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Dirty money: SA’s David and Goliath conundrum

Does the Financial Intelligence Centre have the capacity to identify illicit financial flows running into the billions?
Cleaning up … the centre has been notching up wins, but could no doubt do a lot more if it had additional resources. Image: Shutterstock

Over the past few years swindlers, money launderers, cryptocurrency traders and conniving executives at a certain state-owned enterprise have found out – the hard way – about the existence of a little spoken of but surprisingly pervasive financial regulator.

The Financial Intelligence Centre (FIC) was established in 2003 by the FIC Act. Its primary objective is to identify the proceeds of crime and combat money laundering and the financing of terrorism. In so doing, the FIC purports to protect the integrity of South Africa’s financial system.

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It has concluded memoranda of understanding with 91 international financial intelligence units, and has provided technical support to improve the related systems of those in Botswana, Kenya, the Kingdom of Eswatini (formerly Swaziland), the Kingdom of Lesotho, Mauritius, Namibia, Seychelles, Tanzania and Uganda.

In December 2019, with the support of National Treasury, it launched a public-private financial information-sharing partnership known as the South African Anti-Money Laundering Integrated Task Force (Samlit).

Participants in Samlit include the Prudential Authority of the South African Reserve Bank (Sarb), the banking sector, the Banking Association South Africa and associated bodies, as well as the South African Banking Risk Information Centre.

Performance

The FIC received a clean audit report from the Auditor-General of South Africa for the year ended March 31, 2020.

Its annual report shows that the centre was funded by a transfer from National Treasury of R294.3 million (2019: R278.7 million). An amount of R4.3 million was transferred from the Criminal Asset Recovery Account (Cara) to revenue, which is recognised when the criteria, conditions or obligations of the agreement have been met.

FIC has cash on hand of R96.4 million (2019: R8 million). This includes an amount of R30.9 million (2019: R8 million) received from Cara that is ring-fenced for the funding of the Communications Technology Modernisation Programme.

Regulatory reports

Businesses and reportable institutions are required to report suspicious and unusual transactions to the FIC, including:

  • Cash threshold report: on transactions of R24 999.99 and more;
  • Terrorist property report: on property associated with terrorism and related activities;
  • Suspicious and unusual transaction report: on possible money laundering or terror-financing activities; and
  • Voluntary disclosure report: in terms of which anyone can report a suspicious or unusual transaction, or activities relating to money laundering or terrorist-financing activity.

The FIC will analyse all information and refer it to the relevant authorities for investigation and potential prosecution.

It has the power to block or freeze funds that are suspected to be the proceeds of crime.

The FIC carries out inspections at various institutions that would be at the forefront of detecting possible suspicious financial transactions, and imposes sanctions for non-compliance. A sanction doesn’t necessarily mean that the organisation is guilty of wrongdoing, but could indicate a lapse in the system, or a system that is not robust enough.

Read: Sars’s role in combatting tax evasion and money laundering

The most common type of non-compliance of institutions was not reporting all cash transactions above the threshold of R24 999.99. The FIC issued 22 sanctions amounting to R39 million, and R16 million sanctions which are on appeal.

Case studies

The FIC’s progress is supported a wide range of case studies, among them:

Eskom: Intelligence reports provided to the Special Investigating Unit, which included a summons to recover R3.8 billion from former Eskom executives, former board members, and others external to Eskom.

Crypto: Exchange control contraventions using crypto assets: Local crypto asset service providers informed the FIC of a possible money laundering operation. The FIC investigated, and the Sarb blocked approximately R9 million worth of fiat currency and about 7.3881012 bitcoin.

Ponzi schemes: Various Ponzi schemes were interrupted, including those of a company that was rendering financial and investment services without the necessary licences, a forex investment Ponzi scheme promising returns of up to 700% within a three-month period, and a possible Ponzi scheme of investment in the mining industry.

Hawala illicit financial flows: Hawala is an informal method of transferring money without any physical movement of money, and is based on trust. An analysis of relevant accounts of the reported matter revealed large amounts (ranging from R1 million to R40 million) being moved. The transactional activity raised the possibility of illegal activities. The FIC established that the syndicate conducted transactions with jurisdictions such as Hong Kong, Mauritius, Panama and the United Arab Emirates. The FIC requested information from these jurisdictions and has provided to Sarb for investigation. The matter is ongoing.

The list goes on …

Other cases include a R1 million fraud matter, a lawyer arrested for defrauding road accident victims to a R30 million tax fraud, rhino dealing, human trafficking and money laundering, an online romance scam, a possible narcotics money laundering syndicate involving foreign individuals, exchange control contraventions, and a syndicate involved in smuggling stolen vehicles into neighbouring countries.

There was also the identification of properties and bank accounts with funds belonging to a former cabinet minister in Namibia who was involved in the Namibian fishing rights scandal.

Read: Investec Namibia MD resigns amid fishing bribery scandal

Except for the Eskom matter in the amount of R3.8 billion, all are under R100 million.

Regulating crypto assets

National Treasury, Sarb, the Financial Sector Conduct Authority and the FIC aim to develop a common understanding among regulators and policymakers of fintech developments. A policy position paper on the regulation of crypto asset service providers is to be formulated.

