised crime, corruption and terrorism. 

To be greylisted by the FATF means a country’s shortcomings are a threat to the international financial system and a serious blow to a country’s reputation. Such a country is then subjected to increased monitoring and has to deal with adverse economic consequences for trade and transactions with other countries. 

Regulators in the US, UK and EU may also restrict their banks from transacting with greylisted countries’ banks. The FATF’s greylisted countries include Cambodia, Cayman Islands, Burkina Faso, Albania, Yemen, Pakistan and Syria. 

Blacklisted countries — at this stage only North Korea and Iran — are officially seen as high-risk jurisdictions. The list is a warning of the significant danger of money laundering and terrorism financing that a particular nation holds in global dealings.

“Given the greylisting we face, the sooner we do things, the better for us,” the Treasury’s Momoniat said in an address to Parliament’s joint meeting of the standing and select committees on finance on 15 June.

Speaking virtually from Berlin where he attended a FATF meeting, Momoniat briefed the committees on proposed amendments of schedule 1, 2 and 3 of the Financial Intelligence Centre Act of 2001. 

Momoniat accepted criticism by MPs that the Treasury should have given Parliament more time to follow “due process” rather than attempt to force Parliament’s hand in making a “rushed” decision.

But Momoniat reminded Parliament that the process of aligning South Africa with international standards had started as early as 2015. The Treasury’s last briefing to Parliament was in February 2022.

It “has been a slow [process] with lots of consultation”, Momoniat said. He emphasised that South Africa was “well behind” international anti-money laundering and anti-terrorism funding standards.

Momoniat was gracious enough not to also remind Parliament that the ANC Cabinet, the justice cluster’s ministers and parliamentary committees of the Zuma era were the stumbling blocks in bringing South Africa’s legislation and enforcement implementation up to scratch — at the time, mostly at the behest of the Guptas and other Zuma acolytes.

How the FATF peer review rated SA

Through a peer review process facilitated by the FATF, South Africa was evaluated for a period in 2019 on its anti-money laundering and combating of finance of terrorism systems. It is a two-fold assessment on the adequacy of South Africa’s legal framework and the efficiency with which legislation is implemented. 

It didn’t go well.

“South Africa received a very poor ratings assessment,” the Treasury explained to Parliament and journalists. Out of 40 ratings on legislation adequacy, half of South Africa’s ratings scored as partially compliant or non-compliant. 

South Africa’s three most-critical weaknesses are:

• Customer due diligence;
• Terrorist financing offences; and
• Targeted financial sanctions for terrorism and terrorist financing. 

Read in Daily Maverick: Red flagged: Terror-linked networks in South Africa a ticking time bomb

The FATF report found South Africa has “a solid legal framework to fight money laundering and terrorist financing” but it has “significant shortcomings implementing an effective system, including a failure to pursue serious cases”.

Out of 11 ratings on the efficiency of implementing the legislation, South Africa was scored critically weak on all of it.

In effect, a scorecard on the work of the Hawks, police, intelligence agencies and the National Prosecuting Authority, the FATF report stated South Africa especially struggles to detect and prosecute terrorist-financing offences. 

The key findings in the FATF mutual evaluation report, for example, include that authorities’ understanding of terrorist-financing risks is “underdeveloped and uneven”. Law enforcement further “lack the skills and resources to proactively investigate money laundering and terror financing”.

The FATF found that South African “authorities have identified limited activities of the Islamic State involving South African citizens and acknowledge potential sources of [terrorist financing] risks stemming from the country being used by terrorist groups”.

Momoniat summarised: “The low level of viable investigations and prosecutions relating to terror financing in the country exposes [South Africa] to be used by terrorist groups as a transit point and a base for launching attacks in other countries.”

Law enforcement is also really bad at investigating and prosecuting complex and cross-border money laundering schemes, the FATF peer review found.

When it comes to true beneficial ownership, things are equally dour. According to the FATF, law enforcement is completely in the dark about who actually benefits from opaque structures such as nonprofit organisations, trusts and companies. Slotting into this problem is South Africa’s struggle to identify politically exposed persons who front for thieving politicians. 

An important reason for South Africa’s terrible scoring, the FATF found, is because here, cash is king. 

And cash, it is well known, has amnesia. 

How do we get out of this mess?

The National Treasury and the Financial Intelligence Centre told Parliament on 15 June they’d been working on amendments to schedules 1, 2 and 3 of the FIC Act. These, Momoniat said, would go a long way to start aligning South Africa with the FATF’s standards and were ready to adopt.

South Africa is moving towards the end of a one-year observation period. If sufficient progress is not made after the one-year period, ending in October, an action plan will be drafted and South Africa may be greylisted, Momoniat warned. That can happen as early as February 2023.

MPs from the two financial committees, however, raised a communal eyebrow because they were asked to rubberstamp these amendments then and there.

The Fica amendments are designed to essentially include additional categories of institutions and businesses that will offer the Financial Intelligence Centre far-ranging powers to supply enforcement agencies with detailed financial intelligence.

The game plan, Momoniat explained, is to cast the net over all financial crimes and develop the capabilities to deal with complex “financial fraud like Steinhoff and VBS Mutual Bank”.

That is because law enforcement, Momoniat emphasised, needs to have better forensic intelligence and capability, and the sharing of information between various agencies should be a priority.

Important changes suggested include amendments to the Companies Act and Trust Property Control Act to pierce the veil hiding ultimate beneficial ownership. Criminalising the ownership of unexplained wealth and enabling the forfeiture of such unexplained wealth should be another arrow in law enforcement’s quiver.

The proposed amendments will also impact on attorneys’ trusts, the management of digital assets such as cryptocurrency, accountants’ and auditors’ professions, financial markets and banks, the insurance sector, credit and financial services providers as well as high-value goods dealers. 

The latter will include businesses receiving payments in any form of R100,000 or more per item, including dealers in motor vehicles, precious stones and metals.

Yunus Carrim, chair of the select committee on finance, dug in his heels, saying the committee could not receive the amendments and adopt them on the same day. 

Said Carrim: “We all agree that we need to avoid the greylisting at all cost… [T]here is a need to tackle money laundering and terrorism finance… 

In terms of adopting the necessary amendments, Carrim said, “the best we can do is October, depending on the gravity of what people say”.

Joe Maswanganyi, chair of the standing committee on finance, said it would be prudent for Parliament to at least ask for written comments from the public.         

“We will have to do things properly as a legislative body… [I]t would be of no use if we adopt today and tomorrow the Speaker is taken to court.”

The question every person with a business in South Africa should ask Parliament now is: “How quickly will you ‘do things properly’ this time?” DM