Tough enforcement key to financial sector’s pardon

The successful enforcement of financial sector conduct laws is the most credible deterrent to the myriad shortcomings that got South Africa in trouble with the global Financial Action Task Force (FATF), culminating in the country’s grey-listing from February 2023. “The grey-listing is a very real challenge that our nation is facing [with] far-reaching implications for our economy, the integrity of our financial system, and the rule of law,” said Financial Sector Conduct Authority (FSCA) Commissioner, Mr Unathi Kamlana.

Talking grey-listing to SA’s law gurus

The Commissioner made this and other observations during a virtual address to law departments at the University of South Africa (UNISA), titled ‘Successful enforcement of financial sector laws as credible deterrent in the context of the SA FATF grey-listing’. Early on in his address he observed that South Africa had to strive for a strong and resilient financial system with high levels of integrity and that the country’s financial sector regulators and law enforcement agencies had to “reflect deeply on their enforcement mechanisms and strategies”. 

His address coincided with widespread criticism being levelled at the South African Reserve Bank (SARB) statement into its investigation into the Phala Phala saga, and its decision to keep that report under wraps. For the uninformed, the Phala Phala incident involved the theft of USD580 000 in cold, hard cash from a private game farm owned by President Cyril Ramaphosa. This undeclared cash was brought into the country as part of an uncompleted transaction by a Sudanese businessman to purchase livestock. In a ruling that left this writer and many other critics somewhat bemused, the SARB said that since the transaction had not completed, no foreign exchange contraventions had occurred; case closed. 

This newsletter is not about Farmgate, nor did the Commissioner mention the incident, its investigation or the investigation outcome during his address. But it is worth commenting that the lack of enforcement consequence for moving millions of rand in foreign currency into a country; for not declaring the cash; for not immediately reporting the theft of the cash; and, as a final insult, the SARB taking the approach that the status of this cash is ‘irrelevant’ due to the transaction ‘not completing’ is not the outcome that the global FATF is seeking in performing its Anti-Money Laundering / Combating the Financing of Terrorism (AML-CFT) mandate. 

Mere empty words on paper

The risk is that the criminally inclined interpret the SARB decision as meaning that they can move a few hundred thousand dollars cross-border and then side-step forex legislation by stating, only if caught, that the payment is for goods or services not yet delivered / provided. Apologies for the digression, dear reader … time to allow the Commissioner to steer us back on topic. 

“The effectiveness of laws is determined not only by their articulation or mere existence, but also by their proper enforcement,” Kamlana said. “It is through enforcement, that wrongdoers are deterred, and unlawful activities are curtailed, forming a shield that safeguards the harmony and stability of society”. He added that without effective and robust enforcement, “laws become mere empty words on paper, lacking the power to protect the rights and interests of those they are supposed to protect”. 

The FATF featured prominently during the presentation. Wikipedia.org describes the FATF as “an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering and to maintain certain interest. In 2001, its mandate was expanded to include terrorism financing … and in 2012 [it introduced] new rules on [financing for] weapons of mass destruction, corruption and wire transfers”. Turning to the FATF decision to add South Africa to the grey-list, the Commissioner said this was a consequence of strategic deficiencies in our financial system. 

“On the positive side, [SA’s membership of the FATF] signifies that we are committed to promptly addressing the identified strategic vulnerabilities within the agreed upon timeframes,” Kamlana said. In response to this commitment, FATF has issued an action plan that has been agreed to by South Africa and which includes specific action items that must be strictly adhered to and addressed. 

How to wipe South Africa from the grey-list

The process of clearing South Africa from the grey-list seems simple enough. “The FATF action plan serves as a roadmap for strengthening our regime’s ability to combat sophisticated financial crimes and to remove our country from the grey list,” the Commissioner explained. “This applies specifically to cases involving professional and money laundering networks and enablers as well as third party entities engaged in money laundering”. The bottom line is that South Africa must “exhibit a demonstrable and sustained increase in the number of investigations and prosecutions related to intricate and serious cases of money laundering and financial crimes”. 

This in turn requires a concerted focus on enforcing financial sector laws and establishing the legal framework and its enforcement agencies as true deterrents to financial crime. According to Kamlana, South Africa must therefore “cultivate a belief within the industry that violations are not only punishable, but that detection is inevitable, and sanctions will be uncompromising”. A successful enforcement capability starts with a strong foundation, but endures through the adaptability and flexibility of the regulatory frameworks and legal provisions that underpin it. The address turned to some of the challenges arising from globalisation, which makes it “difficult to detect some criminal activities and illicit flows” and leads to countless transgressions. 

Kamlana supported this observation with statistics from a recent UNCTAD Economic Development in Africa Report, which estimated that  illicit financial flows rob Africa of around USD88 billion each year. And specific to South Africa, a 2022 joint study between the OECD and National Treasury estimated that between USD3.5 and USD5 billion dollars in illicit financial flows leave the country annually… PS, these numbers took the writer by surprise and seem excessive given the domestic and global focus on tackling AML-CFT. 

“The scale of the problem is huge and is growing, and we have to work together and work smartly to disrupt this,” Kamlana conceded. He pointed out that the FSCA referred about 70 cases to the South African Police Service (SAPS) in its latest financial year, with many of these cases proceeding to the specialised Commercial Crime Units and Commercial Crime Courts. 

Financial institutions must play their part

“The responsibility for effective enforcement does not rest solely with regulators and law enforcement agencies; financial institution must also accept responsibility for upholding the highest standards of integrity and transparency,” the Commissioner concluded. “By embracing compliance as a shared goal, we can collectively mitigate the risks posed by financial crimes and work towards a stronger and more resilient financial system”. 

He called for “unprecedented collaboration” between law enforcement agencies, regulators, prosecution authorities and all other relevant stakeholders to re-establish South Africa’s standing as a secure and respected financial centre and gateway, and ultimately remove our name from the grey-list. 

Writer’s thoughts:

South Africa’s Financial Sector Conduct Authority (FSCA) seems wholly committed to the FATF action plan; but the institutions tasked with criminal enforcement appear to be dropping the ball. Do you believe SA has the criminal enforcement capacity to satisfy the FATF and have SA struck from the grey-list? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.