South Africa’s Progress in Combatting State Capture and Reversing its FATF Grey-Listing

Corporate crime and the recoupment of illicit funds have been the focus of South African regulatory authorities in the wake of the conclusion of the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector, including Organs of State (the Commission) hearings. The hearings investigated what has colloquially become known as state capture, involving widespread corruption, irregularity, and personal enrichment in the public sector.

The remedial actions arising out of the Commission’s recommendations have dovetailed with the government’s attempts to reverse its grey-listing by the Financial Action Task Force¹ (FATF) in February 2023. This grey-listing follows the identification of deficiencies in the country’s anti-money laundering and countering the financing of terrorism (AML/CFT) framework, and a failure to timeously remedy same. 

The FATF decision has resulted in South Africa becoming a jurisdiction which is under “increased monitoring”, meaning that the government must work with the FATF to identify and achieve specified outcomes in order to remedy the identified strategic deficiencies. 

Progress Report

In November 2023, the government released a report detailing South Africa’s progress in implementing the actions and commitments which it had made in response to the Commission’s findings. Although many of the planned actions will involve major legislative and institutional reforms, which will take an extensive period to achieve, the following major achievements are listed in the progress report.

• The President has referred 202 recommendations from the Commission for criminal and other investigation, and possible prosecution, to law enforcement agencies and other regulatory bodies, such as the South African Institute for Chartered Accountants and Legal Practice Council.
• A joint task force has been established to ensure co-ordination between the various law enforcement agencies, and now includes the Financial Intelligence Centre (FIC) and the Special Investigating Unit (SIU).
• The budget of the National Prosecuting Authority (NPA) has been substantially increased, and in September 2023 the NPA Amendment Bill was tabled in parliament with the purpose of strengthening the capacity of the NPA to deal with state capture and corruption through making the investigative Directorate Against Corruption a permanent feature of the anti-corruption law enforcement efforts.
• Asset recovery proceedings have been instituted against a variety of entities implicated in state capture, including civil litigation proceedings being instituted for the recovery of R64 billion, with the tax authorities collecting R4.8 billion in unpaid taxes as a result of evidence presented at the Commission, and the NPA having frozen R14.2 billion in assets in state capture related cases; and
• Administrative action has been taken against various directors and companies, with delinquency proceedings instituted against 73 former directors of state-owned enterprises implicated in evidence presented at the Commission. Recommendations have been made for investigation and action against individuals and entities for alleged violations of statutory or professional prescripts directed to various professional bodies. The Companies and Intellectual Property Commission has issued compliance notices to three private sector entities under investigation for state capture activities.

Whilst legislative and institutional reforms have received the main focus of attention, the recovery of funds tainted by state capture have also been prioritised, and institutions implicated in wrongdoing have sought to reach settlements in order to start to repair their reputations. Examples include:

• ABB Limited (ABB) reached a settlement with Eskom to pay R1.56 billion relating to improper payments and other compliance issues, which it voluntarily disclosed on the Kusile project. It reached a settlement with the NPA in terms of which it paid R2.5 billion in punitive reparations to South Africa, to be deposited into South Africa’s criminal Asset Recovery Account. The United States Securities and Exchange Commission (SEC) also settled criminal and civil charges on the basis that ABB agreed to pay a $75 million civil penalty to settle the charges against them for violations of the Foreign Corrupt Practices Act. 
• EOH Holdings Limited (EOH) has agreed to repay close to R200 million to the Department of Water and Sanitation following a probe into procurement, contracting and implementation of an information technology contract.

Collaboration

In addition to the joint task force established in response to the Commission, there has been increased cooperation and collaboration between law enforcement and regulatory agencies over the investigation of corporate crime in response to the FATF grey-listing. Attempts to be removed from the grey-list have resulted in increased collaboration between these agencies and improved resourcing and investigative capabilities. 

Some examples of the actions the government is focusing on include:

• The South African Police Force (SAPS) is required to demonstrate a sustained increase in proactive requests for financial intelligence from the FIC for its money laundering and terrorism financing investigations. 
• South Africa should demonstrate a sustained increase in: 
  • investigations and prosecutions of serious and complex money laundering. 
  • the effective identification, investigation, and prosecution of the full range of terrorism financing activities, consistent with its terrorism financing risk profile. 
  • outbound mutual legal assistance requests and timely follow up to help facilitate money laundering and terrorist financing investigations and confiscations of different types of assets in line with its risk profile.
• The capacity of relevant authorities, including the SAPS and the NPA, should be enhanced by providing each agency with adequate training, personnel, and financial resources to effectively carry out their combat against the financing of terrorism.

The collaborative investigative capabilities were highlighted recently when it came to light that the South African Revenue Service (SARS) instituted recovery proceedings against Sasfin Bank Limited (Sasfin) to claim R4.8 billion in damages. This sum represents the lost revenue resulting from the unlawful transfer out of South Africa of R8.2 billion in untaxed funds over the past decade. 

Sasfin released a SENS² announcement on 27 February 2024, indicating that the former foreign exchange clients operated as a syndicate that ran an unlawful scheme to facilitate the expatriation of money out of South Africa, with the help of former employees of Sasfin. Sasfin states that it took decisive action when it became aware of the unlawful scheme, including instituting an extensive investigation by an independent forensic consultancy, which resulted in the termination of relationships with various employees, and the opening of criminal cases.

Comment

It is clear that some progress has been made in South Africa’s fight to reverse the state capture which exists, and in its attempt, regain some global trust in its financial sector. However, continued political will is required to maintain the trajectory and to achieve removal from the FATF grey-list. 

We anticipate that corporate criminal and regulatory compliance investigations will remain a focus area for the authorities. 

The increased energy displayed by regulators in investigating corporate crime and in enforcing the ever-strengthening legislation requires a heightened level of introspection and internal compliance monitoring by all entities, particularly those in the more highly regulated industries such as the financial services sector. 
Action plans should also be put in place in order to ensure that companies are ready to respond quickly and efficiently to any investigations which may be launched, and to mitigate potential sanctions and reputational damage.

To find out how our Regulatory & Investigations Team can assist your organisation in carrying out compliance audits or advise on concerns relating to potential or existing investigations by regulators, please contact Ernie van der Vyver or Kate Swart.

¹FTAF - The global money laundering and terrorist financing watchdog

²SENS (Stock Exchange News Services)