Read: Sarb fines HSBC for lax money laundering controls

The fight continues – but how strong is the FIC?

The FIC is making good progress in tackling smallish financial crimes including money laundering running into the millions, with the exception of the R3.8 billion related to certain Eskom executives.

Hampered by budgetary constraints – which limit the number of specialists it can employ, such as forensic accountants – does the FIC have the capacity to identify the very large financial crimes concerning state capture and illicit financial flows running into the billions?

Read: Gupta looting: ‘International financial system is culpable’

The FIC commented as follows:

“As part of its role of assisting in combating money laundering, the FIC Act obliges financial and non-financial institutions to submit regulatory reports to the FIC. The reports are central to the FIC’s development of financial intelligence, which is used by law enforcement, investigative authorities and other competent authorities in their investigations and applications for forfeiture of assets.

“In the 2019/20 financial year the FIC referred 745 financial intelligence reports and responded to more than 2 000 requests for such information.

“The value of the proceeds of crime recovered, in which FIC financial intelligence was used, was close to R3 billion,” it added.

“Also, the value of suspected crime proceeds which were frozen due to FIC action amounted more than R70 million. (Please see the FIC’s annual report on www.fic.gov.za for further information.)

“In general, the FIC would benefit from being prioritised to receive additional resources. This would allow it to capacitate itself to do much more in the fight against financial crime, including to supervise compliance with the FIC Act more effectively. However, across government there are currently general restrictions in place on increasing the number of employees.

“In addition, the large budget cuts expected over the medium-term expenditure framework period, are likely to further impact the FIC’s ability to recruit more employees and possibly fulfil its mandate optimally.”

The author requested but did not receive comment on:

The FIC making good progress in tackling smallish financial crimes including money laundering running into the millions, with the exception of R3.8 billion concerning certain Eskom executives.

Hampered by budgetary constraints, does the FIC have the capacity to identify the very large crimes concerning state capture and illicit financial flows running into the billions?

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If they can’t detect illicit flows by false prophets, ANC cadres and their blesses (Guptas) then maybe they are not fit for purpose.

Then you get the money stolen by the ANC assigned to Procurement of PPE (under the ‘protection’ of a state of disaster), which is a crime against humanity.

You find most of the ANC’s Govt sector is not fit for purpose.

International funders must stop funding anything in SA up until there is block chain backed transparency on every Rand spend.

All the laws are of little help, as the Guptas were able to export large sums of S A currency. No doubt with a little help from their political friends.

No it does not and neither does SARS.

Look how much Tax payer money (the country’s money) ended up in Dubai and Pakistan?

Look how many politicians and police commissioners received luxury cars as bribes?

Look at VBS, very well documented how the money got looted from the poor and municipalities.

How many people are in jail?

It is disaster!

We are all behind our regulators to clean up the business and protect the citizens from scams. It is however quite clear that the crypto industry caught them fast asleep. Now they need to hurry to protect their industry from money flowing out to cryptos. Why will people look at crypto trading? Is one of the reasons the collapse of FIAT currency? So many bodies in the FIAT currency that have to make money. The public is gatvol for all these regulators and the money that they charge to create jobs with large salaries. I wish someone can create a drawing of the crypto train that left the station and FSCA members running trying to get on board. ” We do not regulate crypto currency” they told me a couple of months ago when I made an enquiry. Now they try to get on board the crypto train. They just do not have a choice. And o yes, all because they have to protect the public.

Thanks Barbara, you are the best.
Look forward to the follow up.

There is so much that could be done centrally with big data mining.

Run a screen on all bank accounts linked to an identity number, whether that id number is the authorised signatory or a director or trustee or shareholder. In terms of FICA the banks must verify to eventual warm bodies including shareholders of upward companies and trusts.

With that in hand, and a massive threat to banks for incomplete data, there is so much that can be run.

Check all grant recipients for reality check against the turnover of all their bank accounts. That way immediately shut down the fraud like people claiming the basic income grant but need to explain how their 90 day average banking turnover is way too high.

If all transactions are anyway cleared centrally it is not hard to run AI to flag transactions that show a pattern that needs to be looked at. Especially on young accounts. So my bank account is 25y old and has a certain pattern that occasionally included large transactions. Low risk. A new account with large transactions, maybe take a look especially if pattern is that receive big transfers and then distribute most of it to other accounts that themselves do not have a normal operating pattern.

Banks have counterparty trust scoring systems based on who the bank is and where the account is. So if Citibank NY has a transaction with Bank of America NY, it is different than Citibank Dubai with Nedbank Cape Town. Good banks need to refuse doing business with high risk banks and locations. If a crook does get his money to HSBC Belize, it must be nearly impossible for him to buy a property in Cape Town or even use his HSBC credit card anywhere else or buy shares in NY.

How hard can these things be nowadays?

The only reason banks collect all the FICA info is to CMA themselves.

They do nothing with the information. It seems they are very happy for one to live in an 11 sqm home or use an outdated vodacom bill as proof of address.

Gina: What does CMA in this context mean?

End of comments.

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